Citizens Financial Group, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a U.S. bank holding company operating through Citizens Bank, N.A. and Citizens Bank of Pennsylvania. It serves retail, small-business, commercial and institutional customers through approximately 1,200 branches and 3,200 ATMs across 11 states. The filing covers the three months ended March 31, 2015, with balance-sheet comparisons to December 31, 2014 and operating comparisons to the three months ended March 31, 2014. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / March 31, 2015 |
|---|---|---|
| Net interest income | $836 million | $808 million |
| Noninterest income | $347 million | $358 million |
| Total revenue | $1.183 billion | $1.166 billion |
| Provision for credit losses | $58 million | $121 million |
| Noninterest expense | $810 million | $810 million |
| Net income | $209 million | $166 million |
| Diluted EPS | $0.38 | $0.30 |
| Net interest margin | 2.77% | 2.89% |
| Efficiency ratio | 68.49% | 69.43% |
| Return on average common equity | 4.36% | 3.48% |
| Return on average tangible common equity | 6.53% | 5.24% |
At March 31, 2015, total assets were $136.5 billion, loans and leases were $94.5 billion, deposits were $99.0 billion, stockholders’ equity was $19.6 billion and goodwill was $6.9 billion. Loans increased 1% from year-end 2014, while deposits increased 3%. Total cash and cash equivalents were $5.0 billion.
Operating cash flow was $98 million. Investing activities used $1.7 billion, primarily for securities purchases and loan growth, while financing activities provided $3.4 billion, primarily from increased deposits. Cash and cash equivalents increased $1.7 billion during the quarter.
Basel III transitional capital ratios remained strong: CET1 12.2%, Tier 1 risk-based 12.2%, total risk-based 15.5% and Tier 1 leverage 10.5%. Management estimated a fully phased-in Basel III CET1 ratio of 12.1% at March 31, 2015.
Material changes versus comparable periods
- Net income increased $43 million, or 26%, primarily because the provision for credit losses declined $63 million and net interest income increased $28 million.
- Net income excluding restructuring charges and special items was $215 million, up 30% from the prior-year period. This is a non-GAAP measure.
- Net interest income increased 3%, supported by growth in earning assets and lower pay-fixed swap costs. The net interest margin declined 12 basis points because of low interest rates, lower loan yields and mix changes, higher deposit costs and higher borrowing costs.
- Noninterest income declined 3%. Mortgage banking fees and capital markets fees increased, but securities gains fell $17 million and the Chicago branch divestiture reduced reported fee income.
- Noninterest expense was unchanged at $810 million. Higher salaries and software amortization were offset by lower other operating expense, outside services, occupancy and equipment expense.
- Net charge-offs declined to $54 million from $87 million, and the annualized net charge-off rate decreased to 0.23% from 0.41%. Management attributed the improvement partly to a large commercial recovery.
- Nonperforming loans and leases were $1.136 billion, or 1.20% of total loans and leases, compared with 1.18% at year-end 2014. The allowance for loan and lease losses was $1.202 billion, or 1.27% of loans.
- Consumer Banking net income increased 91% to $61 million, while Commercial Banking net income increased 4% to $147 million.
- Non-core assets declined 6% from year-end 2014 to $2.9 billion.
Guidance, outlook, commentary and unusual items
- Management expected U.S. GDP growth to rebound in the second half of 2015 but noted potential pressure in 2016 from a stronger dollar and weak international growth.
- The company planned approximately $280 million of infrastructure and technology investment during 2015 and about $170 million in 2016. It also expected approximately $18 million of additional restructuring costs through December 31, 2015.
- As part of its transition from RBS, the company expected approximately $52 million of one-time separation expenditures over 2015–2017 and approximately $34 million of ongoing annual incremental standalone-company expenses.
- Management stated that the company was asset-sensitive to interest rates; an instantaneous 200-basis-point increase was estimated to increase next-12-month net interest income by 13.9%, while a 200-basis-point decline was estimated to reduce it by 4.6%. These simulations exclude possible future management actions.
- Approximately $4.1 billion of HELOC balances were subject to a payment reset or balloon payment between April 1, 2015 and December 31, 2017. Management reported favorable performance to date but identified payment shock as an ongoing credit risk.
- The company was compliant with the applicable liquidity coverage ratio at March 31, 2015 and expected full compliance by January 2016. Contingent liquidity was approximately $21.9 billion, with total available liquidity including additional pledged borrowing capacity of approximately $29.9 billion.
- In March 2015, the Federal Reserve raised no objection to the company’s capital plan. Subject to regulatory approval, management intended to repurchase an additional $250 million to $500 million of common stock during 2015 and 2016, potentially paired with debt issuance.
- On April 6, 2015, the company issued $250 million of Series A perpetual preferred stock. On April 7, it used the proceeds to repurchase 10.5 million common shares from RBS for approximately $250 million, reducing RBS ownership to 40.8%. A quarterly common dividend of $0.10 per share was announced for payment in May 2015.
- Regulatory and legal matters include consumer-product compliance issues, OCC and FDIC consent orders, LIBOR litigation, Telephone Consumer Protection Act litigation, foreclosure-related inquiries and mortgage repurchase demands. Management stated that aggregate potential liabilities were not expected to have a material adverse effect, but the ultimate exposure could not be estimated with certainty.
- CBNA remained subject to restrictions relating to its ability to own or expand financial subsidiaries until regulatory deficiencies are remediated. The OCC may require additional limitations or divestiture if remediation is unsuccessful.
Most important facts for investors to verify
- Whether loan growth and improving credit trends persist without relying on unusual commercial recoveries.
- The effect of sustained low rates, deposit repricing and borrowing costs on the 2.77% net interest margin.
- HELOC payment-reset performance through 2017, including delinquencies, defaults, refinancings and charge-offs.
- Progress and total cost of RBS separation, standalone infrastructure investments and restructuring initiatives.
- Regulatory remediation at CBNA, compliance with consent orders and any restrictions on subsidiary dividends.
- Potential losses from litigation, consumer restitution, mortgage repurchase claims and related regulatory investigations.
- The impact of planned share repurchases, the Series A preferred stock issuance and RBS’s remaining ownership on capital ratios and common-shareholder returns.
- The sustainability of liquidity and capital metrics as deposits, loans, securities and risk-weighted assets continue to grow.