Citizens Financial Group, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a bank holding company headquartered in Providence, Rhode Island, operating primarily through Citizens Bank, N.A. and Citizens Bank of Pennsylvania. Its two reporting segments are Consumer Banking and Commercial Banking. The unaudited report covers the three and nine months ended September 30, 2016, with comparisons to the corresponding 2015 periods, and the balance sheet comparison is to December 31, 2015.
At September 30, 2016, the Company operated approximately 1,200 branches and 3,200 ATMs across 11 states and reported approximately $147.0 billion of total assets.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $945 million, up 10% | $2.772 billion, up 9% |
| Noninterest income | $435 million, up 23% | $1.120 billion, up 6% |
| Total revenue | $1.380 billion, up 14% | $3.892 billion, up 8% |
| Provision for credit losses | $86 million, up 13% | $267 million, up 27% |
| Noninterest expense | $867 million, up 9% | $2.505 billion, up 2% |
| Net income | $297 million, up 35% | $763 million, up 23% |
| Net income available to common stockholders | $290 million, up 36% | $749 million, up 22% |
| Diluted EPS | $0.56, versus $0.40 | $1.42, versus $1.13 |
| Net interest margin | 2.84%, versus 2.76% | 2.85%, versus 2.75% |
| Efficiency ratio | 62.88%, versus 66.02% | 64.36%, versus 68.17% |
Reported returns improved: return on average common equity was 5.82% for the quarter and 5.08% for the nine months, while return on average tangible common equity was 8.58% and 7.51%, respectively. The effective tax rate was 30.5% for the quarter and 31.9% for the nine months.
Balance sheet, credit, debt and liquidity
- Total assets increased to $147.015 billion from $138.208 billion at year-end 2015.
- Loans and leases increased 6% to $105.467 billion. Commercial loans grew 9% to $50.389 billion and retail loans grew 4% to $55.078 billion.
- Total deposits increased 6% to $108.327 billion, led by checking with interest, money market, savings and term deposits.
- Short-term borrowed funds were $3.412 billion. Long-term borrowed funds increased to $11.902 billion from $9.886 billion, primarily due to additional senior bank debt and Federal Home Loan Bank advances.
- Net cash provided by operating activities was $1.198 billion for the first nine months. Investing activities used $8.699 billion, principally due to $6.724 billion of loan growth and securities purchases. Financing activities provided $7.331 billion, primarily from deposit growth and long-term borrowings. Cash and cash equivalents ended at $2.915 billion.
- Contingent liquidity was $24.2 billion, consisting of $1.9 billion of net overnight cash, $19.2 billion of unencumbered liquid securities and $3.1 billion of unused FHLB capacity. Including secured Federal Reserve discount-window capacity, available liquidity was approximately $36.1 billion.
- The Company stated that it had been fully compliant with the applicable Liquidity Coverage Ratio through September 30, 2016.
- Net charge-offs were $83 million in the quarter and $231 million for the nine months. The annualized net charge-off rate was 0.32% for the quarter and 0.30% for the nine months.
- Nonperforming loans and leases were $1.107 billion, or 1.05% of total loans and leases, compared with 1.07% at December 31, 2015. Commercial nonperforming loans increased, largely due to commodity-related and oil-and-gas exposures.
- The allowance for loan and lease losses was $1.240 billion, or 1.18% of loans, and total allowance for credit losses, including unfunded commitments, was $1.310 billion.
- Basel III transitional capital ratios remained well above minimums: CET1 11.3%, Tier 1 capital 11.5%, total capital 14.2% and Tier 1 leverage 10.1%.
Material changes versus comparable periods
- Revenue and earnings benefited from 7% average loan growth, improved loan yields and a 10-basis-point year-to-date improvement in net interest margin.
- Commercial Banking net income increased 12% in the quarter and 7% for the nine months; Consumer Banking net income increased 35% and 30%, respectively.
- Credit costs increased, particularly in Commercial Banking, due in part to higher losses in the oil-and-gas and other commodity-related portfolios. The nine-month provision included a $36 million reserve build, compared with a $4 million reserve build in the prior-year period.
