Citizens Financial Group Inc (CFG) 2014 Q4 法說會逐字稿

Welcome to the Citizens Financial Group fourth quarter and full year 2014 earnings conference call.

(Operator Instructions)

As a reminder, this event is being recorded. Now, I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin.

Thanks, Brad. Good morning everyone. Thanks so much for joining us today on Citizens' earnings call. We'll start with our Chairman and CEO, Bruce Van Saun and CFO, John Fawcett, reviewing our fourth quarter and full year results. Then we'll open the call up for questions. Joining us as well is Head of Consumer Banking, Brad Conner.

I'd like to remind everyone that in addition to today's press release, we've also provided a presentation and financial supplement. All three are available on our Investor Relations website on Citizensbank.com.

During the call, we may make forward-looking statements which are subject to risks and uncertainties. Factors that may cause our actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed and contained our earnings release and quarterly supplement. Additionally, any information about any non-GAAP financial measures including a reconciliation of those measures to GAAP measures may also be found in our SEC filings, in the earnings release and in the quarterly supplements available on our website. With no further adieu, I'll turn it over to Bruce.

Okay. Well, thanks, Ellen. Good morning everyone. Thanks for dialing in today. Let me start off with an overview of 2014. Then I'll proceed to talk about the fourth quarter. But I'd say overall, we're very pleased with what we achieved over the past year. Let me just touch on four areas.

First, is our financial progress which is very pronounced. Our adjusted ROTCE for the year of 6.1% compares favorably with 5.1% last year.

But even more importantly, we have good momentum. If you look at the fourth quarter ROTCE, we're now at 6.8%, close to 7%, that compares with 5.2% in the fourth quarter of 2013.

The second area I'd comment on is we're making very good traction on our customer agenda. We're improving our position on both the consumer side as well as the commercial side.

This is really how you create long-term franchise value. We're certainly keeping our eye on that ball. I'll give you a few details to back that up.

First off, on consumer side, we launched our one deposit checking offering which has reinvigorated checking account growth. That's up 23% on a year-on-year basis. We also continue to strengthen our customer experience, evidenced by our continued strong trajectory in the JD Power ratings.

We've also further improved our important online and mobile offerings. Through the second year in a row, we were awarded the best mobile app by Javelin Research.

Now, on the commercial side, our Greenwich survey scores on relationship managers remained best in Best-in-Class in nearly all categories. Our formula is we've got great people. We show up with great ideas. We add value to our clients.

You can demonstrate the success there by looking at our market share. We continue to gain share. For example, we finished eighth in the national middle market league table volume. That's up a place from ninth in 2013.

The third area I'd comment on is we've made steady progress in improving our regulatory position. I think we put in a really strong effort on CCAR and have made really demonstrable progress there. We'll wait and see the results, but I feel very good about the progress that we've made.

Then also in remediating our issue backlog with the regulators, we've had a very strong approach there. I think we've made good progress as well.

Then lastly, I'd say another aspect to the year is that we delivered on all our milestones and major projects. So whether it be the IPO, the sale at Chicago region, our overall expense initiative called Project Top and then our various other strategic initiatives, we're really executing very well.

This overall progress reflects well on our people. Our colleagues are very engaged. They're working very hard to make this a better run bank.

While I mention people, I want to take a moment to acknowledge the passing of Robert Matthews who led our commercial business. This is a real tragedy.

Robert was a great guy. He had a passion for building a business, focused on great customer service. Really feel the loss there.

But I would say that we're fortunate to have a strong team behind him. Steve Woods and Bob Rubino, two of Robert's key deputies are going to provide the interim leadership to make sure that we continue our momentum in that business.

Now, turning to the fourth quarter, we delivered a very strong performance, demonstrating our ability to execute as well as our ongoing momentum. Some of the highlights, we had good balance sheet growth and deposit growth which drove 2% sequential growth in net interest income. Our NIM was up slightly versus Q3 at 2.8%.

Our underlying fees showed $5 million in growth, if you factor out the swing in MSR. Cap markets in particular had a big fourth quarter. Our expense control remains very solid. Credit remains very well-behaved.

Overall I guess one aspect I was very pleased to see was sequential positive operating leverage of 2%. We need that. That feels good to deliver it. It stacks up very well against our peer group.

So we feel that we're positioned well. We have a very straightforward playbook that we need to execute against. We have good alignment and accountability on that around the management team. Most of our initiatives are tracking okay.

Loan growth is broadly at our target, $7.6 billion for the year. Our hiring is largely on track. Expense initiatives, on that score, we're delivering against all our milestones. We've got 28% in the run rate at year-end which is a little bit better than we had anticipated.

Now, the outlook for 2015 calls for continued progress in executing our plan. There's a few things that we're going to remain intensely focused on. We've got to continue to grow the balance sheet and our customer relationships.

We need to continue to deliver positive operating leverage and focus on running the bank more efficiently. We also expect our favorability and credit trends to continue.

I am a bit concerned about rates, given our asset sensitive position. This could be a headwind that we'll have to manage through but we already have some things in motion to contend with that if we have to.

So overall, we expect another very solid year. With that, let me hand it off to John to go through a bit more detail on Q4 and 2014 as well as our outlook for 2015. John?

Okay. Thank you, Bruce. Good morning everyone. As Bruce indicated, we rounded out 2014 with solid fourth quarter results as our underlying business performance continues to strengthen. This is reflected in our improved underlying performance across the business, robust asset quality and capital ratios and continued momentum in our growth and efficiency initiatives.

I'll start out by focusing on our financial highlights. I'll reference selective slides from our deck as I go along.

