Citizens Financial (CFG) - 2021 Q1 - Quarterly Report

Part I. Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Net income surged due to a negative credit provision, while stable revenue reflected higher noninterest income offsetting lower net interest income Financial Performance Net income rose to $611 million from $34 million year-over-year, driven by a significant reversal in the provision for credit losses Key Performance Metrics | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Income | $611 million | $34 million | | Diluted EPS | $1.37 | $0.03 | | ROTCE | 17.2% | 0.4% | - Total revenue of $1.7 billion was stable year-over-year, supported by a 9% increase in noninterest income which was partially offset by a 4% decrease in net interest income[18] - Net interest margin (NIM) decreased by 34 basis points to 2.75% from 3.09% in Q1 2020, primarily due to the lower interest rate environment and elevated cash balances[18] - A negative provision for credit losses of $140 million was recorded, compared to a $600 million provision in Q1 2020, reflecting improved macroeconomic outlook and strong credit performance[22] Selected Consolidated Financial Data Key data shows total assets at $187.2 billion, total deposits at $151.3 billion, and a CET1 capital ratio of 10.1% as of March 31, 2021 Operating Data (in millions) | Operating Data (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net interest income | $1,117 | $1,160 | | Noninterest income | $542 | $497 | | Total revenue | $1,659 | $1,657 | | Provision for credit losses | ($140) | $600 | | Net income | $611 | $34 | Balance Sheet Data (in millions) | Balance Sheet Data (in millions) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total assets | $187,217 | $183,349 | | Loans and leases | $122,195 | $123,090 | | Total deposits | $151,349 | $147,164 | | Total stockholders' equity | $22,653 | $22,673 | Results of Operations A 9% rise in noninterest income offset a 4% decline in net interest income, while a significant negative credit provision drove higher net income Net Interest Income Net interest income decreased 4% to $1.1 billion due to a 34 basis point compression in net interest margin, despite growth in earning assets | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $1,117 M | $1,160 M | -4% | | Net Interest Margin, FTE | 2.76% | 3.10% | -34 bps | | Average Interest-Earning Assets | $164.4 B | $150.9 B | +9% | | Average Deposits | $146.6 B | $126.6 B | +16% | - The decrease in NII was primarily due to lower interest-earning asset yields and elevated cash balances, which were partially offset by an improved funding mix and better deposit pricing[18] Noninterest Income Noninterest income grew 9% year-over-year to $542 million, fueled by strong performance in capital markets and mortgage banking fees Noninterest Income (in millions) | Noninterest Income (in millions) | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Mortgage banking fees | $165 | $159 | 4% | | Service charges and fees | $99 | $118 | (16%) | | Capital markets fees | $81 | $43 | 88% | | Trust and investment services fees | $58 | $53 | 9% | | Total Noninterest Income | $542 | $497 | 9% | - The significant increase in capital markets fees was driven by higher underwriting revenue and M&A advisory fees, as well as the impact of a mark-to-market loss on loan trading assets in Q1 2020[36] Noninterest Expense Noninterest expense remained stable at $1.0 billion, as higher technology spending was offset by lower other operating expenses Noninterest Expense (in millions) | Noninterest Expense (in millions) | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $548 | $549 | 0% | | Equipment and software | $152 | $133 | 14% | | Outside services | $139 | $135 | 3% | | Other operating expense | $91 | $111 | (18%) | | Total Noninterest Expense | $1,018 | $1,012 | 1% | Provision for Credit Losses A negative provision of $140 million reflects a significant reversal from the $600 million provision in Q1 2020 due to an improved economic outlook | Metric (in millions) | Q1 2021 | Q4 2020 | Q1 2020 | | :--- | :--- | :--- | :--- | | Provision for credit losses | ($140) | $124 | $600 | | Net charge-offs | $158 | $190 | $137 | | Net charge-off ratio | 0.52% | 0.61% | 0.46% | - The negative provision reflects strong credit performance and improvement in the macroeconomic outlook, compared to the adverse impacts from the COVID-19 pandemic in the prior-year quarter[43][44] Income Tax Expense Income tax expense rose to $170 million due to higher pre-tax income, while the effective