Citizens Financial Group, Inc. 2015 Q3 Form 10-Q Summary
Business Context and Reporting Period
Citizens Financial Group, Inc. is a regional banking holding company operating primarily 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, with Consumer Banking and Commercial Banking as its operating segments.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, with balance-sheet comparisons to December 31, 2014 and operating comparisons to the corresponding 2014 periods.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $856 million | $820 million | $2.532 billion | $2.461 billion |
| Noninterest income | $353 million | $341 million | $1.060 billion | $1.339 billion |
| Total revenue | $1.209 billion | $1.161 billion | $3.592 billion | $3.800 billion |
| Provision for credit losses | $76 million | $77 million | $211 million | $247 million |
| Noninterest expense | $798 million | $810 million | $2.449 billion | $2.568 billion |
| Net income | $220 million | $189 million | $619 million | $668 million |
| Net income available to common stockholders | $213 million | $189 million | $612 million | $668 million |
| Diluted EPS | $0.40 | $0.34 | $1.13 | $1.19 |
| Net interest margin | 2.76% | 2.77% | 2.75% | 2.84% |
| Efficiency ratio | 66.02% | 69.84% | 68.17% | 67.58% |
For the nine months, net income excluding restructuring charges and special items was $650 million, compared with $573 million in 2014. Management identifies these as non-GAAP measures.
- Total assets were $135.4 billion at September 30, 2015, versus $132.9 billion at December 31, 2014.
- Loans and leases increased 4% to $97.4 billion, led by commercial real estate, residential mortgages, auto and student loans. Deposits increased 6% to $101.9 billion.
- The allowance for loan and lease losses was $1.201 billion, or 1.23% of loans and leases. The total allowance for credit losses, including unfunded commitments, was $1.260 billion.
- Nonperforming loans and leases were $1.034 billion, or 1.06% of loans and leases, down from $1.101 billion, or 1.18%, at December 31, 2014.
- Net charge-offs were $75 million in the third quarter and $207 million for the nine months, compared with $88 million and $243 million, respectively, in the comparable 2014 periods.
- Regulatory capital remained strong: transitional Basel III CET1 was 11.8%, Tier 1 capital was 12.0%, total capital was 15.4% and Tier 1 leverage was 10.4% at September 30, 2015.
Cash Flow, Debt and Liquidity
- For the nine months, operating activities provided $831 million, investing activities used $4.196 billion and financing activities provided $1.845 billion.
- Cash and cash equivalents declined $1.520 billion from the beginning of 2015 to $1.756 billion at September 30, 2015. The decline primarily reflected loan growth and securities investment, partly funded by deposit growth.
- Short-term borrowed funds declined to $7.154 billion from $10.529 billion at December 31, 2014. Long-term borrowed funds were $4.153 billion versus $4.642 billion.
- The company issued $250 million of 4.350% subordinated notes due 2025 and used the proceeds to repurchase approximately $250 million of common stock from RBS.
- Management reported approximately $23.0 billion of contingent liquidity, including $17.0 billion of unencumbered liquid securities and $5.3 billion of unused FHLB capacity. Additional available Federal Reserve borrowing capacity secured by loans was approximately $9.1 billion.
Material Changes Versus Prior Comparable Period
- Third-quarter net income increased 16% to $220 million, while diluted EPS increased to $0.40 from $0.34. Management attributed the improvement partly to the absence of third-quarter restructuring charges and special items recorded in 2014.
- Nine-month net income declined 7% because the 2014 period included a $288 million pretax gain, or approximately $180 million after tax, from the Chicago branch divestiture and significant separation and restructuring effects. Excluding those items, management reported a 13% increase in net income.
- Net interest income increased 4% in the quarter and 3% year to date, primarily from earning-asset and loan growth and lower pay-fixed swap costs. The nine-month margin declined nine basis points because of low interest rates, loan mix, higher deposit costs and higher borrowing costs.
- Nine-month noninterest income declined 21% on a reported basis because of the 2014 Chicago divestiture gain; excluding that gain, management stated that noninterest income increased $9 million.
- Noninterest expense declined 5% year to date, reflecting lower restructuring and special items. Excluding those items, expense declined $33 million.
- Non-core assets declined 18% from year-end 2014 to $2.5 billion, continuing the company’s strategy of reducing portfolios outside its strategic focus.
- The company issued $250 million of Series A preferred stock in April 2015 and repurchased approximately $500 million of common stock from RBS during the first nine months.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific earnings or revenue forecast. Management expects continued investment in infrastructure and technology, with approximately $230 million of infrastructure spending planned for 2015 and about $230 million for 2016. The company also expects ongoing incremental expenses of approximately $34 million annually associated with operating as a fully independent public company.
- Management describes credit trends as favorable but identifies economic conditions, unemployment, housing prices and borrower performance as key uncertainties.
- Approximately 20% of the $15.2 billion HELOC portfolio, or $3.0 billion of drawn balances, was subject to a payment reset or balloon payment between October 2015 and December 2017. Approximately $194 million was scheduled to reset in the fourth quarter of 2015.
- The company remains subject to extensive regulatory requirements, including Basel III, CCAR, DFAST, consumer-compliance remediation and an OCC agreement concerning CBNA’s ability to own financial subsidiaries.
- Legacy regulatory matters include customer-deposit remediation, identity-theft and debt-cancellation add-on products, fair-lending and consumer-practices matters. In August 2015, the company and subsidiaries paid $20.5 million in civil monetary penalties related to historical customer-deposit practices; additional remediation and restitution may be required.
- Legal and regulatory contingencies include Telephone Consumer Protection Act litigation, LIBOR litigation, a foreclosure-expense investigation and mortgage repurchase and indemnification exposure. Management states that potential liabilities in excess of recorded provisions cannot generally be estimated.
- The company relies on RBS technology and market-risk infrastructure under transitional arrangements and identifies the failure to replace those functions as a risk.
- Interest-rate risk is material to the banking model. Management reports that the balance sheet is asset-sensitive: a 200-basis-point instantaneous increase in rates was estimated to increase 12-month net interest income by 13.3%, while a 200-basis-point decline was estimated to reduce it by 5.4%.
- RBS completed the sale of its remaining 20.9% ownership stake on November 3, 2015. The company declared a quarterly common dividend of $0.10 per share payable November 19, 2015.
Important Facts for Investors to Verify
- Reconcile reported nine-month earnings with management’s non-GAAP results, particularly the impact of the 2014 Chicago divestiture and 2015 restructuring and special items.
- Monitor net interest margin, deposit pricing and the effect of future interest-rate changes on net interest income.
- Assess the performance of HELOCs approaching payment resets, including delinquency, charge-off and modification trends.
- Review criticized commercial loans, nonperforming assets, allowance coverage and the sustainability of recent credit-quality improvements.
- Evaluate capital distributions, share repurchases and debt issuance against regulatory capital requirements and the company’s CCAR capital plan.
- Track regulatory remediation, litigation, mortgage repurchase demands and potential penalties or restitution not yet estimable.
- Confirm liquidity and funding capacity, including compliance with the modified Liquidity Coverage Ratio requirements beginning in January 2016.
- Consider the valuation sensitivity of $6.876 billion of goodwill and the company’s reliance on management assumptions in future impairment testing.