Turning to slide 3. Our fourth quarter GAAP net income of $197 million was up $8 million or 4% from the third quarter and $45 million or 30% from the fourth quarter of 2013. Diluted earnings per share were $0.36, up $0.02 from the third quarter and $0.09 higher than fourth quarter 2013. This was driven by our expense management initiatives continuing to gain traction allowing us to fund investment in the business to drive future asset and revenue growth.

We show our adjusted fourth quarter results on page 5, which exclude the impact of net restructuring charges and special items associated with the Chicago divestiture, efficiency and effectiveness programs and the separation from the Royal Bank of Scotland. On an adjusted basis for the quarter, we posted strong operating results with net income of $217 million or earnings of $0.39 per share. This is up 7% from the linked quarter and 28% from the previous year.

Our adjusted pre-provision profit of $388 million was up 4% relative to 3Q, largely driven by growth in net interest income and positive operating leverage. Furthermore, we experienced a $5 million decrease in our provision for the quarter to $72 million driven by improving credit and lower charge-offs despite continued loan growth.

There's been a lot of attention on the impact of the drop in oil prices on banks' loan portfolios. I'm pleased to report that our oil and gas related outstandings account for less than 1% of our total loan portfolio. We are continuing to perform reasonably well.

We continue to make strides towards our goal of 10% return on tangible common equity by the end of 2016. On an adjusted basis, we generated a return on tangible common equity of 6.8% during the fourth quarter, up from 6.2% in the third quarter of 2014 and 5.2% from a year ago. This was driven by two primary items: improvement in our underlying pre-provision profit; and secondly, lower tangible common equity reflecting our objective to realign our capital structure to be more consistent with peers.

Turning to the adjusted full year results on slide 6. Net income was $790 million or $1.42 per share, up 18% from 2013. Underlying revenue growth, disciplined expense management and a 33% decrease in provision expense drove the results.

Diving a little deeper into the results for the quarter. On slide 7, you will see we grew net interest income $20 million this quarter, which included the benefit of a $1.5 billion increase in earning assets and modestly improved asset yields.

Our net interest margin this quarter was up by 3 basis points to 280, in comparison to the third quarter. This increase can largely be attributed to higher securities portfolio income related to a portfolio duration extension trade executed at the end of the third quarter, as well as broad-based loan growth.

We did see some pressure from the impact of higher borrowing costs as we continued to diversify our funding base. Net interest margin was impacted adversely by increased deposit costs and growth in variable rate commercial loans, as well as lower yielding auto loans.

Slide 8 details non-interest income which remained essentially flat in the fourth quarter compared with the third quarter as growth in capital markets fees and other income was offset by lower mortgage banking fees. Excluding the impact of a swing in mortgage servicing rights, which moved from an impairment recovery of $5 million in the third quarter to an impairment charge of $2 million in the fourth quarter, underlying non-interest income was up $5 million sequentially. Year-over-year, non-interest income decreased $40 million from the fourth quarter of 2013, largely as a result of a $24 million reduction in securities gains and other income, as well as a $24 million quarterly decrease attributed to the Chicago divestiture.

Moving on to non-interest expenses on slide 9. With our goal in mind of consistently delivering strong operating leverage, we continue to balance our focus on tightly managing our expense base with the need to grow the business through targeted organizational and technology investments. As a result, our adjusted operating expenses of $791 million this quarter was relatively stable with the previous quarter with the benefits of our efficiency initiatives largely offset by investment in the business. We achieved an adjusted efficiency ratio of 67%, an improvement of 91 basis points from the third quarter of 2014 and 124 basis points from the same period last year.

Now turning to the consolidated average balance sheet on slide 10. Our total earning assets of $118.7 billion were up 1% from last quarter and 9% from the fourth quarter of 2013 driven by robust growth in both commercial and consumer lending.

Growth in our commercial loans has been broad-based with virtually all of our businesses posting solid growth. On the consumer side, our growth initiatives are firmly taking hold as we have increased originations in our auto and student platforms.

Deposits continue to strengthen across virtually all categories, with average deposits in the fourth quarter increasing by $3.1 billion or 3% over the third quarter. Organic growth for 2014 has more than offset the impact of the Chicago divestiture with period-end deposit growth of $8.8 billion compared with a divestiture impact of $5.2 billion. Fourth quarter period-end total deposits increased 10% compared to December 31, 2013.

On slide 11, you will see more detail on consumer and commercial loans, where we have continued to perform well despite the persistent low rate environment. Compared to the previous quarter, consumer loans increased $1.6 billion, largely due to growth in auto, mortgage and student loans. Yields are up 1 basis point, reflecting the improved loan mix.

Commercial loans increased by $1.1 billion driven by mid-corporate, commercial real estate, asset finance, healthcare and franchise finance. Other loans decreased as a result of continued runoff in the non-core portfolio, which decreased $200 million versus the third quarter.

Slide 12 is a more in-depth look at deposits which increased across the board with growth in money market and savings, interest, checking and DDA categories. Deposit costs increased by 2 basis points in the quarter, driven by a shift in mix to deposits with longer durations.

Turning to slide 13. Our capital position remains robust with a Tier 1 common equity ratio of 12.4%, which generally exceeds that of our regional peers. We have already met the initial LCR requirement of 90% as a modified LCR reporter and our LDR currently sits at a stable 98%. We also returned to the debt capital markets during the fourth quarter and successfully raised $1.5 billion of low cost senior debt in our first public senior offering.

On slide 14, you can see that our credit quality continues to strengthen with net charge-offs at $80 million. Additionally, our $72 million provision for credit losses was down $5 million, reflecting continued disciplined underwriting and overall improvement in credit quality.

