Citizens Financial Group, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group is a bank holding company headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking. It provides retail, small-business, commercial, capital-markets, mortgage, wealth-management and treasury services across the New England, Mid-Atlantic and Midwest regions. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparative results for the three months ended March 31, 2020. Total assets were $187.2 billion at March 31, 2021.
Financial performance and condition
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1.659 billion | $1.657 billion | Stable |
| Net interest income | $1.117 billion | $1.160 billion | Down 4% |
| Noninterest income | $542 million | $497 million | Up 9% |
| Provision for credit losses | $(140) million | $600 million | $740 million favorable change |
| Noninterest expense | $1.018 billion | $1.012 billion | Up 1% |
| Net income | $611 million | $34 million | Up $577 million |
| Net income available to common stockholders | $588 million | $12 million | Up $576 million |
| Diluted EPS | $1.37 | $0.03 | Up $1.34 |
| Net interest margin | 2.75% | 3.09% | Down 34 bps |
| Efficiency ratio | 61.4% | 61.1% | Higher by 0.3 points |
| ROTCE | 17.2% | 0.4% | Higher by 16.8 points |
- Average interest-earning assets grew 9% to $164.4 billion, but lower asset yields, elevated cash balances and the low-rate environment pressured net interest margin. Average deposits increased 16% to $146.6 billion, while average loans and leases increased 1% to $122.8 billion.
- Noninterest income benefited from higher capital-markets fees, mortgage-banking fees, trust and investment-services fees and letter-of-credit and loan fees. Service charges and fees declined, partly due to COVID-19-related effects on overdraft fees.
- Consumer Banking net income increased to $302 million from $236 million; Commercial Banking net income increased to $211 million from $179 million.
- Cash flow used in operating activities was $690 million and cash flow used in investing activities was $1.072 billion. Financing activities provided $3.689 billion, primarily from a $4.185 billion increase in deposits. Cash and cash equivalents ended at $14.660 billion.
Balance sheet, credit, debt and liquidity
- Total assets increased to $187.2 billion from $183.3 billion at December 31, 2020. Loans and leases declined 1% to $122.2 billion, while total deposits increased 3% to $151.3 billion.
- PPP loans totaled $5.1 billion at quarter-end, up from $4.2 billion at December 31, 2020, and were fully guaranteed by the SBA.
- The allowance for credit losses declined to $2.372 billion from $2.670 billion, reducing coverage to 1.94% of loans and leases, or 2.03% excluding PPP loans. The reserve release reflected improved economic forecasts and credit performance.
- Net charge-offs increased to $158 million from $137 million, or 0.52% of average loans versus 0.46%. Commercial net charge-offs increased to $104 million, while retail net charge-offs declined to $54 million.
- Nonaccrual loans and leases were $1.008 billion, representing 0.82% of loans and leases, compared with 0.83% at year-end 2020. Commercial criticized loans declined to $4.1 billion, or 6.8% of commercial loans, from 7.6%.
- Long-term borrowed funds were $8.316 billion and short-term borrowed funds were $70 million. The company completed a $265 million subordinated-debt exchange in February 2021.
- Regulatory capital remained strong: CET1 ratio was 10.1%, Tier 1 capital ratio 11.4%, total capital ratio 13.4% and Tier 1 leverage ratio 9.5%. The company reported approximately $80.1 billion of total available liquidity, including $50.2 billion of contingent liquidity and $29.9 billion of available Federal Reserve discount-window capacity.
Material changes versus comparable periods
- Profitability improved substantially because Q1 2020 included a $600 million credit-loss provision associated with the initial COVID-19 shock, whereas Q1 2021 included a $140 million negative provision.
- Revenue was essentially unchanged as 9% growth in noninterest income offset a 4% decline in net interest income. The principal pressure on net interest income was a 34-basis-point decrease in net interest margin.
- Underlying net income, excluding notable items, was $626 million versus $59 million in Q1 2020. Q1 2021 notable items were $20 million of pretax expenses, primarily related to TOP 6 transformation and revenue-and-efficiency initiatives.
- Total deposits increased $4.2 billion from year-end, driven by government stimulus-related consumer deposit flows. Period-end loans declined $895 million, or 1%.
- The company repurchased $95 million of common stock and paid a $0.39-per-share common dividend. The board had authorized up to $750 million of repurchases beginning in Q1 2021.
Guidance, outlook, commentary, risks and unusual items
- Management’s full-year 2021 net charge-off guidance was 35 to 45 basis points of average loans. This guidance incorporates an approximately $54 million charge-off related to a private-equity sponsor client. Citizens stated that it considers the incident isolated and filed a lawsuit alleging breach of contract and fraud.
- Management’s ACL forecast assumed approximately 3.2% real GDP growth during 2021 and unemployment of approximately 6.3% to 7.0%. A hypothetical more pessimistic scenario could increase modeled lifetime losses by approximately $350 million, excluding qualitative adjustments.
- COVID-19, vaccination progress, government stimulus and loan-forbearance programs continued to affect credit performance, deposits and loss estimates. Management retained qualitative reserve adjustments for COVID-sensitive commercial sectors, including retail and hospitality real estate.
- Key risks include economic deterioration, interest-rate and deposit-pricing changes, credit losses, commercial real estate and sponsor exposures, regulatory and capital requirements, litigation and investigations, cybersecurity and operational failures, and the planned transition from LIBOR to alternative reference rates. Legacy LIBOR contract remediation is expected to continue through mid-2023.
- Future dividends and repurchases remain subject to capital levels, earnings, risk-weighted assets, market conditions, regulatory requirements and board approval. The company expected its 3.4% stress capital buffer to remain in effect through 2021.
- Mortgage servicing rights increased to $893 million from $658 million at year-end. The value is sensitive to prepayment rates, interest rates and other valuation assumptions.
Important facts for investors to verify
- Reconcile the significant earnings improvement to the Q1 2021 reserve release and determine the sustainability of credit-related benefits.
- Monitor net interest margin, elevated cash balances, deposit pricing and the effect of future rate movements on net interest income.
- Assess the quality and concentration of commercial credit, including the $54 million sponsor-related charge-off, commercial real estate exposure and COVID-sensitive industries.
- Track PPP loan forgiveness, associated fee income and the effect of PPP runoff on reported loan balances and ACL coverage.
- Review the assumptions supporting the ACL, including GDP, unemployment, stimulus and forbearance effects, and the disclosed downside sensitivity.
- Confirm the company’s capacity to maintain dividends and execute repurchases while remaining above regulatory capital and stress-buffer requirements.
- Review pending litigation, regulatory matters and mortgage representation-and-warranty obligations; the filing states that any potential aggregate liability is not currently expected to be materially adverse, but outcomes and amounts may be uncertain.