tax rate decreased to 21.8% from 24.1% - The effective income tax rate was 21.8% in Q1 2021, compared to 24.1% in Q1 2020[46] Business Operating Segments Both Consumer and Commercial Banking segments reported year-over-year net income growth, driven by varied factors including loan growth and capital markets activity Segment Performance (in millions) | Segment Performance (in millions) | Consumer Banking Q1 2021 | Consumer Banking Q1 2020 | Commercial Banking Q1 2021 | Commercial Banking Q1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $863 | $793 | $421 | $365 | | Noninterest income | $351 | $357 | $170 | $125 | | Net charge-offs | $59 | $97 | $101 | $43 | | Net income | $302 | $236 | $211 | $179 | Analysis of Financial Condition Total assets grew to $187.2 billion, while total loans decreased slightly to $122.2 billion and total deposits grew 3% to $151.3 billion Securities The securities portfolio grew to $28.1 billion, with its average effective duration lengthening to 4.1 years due to higher interest rates Securities (in billions) | Securities (in billions) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Debt securities available for sale, at fair value | $24.5 | $22.9 | | Debt securities held to maturity, at cost | $3.0 | $3.2 | | Total Debt Securities | $27.5 | $26.3 | - The portfolio's average effective duration increased to 4.1 years from 2.7 years at the end of 2020, as higher long-term rates reduced projected securities prepayment speeds[54] Loans and Leases Total loans and leases decreased by 1% from the prior quarter to $122.2 billion, with slight declines in both commercial and retail portfolios Loan Portfolio (in billions) | Loan Portfolio (in billions) | March 31, 2021 | December 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total commercial | $60.4 | $60.8 | (1%) | | Total retail | $61.8 | $62.3 | (1%) | | Total loans and leases | $122.2 | $123.1 | (1%) | Allowance for Credit Losses and Nonaccruing Loans and Leases The Allowance for Credit Losses decreased to $2.4 billion, reflecting a reserve release, while nonaccrual loans remained stable at $1.0 billion Asset Quality Metrics | Asset Quality Metric | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Allowance for credit losses (ACL) | $2.4 B | $2.7 B | | ACL to loans and leases | 1.94% | 2.17% | | Nonaccrual loans and leases (NPLs) | $1.0 B | $1.0 B | | NPLs to loans and leases | 0.82% | 0.83% | - Q1 2021 net charge-offs were $158 million (0.52% of average loans), up from $137 million (0.46%) in Q1 2020, driven by commercial NCOs[61] - Total commercial criticized loan balances decreased by $528 million from year-end 2020 to $4.1 billion, representing 6.8% of total commercial loans[65] Deposits Total deposits increased by 3% to $151.3 billion, driven by government stimulus inflows into money market and demand deposit accounts Deposit Composition (in billions) | Deposit Composition (in billions) | March 31, 2021 | December 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Demand | $46.1 | $43.8 | 5% | | Money market accounts | $51.1 | $48.6 | 5% | | Term deposits | $7.7 | $9.5 | (19%) | | Total deposits | $151.3 | $147.2 | 3% | Borrowed Funds Total borrowed funds decreased by $203 million from the prior quarter, primarily due to a reduction in short-term borrowings - Total borrowed funds decreased by $203 million from December 31, 2020, driven by a $173 million decrease in short-term and a $30 million decrease in long-term borrowed funds[78] Capital and Regulatory Matters The company maintained a strong capital position with a CET1 ratio of 10.1% and repurchased $95 million of common stock during the quarter Regulatory Capital Ratios | Regulatory Capital Ratios | March 31, 2021 | December 31, 2020 | Required Minimum + SCB | | :--- | :--- | :--- | :--- | | CET1 capital ratio | 10.1% | 10.0% | 7.9% | | Tier 1 capital ratio | 11.4% | 11.3% | 9.4% | | Total capital ratio | 13.4% | 13.4% | 11.4% | | Tier 1 leverage ratio | 9.5% | 9.4% | 4.0% | - The company's Stress Capital Buffer (SCB) of 3.4% became effective on October 1, 2020, and applies through September 30, 2021[82] - In January 2021, the board authorized the repurchase of up to $750 million of common stock; during Q1 2021, the company repurchased $95 million of its stock[83][97] Liquidity A robust liquidity position was maintained with total available liquidity of $80.1 billion and a healthy loan-to-deposit ratio of 80.7% - Total available liquidity was approximately $80.1 billion, which includes a contingent liquidity buffer of $50.2 billion[108] - The