Slide 15 is worth a mention: we've laid out the key initiatives in our turnaround plan and assessed how we did in 2014; what the market condition was surrounding each initiative in 2014; and what the outlook holds in 2015. The good news is that we've executed well across the initiatives in 2014 and expect that to continue. We are very focused on mortgage and wealth growth along with combating some of the intense competition in the middle market.

That leads us nicely onto our outlook slide on page 17. Given it's a new year and we are a relatively new public Company, we've provided a comprehensive view of both our 1Q 2015 and full year 2015 outlook.

For full year, we expect 5% to 7% earning asset growth and a relatively stable margin, though the interest rate curve and competitive conditions pose some challenges. We expect adjusted expense growth to be relatively flat with mid single-digit positive operating leverage and our efficiency ratio moving to the mid-60%s.

We expect provision expense to be in the $350 million to $400 million range, as we modestly build reserves, with broadly stable asset quality trends. We expect restructuring costs for the first half of 2015 in the $30 million to $50 million range. We are projecting our year end common equity Tier 1 ratio at about 11.5% and an LDR of around 100% with a focus on cost effective deposit growth.

So the headline is that we have delivered well against the plan in 2014 and are focused on doing that again in 2015. We've made up for some challenges on revenues with excellent performances on expenses and favorable credit, which should continue. With that, let me turn it back to Bruce.

Okay. Thanks, John. To sum up, again, I think we had a terrific 2014. We've taken decisive steps to enhance our business model and improve our performance. Our results reflect our steady progress.

We're well-positioned to continue this progress in 2015. It really all boils down to execution. Of course, a little tailwind from rates and the economy would also be most welcome.

So with that, Brad, I think we're done. We're ready to take some questions.

(Operator Instructions)

Ryan Nash, Goldman Sachs.

Bruce, just starting off, when I think about reaching the 10% ROTCE by 2016, I think one of the key components was interest rate rising. I think since that point, the forward curve has moved out and it does seems like the likelihood of rates rising at the pace we thought has become a lot lower. So you talked about having some things in place. Can you just give us a sense of what some of those things are? How much room do you think you have on the cost side if rates don't end up rising?

Sure. If you recall, the target of the 10% ROTCE was kind of the run rate as we leave the year in Q4. When we did the ROTCE walk from 5% to 10%, about 1.3% to 1.5% roughly, related to that forward yield curve. I think the numbers that translated to was about $300 million of net interest income. That called for a 1.75% Fed funds rate at the end of 2016, based on the forward curve we were using earlier in 2014.

My guess is that we'll have some increases and they'll probably be maybe a little later than we originally anticipated. It may not go all the way to 1.75% by the end of 2016. One of the good news aspects, though, is that the benefit is front-end loaded. So as you have the earlier rate rises, you have an ability to lag your deposits. So I think we'll capture a good percentage of that as long as there's some movement.

In terms of what can we do if it doesn't -- if we don't get that full benefit. Clearly what we've seen is that credit costs tend to also follow to some extent the path of rates. So if rates are a bit lower for longer, then the stress on borrowers should be less. Therefore, we should potentially have some pick-up on the credit cost of the equation which is an unknown. But I think it's logical that could be the case.

Then on expenses, working on the expense base is a way of life for us. So I think we've done a really good job to find a program that can deliver $200 million in benefit. As you know, we're turning around and reinvesting a bunch of that in originators and people close to customers so we can drive more business volume and in technology.

But basically, we've done a pretty good job in the second half of the year. We've kept our expense growth reasonably flat. We're getting that positive operating leverage. Is there more?

There has to be more. I mean, I think we're continuing to go farther up the tree from some of the things that we put in wave one of the program. But looking for ways to streamline how we're operating, trying to look at our vendor relationships. Is there more we can squeeze out of our vendors? We have initiatives in place to keep turning over rocks and see what else that we can deliver.

Got it. Then just on the outlook for the net interest margin, you allude to stable with some risks. I'm just wondering if you can help us understand some of the puts and takes. Clearly, the swaps rolling of off is a benefit, but where are you in terms of loan yields rolling off, relative to what's coming on?

Are you planning on making any further changes to the duration of the securities book embedded in that guidance? If so, what impact would that have on the rate sensitivity of the franchise? Thanks.

Yes, okay. Sure. I'll start off and then maybe John wants to chime in. But just in terms of the puts and takes, yes, the positives as you point out having the swaps roll off, that continues to create a benefit. Our efforts to try to grow the portfolio in areas that have evidence of little higher risk appetite, not a huge amount, but a little, in terms of moving for example into the prime space in some of our portfolios, particularly auto. That should create a bit of additional yield for us in growing commercial real estate and leverage lending books selectively. That should create a bit more yield for us.

So we're working on ways to try to improve the yield on the portfolio through either risk appetite moves or mix of asset moves. So those are the things I think that are going to be positive. Obviously, if we get some rate move, that clearly -- in the second half of 2015, that clearly would help. We've seen in 2014 one of the headwinds, particularly on the commercial book, is in this low rate environment. We've had customers looking to refinance who can do that.

The bigger companies going to the capital markets. Then others just refinancing some of their facilities. We saw a fairly good dose of that in Q3. We didn't see that much of it in Q4. But I think you have to keep your eye on that as we go through the year. If rates continue to stay this low, that could pick up again.

In reinvesting the securities portfolio, clearly you've got a roughly four-year duration, which is tightened a bit, given the lower rates. So that might be back down at 3.5 years at this point. So you're left with some tough decisions as to whether you want to kind of extend in the current rate environment or you want to keep some powder dry. So we're certainly working through that.

That could potentially be a little bit of a headwind but we'll have to see. We saw last year rates came down to this level briefly and then promptly motored back to 2.25% to 2.40% range. So it's a little hard to call that one at this point. But that could be a headwind as well. So that's what I would think are the puts and takes. John, I don't know if you want to add anything.

