Citizens Financial Group, Inc. — 2Q15 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a bank holding company operating through Citizens Bank, N.A. and Citizens Bank of Pennsylvania. It provides consumer and commercial banking services across an 11-state New England, Mid-Atlantic and Midwest footprint through approximately 1,200 branches, 3,200 ATMs and digital channels. The filing covers the three and six months ended June 30, 2015; financial statements are unaudited and prepared under GAAP.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Net interest income | $840 million | $1.676 billion |
| Noninterest income | $360 million | $707 million |
| Total revenue | $1.200 billion | $2.383 billion |
| Provision for credit losses | $77 million | $135 million |
| Noninterest expense | $841 million | $1.651 billion |
| Net income | $190 million | $399 million |
| Diluted EPS | $0.35 | $0.73 |
| Net interest margin | 2.72% | 2.74% |
| Efficiency ratio | 70.02% | 69.27% |
- Compared with the prior-year periods, reported net income declined 39% in the quarter and 17% year to date. Adjusted net income excluding restructuring charges and special items increased 5% to $215 million in the quarter and 16% to $430 million year to date.
- Return on average tangible common equity was 5.90% for the quarter and 6.21% year to date; excluding restructuring charges and special items, it was 6.67% and 6.70%, respectively.
- At June 30, 2015, total assets were $137.3 billion, loans and leases were $96.5 billion, deposits were $100.6 billion, and stockholders’ equity was $19.6 billion.
- Loans and leases increased 3% from December 31, 2014, led by commercial loans, student loans, auto loans and residential mortgages. Deposits increased 5%, led by money-market and term deposits.
- Net cash provided by operating activities was $515 million for the first six months. Investing activities used $5.0 billion, primarily for securities purchases and loan growth, while financing activities provided $4.0 billion, primarily from deposit growth. Cash and cash equivalents ended at $2.9 billion, down from $3.3 billion at year-end 2014.
- Total short-term borrowed funds were $10.5 billion and long-term borrowed funds were $3.9 billion at June 30, 2015. Available FHLB borrowing capacity was approximately $3.3 billion, and total available liquidity was approximately $29.8 billion, including unencumbered securities, FHLB capacity and FRB borrowing capacity.
- Transitional Basel III capital ratios were strong: CET1 11.8%, Tier 1 12.1%, total capital 15.3% and Tier 1 leverage 10.4%. Management stated that ratios were above fully phased-in Basel III minimums.
Material changes versus comparable periods
- Net interest income increased 1% in the quarter and 2% year to date, but net interest margin declined 15 basis points and 14 basis points, respectively, because of low interest rates, loan-yield and mix pressure, higher deposit costs and higher borrowing costs.
- Noninterest income declined 44% in the quarter and 29% year to date primarily because the second quarter and first half of 2014 included a $288 million pretax gain from the Chicago-area branch divestiture. Excluding that gain, noninterest income was higher in the quarter and broadly stable year to date.
- Mortgage banking fees increased to $30 million in the quarter and $63 million year to date, supported by higher origination volumes, improved gain-on-sale spreads and mortgage-servicing-rights valuation recoveries.
- Noninterest expense declined 11% in the quarter and 6% year to date, reflecting lower restructuring and special costs, lower salaries, outside services and other operating expenses. Commercial Banking expense increased as the company invested in growth and incurred higher regulatory costs.
- Provision expense increased 57% in the quarter because of higher loan balances and lower commercial recoveries, but declined 21% year to date as credit quality improved. Net charge-offs were $78 million in the quarter and $132 million year to date, compared with $68 million and $155 million in the prior-year periods.
- Nonperforming loans and leases were $1.05 billion, or 1.09% of loans and leases, versus 1.18% at December 31, 2014. The allowance for loan and lease losses was $1.2 billion, or 1.24% of loans and leases, covering 114% of nonperforming loans.
Guidance, outlook, risks and unusual items
- Management reported continued progress on strategic initiatives, cost savings and efficiency efforts, but stated that slower growth in selected fee businesses, net interest margin pressure and the forward fed-funds curve create a 2016 revenue headwind. The targeted 10% ROTCE run rate by the end of 2016 was likely pushed out. No specific revised earnings guidance was provided.
- The company is asset-sensitive: an instantaneous 200-basis-point rate increase was estimated to increase next-12-month net interest income by 13.0%, while a 200-basis-point decline was estimated to reduce it by 5.7%. Low rates continue to pressure margins, deposit pricing and mortgage-servicing-rights values.
- Approximately 23% of the $15.4 billion HELOC portfolio was subject to payment reset or balloon payment between July 2015 and December 2017. Management cited customer outreach and refinancing efforts but identified potential future delinquency and charge-off risk.
- Regulatory matters include ongoing OCC and FDIC consent-order remediation, anticipated enforcement actions involving certain consumer products, restrictions on Citizens Bank, N.A.’s financial subsidiaries, and heightened compliance costs.
- Legal and contingent exposures include Telephone Consumer Protection Act litigation, LIBOR litigation, foreclosure-related investigations and mortgage repurchase or indemnification demands. Management stated that aggregate liabilities beyond recorded provisions were not expected to be materially adverse, but several matters cannot be reliably estimated.
- The company incurred $26 million of restructuring costs during the first six months. It also issued $250 million of Series A preferred stock in April and repurchased approximately $250 million of common stock from RBS. Subsequent to quarter-end, it issued $250 million of subordinated notes and used the proceeds to repurchase an additional 9.6 million shares from RBS.
- In June 2015, the company entered into commitments to purchase student loans and automobile loans in future periods, with maximum cumulative or quarterly purchase amounts specified in the filing.
Most important facts for investors to verify
- Whether margin compression persists as rates, deposit costs, loan yields and funding costs change.
- The effect of HELOC payment resets, student and auto loan growth, and commercial credit performance on charge-offs and reserves.
- Progress and financial consequences of OCC/FDIC remediation, consumer-product enforcement matters and other legal proceedings.
- The sustainability of adjusted earnings after restructuring and special items, including whether efficiency gains offset ongoing technology, compliance and stand-alone-company costs.
- Capital and liquidity after the post-quarter-end subordinated debt issuance, share repurchase and future planned capital actions.
- The company’s ability to achieve LCR compliance requirements and reduce reliance on RBS-provided systems and transitional services.
- The assumptions supporting goodwill, mortgage-servicing-rights and allowance-for-credit-loss valuations, which involve significant management judgment.