consolidated period-end loan-to-deposits ratio was 80.7%, indicating that core deposits are the primary source of funding[108] - The Parent Company's cash and cash equivalents totaled $2.7 billion as of March 31, 2021[100] Off-Balance Sheet Arrangements Total off-balance sheet arrangements increased 2% to $78.4 billion, driven by a $2.0 billion rise in commitments to extend credit Off-Balance Sheet Arrangements (in billions) | Arrangement (in billions) | March 31, 2021 | December 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Commitments to extend credit | $76.2 | $74.2 | 3% | | Letters of credit | $2.1 | $2.2 | (7%) | | Total | $78.4 | $76.6 | 2% | Critical Accounting Estimates The Allowance for Credit Losses remains the most critical estimate, based on an economic forecast of 3.2% GDP growth for 2021 - The ACL is the most critical accounting estimate, based on expected lifetime credit losses over the contractual life of the loan portfolio[116] - The economic forecast used for the Q1 2021 ACL projects real GDP growth of approximately 3.2% and an unemployment rate in the range of 6.3% to 7.0% throughout 2021[116] - A sensitivity analysis using a more pessimistic scenario would result in an increase of approximately $350 million to the quantitative lifetime loss estimate, before qualitative adjustments[118] Risk Governance The company's integrated risk management framework, overseen by the Board and executive committees, remained unchanged during the quarter - The Board of Directors sets the risk appetite, with delegated authority for risk management and oversight given to Board and executive management level risk committees[120] - The Executive Risk Committee (ERC), chaired by the Chief Risk Officer, is responsible for oversight of risk across the enterprise[120] Market Risk The company's primary market risk is its asset-sensitive balance sheet, where a 200 basis point rate increase would boost NII by 8.5% | Interest Rate Scenario (Gradual Change) | Estimated % Change in NII over 12 Months | | :--- | :--- | | +200 bps | 8.5% | | +100 bps | 4.3% | | -25 bps | (1.3%) | - The company's balance sheet is asset sensitive, meaning net interest income benefits from rising interest rates[122][124] - The company is operationally prepared for the transition from LIBOR and is continuing efforts to move new originations to alternative reference rates during 2021[130] Financial Statements This section presents the unaudited interim Consolidated Financial Statements for the three months ended March 31, 2021 Consolidated Balance Sheet (in millions) | Consolidated Balance Sheet (in millions) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $187,217 | $183,349 | | Net Loans and Leases | $120,001 | $120,647 | | Total Deposits | $151,349 | $147,164 | | Total Liabilities | $164,564 | $160,676 | | Total Stockholders' Equity | $22,653 | $22,673 | Consolidated Statement of Operations (in millions) | Consolidated Statement of Operations (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net Interest Income | $1,117 | $1,160 | | Provision for Credit Losses | ($140) | $600 | | Total Noninterest Income | $542 | $497 | | Total Noninterest Expense | $1,018 | $1,012 | | Net Income | $611 | $34 | Part II. Other Information Legal Proceedings The company is involved in various legal and regulatory matters from normal business operations, which are not expected to have a material impact - The company is a party to legal proceedings and regulatory matters arising from normal business operations, including issues related to fair lending, unfair/deceptive practices, and mortgage-related issues[237] - Management believes that the aggregate liabilities, if any, from these proceedings will not have a materially adverse effect on the company's consolidated financial statements[239] Risk Factors This section refers to the detailed discussion of risk factors in the company's 2020 Annual Report on Form 10-K - For a detailed discussion of risks, the report refers to the "Risk Factors" section in the company's 2020 Form 10-K[261] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 2.2 million shares in Q1 2021, with $655 million remaining available under the current repurchase program Share Repurchase Activity | Period | Total Shares Repurchased | Weighted Average Price Paid Per Share | Maximum Dollar Amount Remaining | | :--- | :--- | :--- | :--- | | Jan 1 - Jan 31, 2021 | 2,103,412 | $42.32 | $660,988,442 | | Feb 1 - Feb 28, 2021 | — | $— | $660,988,442 | | Mar 1 - Mar 31, 2021 | 141,512 | $42.32 | $655,000,000 |