No. I think the only thing I would add and it bears repeating, a point that Bruce made, is that 75% of the sensitivity is centered at the very short end of the curve, three months and in. I think the other thing is that clearly the investment portfolio is something that we very closely manage. At the end of the third quarter, we did the duration extension trade which paid some dividends in the fourth quarter. So we're always looking for opportunities to avail ourselves of that.

I think if you look at sensitivity over the course of the year, it's up to probably the highest point it's been during the year at 6.8% at the end of the year. I think at the beginning of the year, we started at 6.2%. But it's always been in that 6.2% to 6.8% range.

I think the last point I would make around the investment portfolio is that as Bruce said, at some point you wonder when you start to drag your feet in terms of reinvestment. Thus far, we've been reinvesting cash flows on a month-to-month basis but you might expect if rates get down to around 1.75%, it's something we'd look at a lot more carefully.

Thanks for taking my questions.

Okay.

Ken Usdin, Jefferies.

John, just one follow-up on your -- on the rate comments there. Can you just help us understand then the front-end benefits that you either are or not building into your flat NIM forecast? So I guess if you could just help us understand what your rate forecast is within your net interest margin guidance? What would your forecast be kind of ex-rates?

Well, we're just using the forward curve at the end of December. So that's the forecast. If you look at that against where we budgeted the front-end, it's got rates moving out a little bit more back-ended into the fourth quarter as opposed to rates starting to move in the first half of the year.

I think we have -- Ken, it's Bruce -- maybe the Fed funds rate, the forward curve is about 65 basis points (multiple speakers). So there's some benefit in that which, again, provides solidity to the overall outlook. But this kind of lower for longer and kind of some payoffs on the commercial side and some of the reinvestment issues in the first half of the year, I think, are why you'd still have a broadly stable handle on the overall forecast.

Understood. Okay. Then Bruce, a second question, just on the fee parts of the business. The box chart is an interesting one in terms of the outlook. There's a couple comments in there about greater competition. But I believe if I do the math, your outlook is still for a really strong fee growth rate this year. So I was wondering if you can talk this through, growth in fee businesses and overall what you think the business can grow this year.

Yes, sure. I'll ask probably Brad to comment on a couple of the initiatives on the consumer side. So you're referring to slide 15 in our slide deck. I think the big fee initiatives here: we have mortgage is one; wealth is another one on the consumer side; Treasury solutions and cap markets are the biggest ones on the commercial side; and I guess also household growth. If we continue to grow households, we'll continue to gain fee income from that.

We've scored those three to be, I'd say, just cautious -- cautiously optimistic. I think we've made good traction on all three.

On the household growth, clearly you're just contending with a high level of competition in the market and also less foot traffic going through the branches. So the way we go about adding households and advertising, et cetera, just needs to be flexible, I would say. So we still feel good. We hit our goals in 2014, but I think we're just being dually cautious there.

On mortgages, similarly I think we hit the bar in terms of the gross hiring we wanted to do. We had attrition a little higher in the first half of the year. That's come back down nicely in the fourth quarter. One of the interesting things here is if you're in this re-fi boomlet, that should start to drive higher levels of income coming from the mortgage business, both portfolio balance sheet income as well as fee income.

But at the same time, it might be harder to lift some of the mortgage brokers to hit our longer term goal of doubling the size of the sales force because if it's an active market people are making a good living where they are. So I think that's why we have a cautious -- we might still have a resounding victory in 2015, but it may slow the pace in terms of actually hiring mortgage loan officers.

In wealth, I think that you're just looking at a very competitive market. So we're only trying to hire in terms of financial consultants maybe 20, 25 a year. We came in pretty close to that in 2014. But it is kind of hand-to-hand combat in terms of bringing those people in the door. So we're being a little cautious there but we still, I think, over time, if you look over the last three years, we've had nice growth there. The market conditions have been conducive I think. It's more on the competition side. But in terms of the backdrop for making money in the wealth business it's pretty attractive.

Treasury solutions. On that one, we've I think hired a great leader, Mike Cummins, to run the business for us. We put some money into technology. We're out trying to get more market share here, particularly when we led left transactions, we should always get the operating accounts and always get that cross-sell. So I think it's more just getting the rhythm and starting to see the benefits from some of the investments that we've made.

Cap markets as I said, we've done really, really well in terms of building up a quality operation that can compete with the best of them, gaining market share, bringing good ideas to our clients. So we feel good about that one.

So broadly speaking, Ken, I think there's good momentum on fees to match the growth in the balance sheet, but there are some areas of caution that we have to stay focused on and really execute well against. I think I've said enough. Brad, I hope I didn't steal your thunder. Over to you.

Well, actually I think you did a pretty good job of covering it, Bruce. The only thing I would probably add from a mortgage perspective, we are off to a very good start in the first quarter. So, mortgage application volume is very strong which I think is probably pretty consistent across the market. It's allowing us also to have nice margins from a mortgage perspective.

So I think we feel good about the progress that we're seeing early on in mortgage. But as you said, that could have an impact on recruiting over the course of the year, but I think you covered it for the most part. Most of our hiring initiatives are on pace. Growth initiatives are in place. It's just a very competitive marketplace.

Yes. Good. Thanks.

Thanks a lot for the color, guys.

Okay, Ken.

John Pancari, Evercore ISI.

On the bond portfolio additions, just wanted to get some color on what types of securities did you add to the balance sheet? Also what yields? What duration was added to the quarter? Thanks.

Sure. I can start, John. You can correct me if I'm not 100% grip on this one. But for the most part, I think we've been buying Ginnie Mae securities. In terms of that duration trade that we did, the extension of the duration trade, and those were 30-year agency pass-throughs. I think the yield on that has been around -- let me see. John, do you have that?

