Citizens Financial Group, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. reported results for the three months ended March 31, 2022. The company is a bank holding company headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking. Total assets were $192.1 billion at March 31, 2022.
CBNA completed the acquisition of HSBC’s East Coast branches and national online deposit business on February 18, 2022, adding approximately $6.3 billion of deposits and $1.5 billion of loans. Citizens completed its acquisition of Investors Bancorp on April 6, 2022, after the reporting date; Investors had approximately $23 billion of loans and $20 billion of deposits at March 31, 2022.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1.645 billion | $1.659 billion | Down 1% |
| Net interest income | $1.147 billion | $1.117 billion | Up 3% |
| Net interest margin | 2.75% | 2.75% | Stable |
| Noninterest income | $498 million | $542 million | Down 8% |
| Noninterest expense | $1.106 billion | $1.018 billion | Up 9% |
| Provision for credit losses | $3 million expense | $140 million benefit | Unfavorable comparison |
| Net income | $420 million | $611 million | Down 31% |
| Net income available to common stockholders | $396 million | $588 million | Down 33% |
| Diluted EPS | $0.93 | $1.37 | Down $0.44 |
| ROTCE | 11.4% | 17.2% | Down 580 bps |
| Efficiency ratio | 67.2% | 61.4% | Higher by 580 bps |
Underlying, non-GAAP net income available to common stockholders was $452 million, or $1.07 diluted EPS, compared with $603 million, or $1.41 diluted EPS, in Q1 2021. Underlying results exclude notable items, including $37 million of acquisition integration costs, $11 million of transformation and other costs, and a $24 million HSBC-related day-one CECL provision expense.
Average loans and leases increased 5% to $129.2 billion, led by retail loan growth in mortgages, auto and education. Average deposits increased 6% to $155.1 billion. Period-end loans and leases were $131.3 billion, up 2% from December 31, 2021, while deposits were $158.8 billion, up 3%.
Net charge-offs were $59 million, or 0.19% of average loans and leases, compared with $158 million, or 0.52%, in Q1 2021. The allowance for credit losses was $1.878 billion, equal to 1.43% of loans and leases, compared with $1.934 billion, or 1.51%, at year-end 2021. Nonaccrual loans and leases increased 12% from year-end to $789 million, or 0.60% of total loans and leases.
Operating cash flow was $1.554 billion, compared with an operating cash outflow of $690 million in Q1 2021. Investing activities used $3.914 billion, principally reflecting loan growth and securities purchases. Financing activities provided $3.138 billion, primarily from deposit growth, partly offset by debt repayments and dividends. Cash and cash equivalents ended the quarter at $9.936 billion.
Long-term borrowed funds were $5.894 billion, down from $6.932 billion at December 31, 2021, primarily due to debt redemptions. Total available liquidity was approximately $71.9 billion, including $45.7 billion of contingent liquidity and $26.2 billion of available Federal Reserve discount-window capacity.
Regulatory capital remained above requirements. The CET1, Tier 1, total capital and Tier 1 leverage ratios were 9.7%, 10.9%, 12.5% and 9.6%, respectively. The company declared and paid a common dividend of $0.39 per share, totaling $165 million. Approximately $455 million remained available under the common-stock repurchase authorization at quarter-end.
Material changes versus the prior comparable period
- Net income declined primarily because Q1 2021 included a $140 million credit provision benefit, whereas Q1 2022 included a $3 million provision expense, and because noninterest expense increased.
- Net interest income rose 3% as interest-earning assets grew 3%, while the net interest margin remained broadly stable.
- Noninterest income fell 8%, mainly because mortgage banking fees declined 58% due to lower mortgage production volumes and gain-on-sale margins. Capital markets fees and foreign exchange and derivative products revenue increased.
- Noninterest expense increased 9%, or 6% on an underlying basis, driven by higher salaries, employee benefits, travel, advertising and outside services.
- Credit performance improved materially, with net charge-offs down 63% year over year and commercial criticized loans declining to 5.1% of the commercial portfolio from 5.4% at year-end.
- Accumulated other comprehensive loss increased substantially to $2.258 billion from $665 million, primarily from unrealized losses on debt securities and derivatives as interest rates increased. Total comprehensive loss was $1.173 billion despite net income of $420 million.
- Tangible book value per common share decreased 6% year over year to $30.97.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management described the macroeconomic outlook as positive but cited tightening monetary and fiscal policies, elevated inflation, labor shortages, supply-chain challenges and the potential effects of Russia’s invasion of Ukraine. The company’s CECL forecast assumed 2022 real GDP growth of 2.5% and average unemployment of 5.2%.
A hypothetical adverse economic scenario involving 2022 unemployment of 6.6% to 7.4% would increase the modeled period-end credit-loss estimate by approximately $160 million, excluding qualitative adjustments. This is a sensitivity analysis and is not management’s forecast.
The company’s balance sheet was asset-sensitive; a gradual 200-basis-point increase in rates was estimated to increase net interest income by 7.2% over 12 months. Interest-rate changes also pose risks to deposit pricing, mortgage originations, mortgage servicing rights, securities valuations and accumulated other comprehensive income.
Key execution risks include integration of Investors and the HSBC branches, retention of acquired customers and employees, regulatory and supervisory requirements, litigation and investigations, cybersecurity, liquidity and capital requirements, and market effects from the Russia-Ukraine conflict. Management stated that legal and regulatory matters could result in settlements, damages, fines, penalties, remediation or business restrictions, but believed established reserves and currently known matters were not expected to have a material adverse effect on the financial statements.
Facts investors should verify
- Completion and purchase-accounting effects of the Investors acquisition, including final fair values, goodwill, pro forma results and the approximately 73.6 million shares issued.
- Whether deposit and loan growth from the HSBC and Investors transactions is retained and translated into sustainable net interest income.
- Trends in mortgage banking revenue, gain-on-sale margins and mortgage servicing-rights valuations.
- Changes in nonaccrual loans, criticized commercial loans, net charge-offs and the CECL allowance as inflation, rates and economic conditions evolve.
- Impact of rising rates on securities unrealized losses, AOCI, deposit betas, funding costs and capital ratios.
- Progress toward integration, cost savings and efficiency objectives, including the effect of acquisition-related expenses.
- Future dividends and share repurchases, which remain subject to capital, regulatory, market and board approval considerations.