Citizens Financial (CFG) - 2023 Q1 - Quarterly Report

Part I. Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations Citizens Financial Group's Q1 2023 net income increased significantly, driven by higher net interest income from rising rates and acquisitions, while managing credit provisions and maintaining strong capital Financial Performance Q1 2023 financial performance showed increased net income, diluted EPS, and total revenue, with improved efficiency and return on tangible common equity Q1 2023 Key Financial Highlights (vs. Q1 2022) | Metric | Q1 2023 (Reported) | Q1 2022 (Reported) | Change | | :--- | :--- | :--- | :--- | | Net Income | $511 million | $420 million | +$91 million | | Diluted EPS | $1.00 | $0.93 | +$0.07 | | Total Revenue | $2.1 billion | $1.6 billion | +$483 million | | Efficiency Ratio | 60.9% | 67.2% | -6.3% | | ROTCE | 14.4% | 11.4% | +3.0% | - Underlying net income, which excludes notable items like integration costs, was $560 million ($1.10 per diluted share) for Q1 2023, compared to $476 million ($1.07 per diluted share) for Q1 2022[22][125] - Tangible book value per common share increased by 6% from December 31, 2022, to $29.44[22] Results of Operations Q1 2023 results showed significant growth in net interest income, a slight decrease in noninterest income, increased noninterest expense, and a higher provision for credit losses - Net interest income increased by 43% YoY to $1.64 billion, driven by a 55 basis point expansion in net interest margin to 3.30% and 20% growth in average interest-earning assets, reflecting higher rates and acquisition impacts[26] - Noninterest income slightly decreased by 3% YoY to $485 million, mainly due to lower mortgage banking fees and capital markets fees[27][33] - Noninterest expense rose 17% YoY to $1.30 billion, primarily driven by acquisition-related costs and higher FDIC insurance expenses[29][35] - The provision for credit losses was $168 million, a significant increase from $3 million in the prior year, reflecting increased net charge-offs and concerns in the CRE general office portfolio[36] Business Operating Segments Both Consumer and Commercial Banking segments reported increased Q1 2023 net income, driven by net interest income growth from margin expansion and asset growth Segment Net Income (Q1 2023 vs Q1 2022) | Segment | Q1 2023 Net Income | Q1 2022 Net Income | Change | | :--- | :--- | :--- | :--- | | Consumer Banking | $281 million | $209 million | +34% | | Commercial Banking | $319 million | $271 million | +18% | - Consumer Banking's net interest income grew 28% YoY, driven by margin expansion and asset growth from acquisitions. Net charge-offs increased by 69% as credit normalizes from pandemic-era lows[41] - Commercial Banking's net interest income increased 44% YoY due to higher margins and asset growth. Noninterest income decreased 6% due to lower syndication fees[42][44] Analysis of Financial Condition Q1 2023 financial condition showed a slight decrease in total loans and deposits, an increase in the Allowance for Credit Losses, and a rise in nonaccrual loans - Total loans and leases decreased by 1% from year-end 2022 to $154.7 billion, reflecting a decrease in commercial loans due to sales and reduced line utilization, and planned runoff in auto loans[48] - The Allowance for Credit Losses (ACL) increased to $2.3 billion (1.47% of total loans) from $2.2 billion at year-end 2022, reflecting a reserve build of $35 million[49][50] - Total deposits decreased to $172.2 billion from $180.7 billion at year-end 2022, driven by seasonal and rate-related outflows. Estimated insured/secured deposits represented 68% of the total deposit base[59][60] - Nonaccrual loans increased to $996 million (0.64% of total loans) from $944 million (0.60%) at year-end 2022, with the increase primarily in the commercial portfolio[52] Capital and Regulatory Matters The company maintained strong regulatory capital ratios in Q1 2023, including a 10.0% CET1 ratio, while actively repurchasing common stock and increasing its repurchase authorization Regulatory Capital Ratios (as of March 31, 2023) | Ratio | CFG Actual | Required Minimum | | :--- | :--- | :--- | | CET1 Capital Ratio | 10.0% | 7.9% | | Tier 1 Capital Ratio | 11.1% | 9.4% | | Total Capital Ratio | 12.9% | 11.4% | | Tier 1 Leverage Ratio | 9.4% | 4.0% | - The company's CET1 and Tier 1 capital ratios remained flat at 10.0% and 11.1% respectively, compared to December 31, 2022[66] - During Q1 2023, the company repurchased $400 million of common stock and paid $205 million in common dividends[74] - The Board of Directors increased the common share repurchase authorization to $2.0 billion in February 2023[75] Liquidity The company maintained robust liquidity in Q1 2023 with approximately $66.0 billion in total available liquidity, supported by a healthy loans-to-deposits ratio and increased parent company cash - As of March 31, 2023, total available liquidity was approximately $66.0 billion, consisting of $40.7 billion in contingent liquidity (cash, unencumbered securities, FHLB capacity) and $25.3 billion in available discount window capacity[96] - The consolidated period-end loans-to-deposits ratio was 89.8%, with organically generated deposits remaining the primary source of funding[95] - The Parent Company's cash and cash equivalents increased to $2.0 billion from $1.6 billion at year-end 2022[86] Quantitative and Qualitative Disclosures about Market Risk The company actively manages market risk, primarily interest rate risk, maintaining an asset-sensitive balance sheet and utilizing derivatives, resulting in low trading risk Sensitivity of Net Interest Income to Interest Rate Changes | Instantaneous Change in Rates | Estimated % Change in NII (over 12 months) | | :--- | :--- | | +200 bps | 2.5% | | +100 bps | 1.0% | | -100 bps | (2.1)% | | -200 bps | (4.8)% | - The company utilizes interest rate derivative contracts to manage interest rate exposure, with a total notional amount of $53.75 billion in swaps and $2.0 billion in options as of March 31, 2023[113] - Market risk from trading activities is low, with total market risk-weighted assets at $654 million as of March 31, 2023, down from $1.15 billion a year prior[122] Financial Statements The unaudited consolidated financial statements for Q1 2023 show slight decreases in total assets, loans, deposits, and liabilities, with an increase in stockholders' equity, and strong net interest income and net income Consolidated Balance Sheets The consolidated balance sheets as of March 31, 2023, show slight decreases in total assets, net loans, and deposits from year-end 2022, while total stockholders' equity increased Consolidated Balance Sheet Highlights (as of March 31, 2023) | Account | March 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $222,256 million | $226,733 million | | Net Loans and Leases | $152,671 million | $154,679 million | | Total Deposits | $172,194 million | $180,724 million | | Total Liabilities | $198,055 million | $203,043 million | | Total Stockholders' Equity | $24,201 million | $23,690 million | Consolidated Statements of Operations The consolidated statements of operations for Q1 2023 show significant increases in net interest income and net income, alongside higher provision for credit losses and noninterest expense Consolidated Statement of Operations (Three Months Ended March 31) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $1,643 million | $1,147 million | | Provision for Credit Losses | $168 million | $3 million | | Total Noninterest Income | $485 million | $498 million | | Total Noninterest Expense | $1,296 million | $1,106 million | | Net Income | $511 million | $420 million | | Diluted EPS | $1.00 | $0.93 | Notes to Consolidated Financial Statements The notes detail the adoption of new accounting standards, the increase in the Allowance for Credit Losses, the use of derivative instruments for hedging, and total commitments to extend credit - The company adopted new accounting standards in 2023 related to Troubled Debt Restructurings (TDRs), Fair Value Hedging, and Investments in Tax Credit Structures. The adoption for tax credit investments resulted in a $26 million reduction to retained earnings[147][148] - The Allowance for Credit Losses (ACL) increased by $35 million during the quarter to $2.275 billion, driven by $133 million in net charge-offs and a $168 million provision expense[162][168] - The company uses a variety of derivative instruments for hedging purposes, with interest rate contracts having a notional amount of $58.75 billion designated as hedging instruments[212] - Total commitments to extend credit were $96.0 billion, and letters of credit stood at $2.1 billion as of March 31, 2023[232] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[265] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[265] Part II. Other Information Legal Proceedings The company is involved in various legal proceedings and regulatory matters, which management does not expect to have a materially adverse effect on its financial condition - The company is a party to various legal proceedings and regulatory matters. Based on current information and established reserves, management does not expect these to have a materially adverse effect on the company's financial condition[238][266] Risk Factors No significant changes were reported to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No significant changes were reported to the risk factors from the company's 2022 Form 10-K[275] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2023, the company repurchased over 10 million common shares and increased its share repurchase authorization, with approximately $1.6 billion remaining for future repurchases Q1 2023 Share Repurchases | Period | Total Shares Repurchased | Average Price Paid | | :--- | :--- | :--- | | Jan 2023 | 8,482,536 | $39.68 | | Feb 2023 | 3,449 | $33.74 | | Mar 2023 | 1,603,306 | $39.65 | - On February 17, 2023, the Board of Directors increased the common share repurchase program by an additional $1.15 billion[276]