Yes. The extension is 74 basis points of yield pick-up between the 30-years that we got and the 15-year pass-throughs we traded out.

Yes.

Okay.

I guess one of the other benefits of moving into some of the Ginnies also helped the LCR ratio a bit.

Right. Okay. Then are you looking to do more? Did you imply that I think in your earlier comments?

I think we just have to watch it. We'll be opportunistic in terms of -- in this lower rate environment, the overall duration on the portfolio came in from just about 4-years to around 3.5-year, weighted average life came from the 4.7-year to about 4.2-year. So I think we'll -- ideally, we'd like to run that duration at about 4 years but you have to pick your spots when you go back into the market and put on that extra length.

Okay. All right. Then my follow-up is on the loan growth side, just wanted to get your -- a little bit of color around your expectation for loan growth in coming quarters. It's good that you gave us the earning asset growth expectation, but I wanted to slice out loan growth and get your thoughts there specifically and potentially by loan type. Thanks.

Yes. There it's I think the loan growth numbers are maybe in the 7% to 8% range. The securities portfolio much lower, maybe 2% or something broadly. So we want to keep the securities portfolio at a set percentage of assets. We got pretty full on that in 2014.

So I'd see a differential between the rate of -- pace of growth of loans and of the securities portfolio. That's how you kind of blend it back down to something like 5% to 7%. I think we'd expect to grow in the same areas that we grew this year.

So we've been able to grow the commercial book probably for five years now in a 7% to 9% targeted range. That I think is derived from two things. One is we keep adding people and originators as we build out commercial. So we've got more people with more relationships bringing in business.

We've also had a pretty healthy market, particularly in the middle market. So I think those things have allowed us to -- we focus on places where we see real opportunities, sectors of the market that are growing. So a combination of those things I think gives us confidence we can continue to deliver that.

Then in the consumer side, we've got -- we've had a nice year in auto, both our own originations plus the relationship we have with SCUSA on flowing in some prime auto paper. I think we have a very solid position in student, both on the underlying core product as well as the new refinance product. We'd expect to see some very good growth there as well.

Then again, in mortgages, as we build up the size of the force, we'll be retaining more on balance sheet and that will help that grow. That helps to offset I would say a kind of flat or even slightly declining home equity portfolio which you're seeing across the industry. But I think we're okay with that mix shift to more first mortgage on our book and maybe a little less as a percentage of the HELOC. Brad, do you want to add anything on that?

You hit it spot on, Bruce. I think that's exactly the right story.

Okay.

All right. Thank you. Thanks for taking my questions.

Sure, John.

Matthew O'Connor, Deutsche Bank.

Can you talk a bit about how much you've had to spend on higher regulatory compliance costs? And maybe just the costs associated with splitting away from RBS? Then how you think those costs trend from here?

Sure. We gave some disclosure that the one-time regulatory cost associated with CCAR to get really in position when we saw where the bar was, we had some catching up to do. That was $25 million which is behind us at this point. Then the ongoing run cost to build sustainability is $8 million to $10 million.

We've got about I'd say two-thirds of that in our run cost. It was important that we hired those resources up during the year so when some of the consultants who helped us get in position left, that we had the knowledge transfer to our own people. So I think we've accomplished that fairly well.

We've also had efforts around our kind of issue backlog in terms of making sure we could accelerate the remediation of that. So there were some costs that went along with that. I think whatever we have now is in our run rate. So there won't be any need to pick that up.

In terms of the cost to separate from RBS, I think there's also a fair amount of disclosure in our broad restructuring costs. It runs the gamut of having standalone capabilities and having our own vendor contracts, so there's a few dissynergies of scale associated with that. We also had to change our branding in terms of moving to a unified Citizens brand without RBS in the name for the commercial side and sunsetting the Charter One name and going fully to the Citizens name.

Those costs are also kind of detailed in some of our earlier disclosures. They're running on track. So we said that there's still about $30 million to $50 million of broad costs to go. Some of those associated with the cost program, some associated with separation from RBS and the rebranding.

But I think by the end of the first half, we'll have all of those kind of separation and the overall program costs sunset. We'll just be back to reporting nice, clean earnings with nothing below the line at that point.

Okay. So the adjusted expense levels that we see should be not materially impacted by either the one-time separation cost obviously or higher Reg compliance (multiple speakers).

Yes. Those adjusted expenses with the things moved out into below the line restructuring is probably a good base to work from. As I said, the cross-currents going on there is we're investing in playing offense in people and technology. Our cost program overall is creating enough offset that you saw in the second half of the year, we were able to keep expenses at a pretty contained level and pretty flat. Which if you can get your revenue engine going and you can get some positive momentum on revenues and keep your expenses flat, that's certainly a prescription to drive your ROE higher.

Okay. Then just separately, there was a footnote about your tax rate, just an accounting change related to the low income housing credit. I guess it says it's going to increase fee revenues and also increase the tax rate. Are those offsetting? Or is there a --

Yes, it's offsetting. It's offsetting. So it's just a tweak have you to make to your model to put the fee income up by that amount. It's in the footnote, $48 million.

$48 million.

Then the expense, if you look at the tax line, that takes the tax rate up to, we're calling it maybe 33.5%.

For next year.

Okay. Then lastly, if I could just sneak in regarding this portfolio acquisition of I guess it's oil and gas from RBS. Obviously very small numbers, I think it's $200 million or $400 million, but also -- or $400 million, but I guess the timing as oil prices have come down sharply. Just any color you can add there? Is there any recourse given maybe macro conditions have changed so quickly since the purchase was --

Look, I -- energy is a key sector to play in. If you're going to be a commercial bank, you need to play in the energy space. As part of separation, it was clear, that was RBS turf prior to separation and RBS is rethinking also who they're banking and the size of companies they want to bank. So we negotiated to bring that over. I think it always was a more logical business to be done at Citizens than at RBS but they got there first. So we brought that business over. We brought a few people over.