- Noninterest income included a $72 million pretax gain from the sale of $310 million of mortgage and home-equity troubled debt restructurings. The transaction reduced retail TDRs to $812 million from $1.2 billion at year-end 2015.
- Non-core assets increased 26% to approximately $3.0 billion. The increase primarily reflected the transfer of a $1.2 billion legacy RBS aircraft-leasing and loan portfolio into runoff following an Asset Finance review.
- The Company issued $350 million of 2.375% senior notes due 2021 and used proceeds and cash to repurchase $500 million of subordinated debt.
- During the quarter, the Company repurchased 11.1 million common shares for $250 million at an average price of $22.60. Common dividends paid during the first nine months totaled $179 million.
- Cash flow and financing activity were substantially larger than in 2015 because of increased loan growth, securities purchases, long-term debt issuance and FHLB funding.
Guidance, outlook, commentary and risks
The filing does not provide a conventional full-year earnings or revenue forecast. The Federal Reserve did not object to the Company’s 2016 capital plan, which contemplated quarterly common dividends of $0.12 per share through 2016, a potential increase to $0.14 per share in 2017, and share repurchases of up to $690 million through the second quarter of 2017. These actions remained subject to Board approval, capital conditions, financial performance and market conditions. A $0.12 per-share fourth-quarter 2016 dividend was subsequently approved.
- Management described the U.S. economy, employment and credit conditions as broadly stable, but emphasized the sensitivity of net interest income and mortgage activity to interest rates and yield-curve movements.
- The Company’s balance sheet was asset-sensitive; an instantaneous 200-basis-point increase in rates was estimated to increase next-12-month net interest income by 11.6%, while a 200-basis-point decline was estimated to reduce it by 5.1%. These are model-based scenarios, not forecasts.
- Approximately $3.0 billion of HELOC balances were scheduled for a payment reset or balloon payment between October 2016 and December 2018. Management reported favorable performance of previously reset balances but identified future resets as a continuing risk.
- Legacy regulatory matters included OCC, CFPB and FDIC consent orders concerning checking products, deposit reconciliation, identity-theft products and debt-cancellation products. Financial penalties had been paid and substantially all related remediation was expected to be resolved by year-end 2016.
- The Company remains subject to litigation, regulatory investigations, fair-lending and consumer-protection requirements, and ongoing compliance costs. Management stated that any liabilities beyond recorded provisions could not be estimated, although it did not expect aggregate liabilities to materially adversely affect the financial statements.
- Other risks include deterioration in commercial commodity and oil-and-gas credits, housing and collateral values, deposit pricing, wholesale funding access, liquidity conditions, cybersecurity and operational failures, changes in Basel III and other regulations, and potential goodwill impairment.
- The Company is assessing the future effects of major accounting standards, including the current expected credit loss standard effective January 1, 2020, and revenue recognition, lease and financial-instrument standards with earlier effective dates.
Investor verification items
- Separate recurring earnings from the $72 million pretax TDR-sale gain and other third-quarter notable items; adjusted net income was $278 million versus reported net income of $297 million.
- Monitor commercial nonperforming loans, criticized loans and oil-and-gas exposure, including the increase in commercial nonperforming loans to $396 million.
- Assess the performance and valuation of the $1.2 billion aircraft-leasing portfolio placed in runoff and the broader $3.0 billion non-core asset portfolio.
- Track loan growth, deposit pricing, funding costs and the effect of interest-rate changes on net interest margin.
- Review HELOC payment-reset performance through 2018 and related charge-offs, delinquencies and loss assumptions.
- Confirm continued capital-plan distributions against regulatory capital, stress-test outcomes and the fully phased-in Basel III requirements.
- Review the status and financial impact of outstanding regulatory consent orders, remediation obligations, litigation and other contingencies.
- Reconcile reported consolidated cash, contingent liquidity and available borrowing capacity with actual funding needs and maturities.