Citizens Financial Group, Inc. — 1Q 2016 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a bank holding company operating primarily through Citizens Bank, N.A. and Citizens Bank of Pennsylvania. It serves customers across 11 New England, Mid-Atlantic and Midwest states through Consumer Banking and Commercial Banking segments. The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015, and the balance sheet as of March 31, 2016, compared with December 31, 2015.
Financial performance and condition
| Metric | 1Q 2016 | Comparable or prior period | Change |
|---|---|---|---|
| Total assets | $140.1 billion | $138.2 billion at December 31, 2015 | +1% |
| Loans and leases | $101.0 billion | $99.0 billion at December 31, 2015 | +2% |
| Total deposits | $102.6 billion | $102.5 billion at December 31, 2015 | Approximately flat |
| Net interest income | $904 million | $836 million in 1Q 2015 | +8% |
| Noninterest income | $330 million | $347 million in 1Q 2015 | -5% |
| Total revenue | $1.234 billion | $1.183 billion in 1Q 2015 | +4% |
| Provision for credit losses | $91 million | $58 million in 1Q 2015 | +57% |
| Noninterest expense | $811 million | $810 million in 1Q 2015 | Approximately flat |
| Net income | $223 million | $209 million in 1Q 2015 | +7% |
| Net income available to common stockholders | $216 million | $209 million in 1Q 2015 | +3% |
| Diluted EPS | $0.41 | $0.38 in 1Q 2015 | +8% |
| Net interest margin | 2.86% | 2.77% in 1Q 2015 | +9 basis points |
| Efficiency ratio | 65.66% | 68.49% in 1Q 2015 | Improved |
Average loans and leases increased 7% year over year to $100.3 billion, while average deposits increased 7% to $102.0 billion. Loan growth was led by commercial, commercial real estate, student, residential mortgage and auto lending. Commercial Banking generated $133 million of net income, down 10% year over year, while Consumer Banking generated $71 million, up 16%.
Cash provided by operating activities was $374 million, compared with $98 million in 1Q 2015. Investing activities used $2.321 billion, primarily because of a $2.401 billion net increase in loans and leases. Financing activities provided $717 million, including $750 million of long-term debt issuance and $670 million of additional short-term borrowings. Cash and cash equivalents declined by $1.230 billion to $1.855 billion at March 31, 2016.
Total borrowed funds were $14.0 billion, comprising $4.0 billion of short-term borrowings and $10.0 billion of long-term borrowings. The company reported $21.9 billion of contingent liquidity and approximately $32.6 billion of total available liquidity including Federal Reserve borrowing capacity. It had no outstanding short-term unsecured wholesale funding and stated that it was fully compliant with the modified liquidity coverage ratio through March 31, 2016.
Regulatory capital remained strong: CET1 was 11.6%, Tier 1 capital was 11.9%, total capital was 15.1% and Tier 1 leverage was 10.4%, all above applicable minimum and well-capitalized thresholds.
Material changes versus prior comparable period
- Net interest income benefited from 7% average loan growth, improved loan yields and a 9-basis-point increase in net interest margin.
- Noninterest income declined $17 million, mainly because of lower mortgage banking income, lower other income and a $7 million impact from a card-reward accounting change.
- Credit costs increased $33 million. The quarter included an $8 million reserve build and additional reserves related to the oil and gas portfolio following the Shared National Credit review. The prior-year quarter benefited from $28 million of commercial recoveries.
- Net charge-offs increased to $83 million from $54 million, and the annualized net charge-off rate increased to 0.33% from 0.23%. Total nonperforming loans and leases remained $1.1 billion, or 1.07% of loans, although commercial nonperforming loans increased to $370 million from $148 million at December 31, 2015.
- On March 31, 2016, the company transferred $373 million of troubled debt restructurings to loans held for sale, including $97 million previously classified as nonperforming. This contributed to lower reported retail nonperforming balances.
- Commercial loans and leases grew 4% from year-end, while retail loans were approximately flat. Student loans increased 15% from year-end, partly reflecting purchases.
- No restructuring costs or special items were recorded in 1Q 2016, compared with $6 million after tax in 1Q 2015. Reported expense was nevertheless broadly flat because underlying operating expenses increased.
- On March 7, 2016, the company repurchased $125 million of subordinated notes held by RBS. It also issued $750 million of three-year senior notes through its banking subsidiary.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal full-year earnings or revenue guidance. Management expects continued investment in infrastructure and technology, with planned 2016 investment of approximately $245 million and approximately $164 million in 2017. Management expects additional compliance personnel and professional-fee costs because of heightened regulatory expectations.
- Management described the U.S. economy as expanding slowly, with low interest rates and a federal funds target range of 0.25% to 0.50%. The company is asset-sensitive and stated that rising rates would benefit net interest income, while declining rates or a flatter yield curve could reduce margins.
- Approximately 26% of the $14.9 billion HELOC portfolio, or $3.9 billion, was subject to a payment reset or balloon payment between April 2016 and December 2018. Management stated that prior reset cohorts had largely been refinanced, paid off or remained current, but payment shock remains a credit risk.
- Oil and gas deterioration increased criticized and nonperforming commercial exposures and reserve requirements. Commercial criticized loans and leases increased to $2.8 billion, or 5.8% of the commercial portfolio.
- Citizens and its banking subsidiaries remained subject to legacy OCC, CFPB and FDIC consent orders involving checking products, deposit reconciliation and identity-theft and debt-cancellation products. Financial penalties had been paid, and substantially all related remediation was expected to be completed by the end of 2016. CBNA also remained restricted from certain financial-subsidiary activities pending completion of an OCC remediation plan.
- Legal, regulatory, fair-lending, mortgage-related, consumer-practices, cyber, operational and compliance matters could result in fines, remediation, restrictions or increased costs. Management stated that potential aggregate liabilities were not expected to materially adversely affect the financial statements, but losses beyond accrued provisions could not be estimated.
- The company submitted its 2016 capital plan and stress-test results to the Federal Reserve on April 5, 2016. Federal Reserve stress-test results and decisions on proposed capital actions were expected by June 30, 2016.
- Subsequent events included a $348 million student-loan purchase on April 7, 2016 and an announced $0.12 quarterly common dividend, totaling approximately $64 million, payable May 18, 2016.
- An amended employment agreement for CEO Bruce Van Saun was entered into on May 5, 2016. It includes target annual variable compensation of $6.013 million and a one-time equity award with an approximate grant-date value of $3 million.
Important facts for investors to verify
- Whether commercial credit deterioration, particularly in oil and gas, results in additional provisions, charge-offs or nonperforming assets.
- The performance of HELOCs as scheduled payment resets continue through 2018 and the effect of housing prices and interest rates on losses.
- Whether loan growth can continue without materially increasing funding costs, credit risk or capital requirements.
- The Federal Reserve’s 2016 stress-test results and approval or objection to planned dividends, repurchases and other capital actions.
- Progress and remaining costs associated with regulatory consent orders, CBNA’s financial-subsidiary restrictions and broader compliance remediation.
- Changes in mortgage banking income and mortgage servicing rights valuations if interest rates or prepayment speeds change.
- The effect of future interest-rate movements on net interest margin, deposit pricing, liquidity and derivative valuations.
- The company’s reliance on secured funding capacity, pledged collateral and Federal Reserve facilities under stressed liquidity conditions.