I'd do that trade over 100 times out of 100 if I had a crystal ball and I could see that oil prices were going to crack. I think we've done stress -- reverse stress testing on this portfolio. You'd have to have oil prices below -- well below where they are, below $50 for over five years before you'd have credit issues in that portfolio. So I think the advanced rates, the hedging on the part of the borrowers is all sound. So we're not worried from a credit standpoint about that portfolio.

Okay. That's very helpful. Thanks so much.

Sure.

Matt Burnell, Wells Fargo Securities.

I wanted to follow up on the cost outlook. I guess specifically around your targeted plan for efficiency savings. I think you noted that you're at about 28% of your targeted efficiency savings by the end of 2014. If I remember correctly, it's a little bit ahead of your earlier expectation. I guess I'm just asking if that potentially means that you could reach your full run rate on the efficiency savings ahead of your end of 2016 schedule?

Well, I think it's a marginal ahead. So it's, I think, 28%, John, versus 25%?

Right. Yes.

Or something. So it's a good spot that you noticed that. But I think in the big scheme of things, we're broadly on track. We have built a very solid ability to track all these initiatives. We have people signed up in blood with their name next to each one that they'll deliver them. They've been delivering them. So, John's people monitor this very closely on a monthly basis. That gives us a high degree of confidence that we're going to hit those numbers.

Okay. Then just secondly, a question on asset quality. You mentioned your outlook assumes relatively stable asset quality, but we did notice higher NPLs in the HELOC portfolio which is about 20% of your total loans if I exclude the HELOC service for others. Can you give us a little color as to what is going on in that portfolio? And if there could be further NPL pressure in that portfolio specifically?

Brad, do you want to take that one?

Yes, I'll take that one. So Matt, there was a little bit of accounting -- little bit of accounting noise I guess I would say in those NPLs, in that about a year ago, we had $550 million group of HELOCs that were on non-accrual status that moved into accrual status based on a year of positive performance. So that was actually improving our NPLs as a result of that. That has really run its course. So what you're seeing now is really just a return to normalization.

All of the underlying trends in the home equity portfolio remain on track. Our delinquency levels look good. The portfolio really appears to be strong. So we don't see any underlying fundamental issues with the HELOC portfolio.

Okay. That's helpful. Then just finally from me. John, you mentioned you're pretty comfortable with where you sit relative to the LCR. Can you give us a sense as to what kind of buffer you would think about going forward above the 90% minimum requirement?

Yes. We're very comfortable with where we are right now. Right now, I think we're at 102%. We've printed at the end of December. I think we'd be comfortable staying right in that range. I think we're going to be comfortably above the 90%.

Thank you very much.

Okay.

Vivek Juneja, JPMorgan.

Brad, for you, the mortgage business, because that's one that you've been trying to grow. Where does that headcount in terms of adding mortgage loan officers stand? I know last quarter it had slowed a little bit. Where do you stand on that one?

Yes. We're actually very much right on track. So we added a net of 41 loan officers in the fourth quarter which was our best quarter to date. We finished the year up a net 67 loan officers. So I think our final year-end count was 413 which was spot on the guidance that we had been giving. So very good progress there.

Are you being able to get the production with that? Or is that impacting pricing, given the competition?

Yes. So here's what I would say, through 2014, as you know the mortgage business was challenged. The volume across the industry was down from projections. So we were a little bit behind. Our hiring was on track but we were a little bit behind pace in terms of origination volume. But what we've seen as rates have come down over the last few weeks, we're seeing a very strong pipeline building a lot of very good momentum in applications. So I would say early into 2015, we're a bit ahead of pace.

Yes. I would just add, it's Bruce, Vivek, that our objective in building up the mortgage business was really strategic in nature, not tactical. So when we set about putting together our turnaround plan, we looked at the size and scale of our mortgage business relative to peers and relative to the opportunity that we saw in the marketplace. We had a 350-person operation and an origination rank of, say, maybe 25.

Our deposit market share for traditional banks is 12 or 13. So we said is there an opportunity to try to get closer to our deposit market share and what would it take? Does our market support that? I think the answer to that was all yes. Let's try to double the size over the 3-year time period and bring that up to 700. So you end up challenged when you see the conditions we saw in 2014. Is this still the right strategy? Should we slow it down?

Our view is let's keep our foot on the gas pedal and let's keep going because we know the mortgage market is ultimately coming back. The people that are coming in are still covering their nut in terms of being accretive to overall performance. So anyway, I think we're still on pace. I think our outlook for 2015 is, it should be better than 2014. That should create a bit of tailwind in terms of the impact that comes from this hiring that we've been able to achieve.

I have another question, Bruce, which is the restructuring cost of $30 million to $50 million that you're expecting in the first half, how much of that would you say is for headcount cuts versus developing, building new business areas as you've been working on both sides?

Well, the restructuring is only related to either the pull-through of our efficiency initiatives or some of the rebranding costs. We're just kind of giving you an estimate of what that's going to be and trying to pull that below the line. As I said, it will be sunset. By the end of the first half, we will have completed all of that work. All the costs associated with those programs will have been reflected.

The benefits of the efficiency program are coming through above the line in our expense base. Roughly, they've been offsetting the increase in ongoing expenses that comes from these hiring initiatives in consumer and commercial and some of our technology initiatives to keep driving an improved overall technology suite. So that's been the kind of challenge for us is to -- we know we've got to play offense. We know we need continued investment.

But where can we pinch down on expenses and operate more efficiently and effectively so that we can afford that and so that we can deliver the positive operating leverage. Again, our outlook if we're going to deliver the progress we need to stay on track to get that ROTCE up towards our goal of 10%, we've got to do that on a consistent basis. I'm very pleased that the last two quarters you can see that coming through in spades. We've kept expenses relatively flat. We've been able to grow the balance sheet which drives income growth. So we are getting that positive operating leverage.

Okay. Great. Thank you.

Sure.

David Eads, UBS.

Just I wanted to touch on the uptick in the cost of deposits. I was curious how much of that was driven by the loan growth and looking to maintain the loan to deposit ratio versus looking to kind of lock in funding in preparation for rates whenever that comes?

So a bulk of the growth is actually in our term and time deposits. So for a very long time, we've been out of this business. I think we grew our term and time deposits $1.2 billion or $1.3 billion quarter-on-quarter. So this is mostly 14% money. And that's driven --

14-month money.

14-month money, so that's driven a bit of the uptick in costs. I think strategically, I think, we're going to continue to try and manage the loan to deposit ratio that's 98% to 100%. So we keep a very close eye on this.

Some of this is a little bit of experimenting in terms of price elasticity in particular markets. So far so good. So we're pleased with the way we've been able to manage the LDR.

It's important to go back to one of the challenges we faced. One of the points that I made in my prepared text is that when we sold the Chicago franchise, we gave up $5.2 billion of deposits against $1 billion of loans. I think year-on-year, we've actually grown deposits by 10%. So we're reigniting this deposit engine and trying to do it in a very thoughtful way.

I would expect that as we go forward on a quarter-to-quarter basis, you might expect to see our cost of deposits increase 1 to 2 basis points here and there as we meet the need to sensibly fund our loan growth with raising deposits.

Yes. It's Bruce. I would just add that we've got to continue to be good at raising cost effective deposits. For a long time -- for the better part of the last five years, we were running off deposits because we were shrinking the balance sheet as part of RBS' shrink agenda. Now we're kind of back in the gym, getting our muscle back in terms of growing deposits cost effectively, that means getting better at making offers to our existing customers, doing marketing to go out and get that and not just relying on rate.

But you're right to point out that some of this also is a bit of a tactical shift in terms of securing some longer term fixed money. When you combine that with the senior debt offering that we did, I think we're positioned now even better for rising rates.

As John said earlier, the sensitivity to the ramp is 6.8% which is up from 6.3% at the end of the third quarter. That really reflects both the types of deposits that we're bringing in plus this senior debt issue that we did.

Great. That's helpful. I guess just kind of following up on that, does that -- do you have any update on your sense of where deposit betas might shake out? I'm of uncertain.

I think that the betas are moving up just a little bit. But I think we kind of have interest bearing deposits at around 60%. John?

Yes. It's 60. It hasn't changed dramatically from what we presented at analyst presentations and the road shows. It's pretty stable.

Total deposit is 48% --

48%, yes.

-- roughly where it was.

Okay. Great. Then just lastly, on the slide 15 which was really helpful. Just a quick question on the student loans. I think that you guys indicate that the market conditions there are more cautious. I was curious what was driving that? I guess really, how much -- if that environment improves, how much faster could the originations grow there?

This is Brad. Let me clarify the market condition. One of the things that we're seeing is tremendous demand for our newly launched refinance products. So I think we believe the market conditions will be favorable there. The demand is actually stronger than we had anticipated.

What we have seen in the private -- the traditional private student loan market, it's still growing but it's growing at a slower pace than what we had seen the prior two to three years. So we indicated that as cautious, primarily based on just a bit of slowing of the traditional private student loan market.

But I think it's timely, Brad, that we have this re-fi product.

Yes.

We're pleased that it's exceeding our expectations at this point.

Correct.

Great. Thanks for all the color.

Sure.

Ken Zerbe, Morgan Stanley.

A clarification question. On page 17 on the provision expense or more specifically credit cost of $350 million to $400 million, is that all provision expense? Or does that include some non-provision credit costs?

I think it's all.

Yes, everything.

It's the numbers that you'll see on the face of our income statement.

Provision expense only?

Yes.

Okay. Fine. Then the other question just on CCAR, I know, Bruce, you had mentioned that you made good progress sort of with the checklist going into this year's CCAR process. But is there any big areas that you're still working on that you wish that you would have had complete ahead of the filing for this year's CCAR?

You know, Ken, I think we made probably as much progress as was humanly possible in this time period. I think the whole process around your governance, your risk appetite, your whole frameworks for assessing risk inside a company is a continuum. I think you'll never be fully satisfied because there will be new things to think about and new ways to do things. So I think where we got to in terms of that framework is satisfactory from my standpoint here in the Company. I hope the Fed ultimately agrees with my take on that.

But I don't think really anyone in our peer group can say that they're the finished products, that they're the finished article. I think there's constant work to do, areas to refine and improve in. So we already know the additional work that we have planned for the next cycle. We're very transparent about that. I think all banks are when they go through that process, to say this is an ongoing multi-year effort. We keep making significant progress year in and year out. I think that's the way you have to approach it.

All right. Great. Thank you.

Sure.

Jeffrey Elliott, Autonomous Research.

Just a quick question on the loan growth. There's quite a bit of acquired growth that we've seen over the last couple of quarters. Clearly the auto agreement that you've got to purchase loans there. You had some acquired loan growth in mortgage in 3Q. The loans that you've acquired in the oil and gas sector from --

Jeffrey, could you speak up a little bit? I'm having trouble hearing.

Sure. So I was saying there's been quite a bit of acquired loan growth in 3Q and 4Q. Clearly some of that through the auto channel, the mortgage loans you acquired in the third quarter, the RBS energy loans you acquired in 4Q. Could you just help us by splitting out how much of the growth that we're seeing come onto the balance sheet is through your own originations versus loans that you've acquired?

Sure. I guess in Q4, we had about $900 million of purchased growth in consumer and about the $200 million in commercial. I would say from an ongoing basis, the resi mortgage purchases were pretty full on that. One of the strategies we had this year was to do those purchases to lead the build-up of our own force, so that we can do our own originations. So as we bring on these loan officers, and the market's looking favorable for 2015, I think we'll do very little or much, much less in terms of resi purchases.

On the auto side, we said we had a target to do about $500 million a quarter. We did about $400 million, in fact, in Q4 through our relationship with SCUSA. Again, the effort there is to ultimately bring on more prime paper which gives us a better risk adjusted return profile than what we have in our back book, which is mainly super prime. We're kind of orienting our own origination capabilities to do more prime and to change that mix.

So ultimately I think we'll sunset at some point that relationship with SCUSA when our own capabilities are where we need to be. But certainly for 2015, we still have this plan. We're still planning to purchase around $500 million a quarter.

Then I think the commercial side, we've done very little loan purchasing. This was a pretty unique opportunity for us to pick up that energy portfolio. So I would consider that a one-off.

Great. So it sounds like about $1.1 billion out of the $2.4 billion of average balance growth linked quarter was acquired?

Yes.

Perfect. Thank you.

Sure.

Gerard Cassidy, RBC.

Bruce, you were pretty clear on the outlook on the interest rates with the forward curve by the end of 2016, where it may or may not be. In the slide 17 where you give your 2015 outlook, where do you guys to keep the margin steady as you're anticipating, where does the Fed funds rate have to be by the end of the year under that scenario?

Well we're, again, using a forward curve view on that. The forward curve right now I think has the Fed funds rate at 65 basis points. So there's I think a debate in the market, if you will, between whether there's one move or whether there's two moves over the course of 2015. That's currently what we're looking at. So we'll see if that happens.

If rates -- if there was no rate move at all, I think there's maybe $40 million to $50 million impact of a flat rate through the end of the year. So that's a number that we can kind of put a marker next to and work on ways that we can offset that, in case it looks less likely that's going to happen.

Referring to the forward curve, what's your guys' confidence in the accuracy of the forward curve?

Gerard, I mean, that's the market speaking. So I think if you're doing budgeting and you're doing forecasting, you kind of have to roll with what the market thinks at any given point in time. It does move around a lot, which makes it challenging when you go from one quarter to the next and you see the curve whipping around. But I think all kind of forward thinking has to be informed by the curve, the market's view of where rates are going.

Okay. Then shifting over to your slide 15 when you talked about re-energizing the household growth. The reduced foot traffic, is that a seasonal or a secular or a cyclical? Can you guys talk about what you're seeing there at the branch level?

I think it's just -- it's industry-wide. So it's a secular trend that -- with the new offerings of convenience around mobile and online, more customers can access their banking services that they need remotely. They still come into the branches. They still like branches and so having a branch configuration is important.

But kind of the purpose for why they go into the branches I think is becoming more specific. They don't need as much help with transactions. They may want to talk to one of our specialists, et cetera. So I think that's what we're saying is, you maybe have less swings at the bat, if you will, of people coming through your branches, so you have to get good at making targeted offers through other channels.

Brad, I'll flip it to you. You can probably elaborate on that a bit.

Thank you, Bruce. I think you did a very good job of stating that. It puts you in a position of having to be more effective when you do have the interactions with your customers. That's what we're focusing on is making the right offer when do you interact with your customers and setting appointments to get them to come into your branches and those kind of things. But it is an industry-wide trend that everyone is having to adapt to.

Yes.

I recall on the last quarter's call, if I recall correctly, that you guys really didn't have any desire to reduce the number of branches as you go forward. If this foot traffic continues to fall, do you rethink that strategy? Do you start reducing number of branches?

I think the play in the medium term is really to reconfigure your branches, make them more fit for purpose and smaller. So that's really where we're focused on. Is there an expense opportunity? Yes. I think it's in kind of getting the overall square footage that we have to something that is smaller and that makes sure that we have enough meeting space, we have less space designated for the long teller, number of teller station that we needed in the past.

This is not something you can turn on a dime on. Because we have well over 75% of our branches are leased. You have to kind of time it with lease rolls. But there is a prize there. That's what we're focused on.

In terms of consolidations, we've done most of the logical ones to do. There might be a few here and there. But I think that plays really around reducing square footage.

Great. One final question. You mentioned your mobile app has a very high ranking from an outside independent ranking organization. What percentage of customers today are interacting with Citizens through the mobile app?

Well, let me answer it this way. So we've talked a lot about transaction migration, customers moving to doing their transactions with us in non-traditional ways. We are up to about 8% of our deposit base or 8% of our deposits coming through mobile deposits, about 25% in total being non-branch activity.

I don't have off the top of my head the number of the percentage of customers that interact with us on mobile. But I can tell you that it's growing rapidly. Our transaction volume happening through mobile is growing really at a pace even beyond what we expected. Like I said, over 25% of our deposit volume now coming from non-branch activities.

Great. Appreciate all the color.

Sure. Okay. Are there any more questions, operator?

No further questions in queue.

Okay. Well, again, it's Bruce speaking. I'd like to just end the call by saying I think we have a very solid quarter here in the bank. We're optimistic as we enter 2015. Thanks everybody for dialing in today. Have a good day.

That does conclude today's conference call. Thanks for your participation. You may now disconnect.