Citizens Financial Group, Inc. — Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a bank holding company headquartered in Providence, Rhode Island, with approximately $176.7 billion of assets at March 31, 2020. Its principal subsidiary, Citizens Bank, National Association, operates through Consumer Banking and Commercial Banking across New England, the Mid-Atlantic and Midwest regions. This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019 and balance-sheet comparison to December 31, 2019.
Financial performance and condition
| Metric | Q1 2020 | Comparable period or prior period |
|---|---|---|
| Total revenue | $1.657 billion | $1.588 billion, up 4% year over year |
| Net interest income | $1.160 billion | $1.160 billion |
| Noninterest income | $497 million | $428 million, up 16% |
| Provision for credit losses | $600 million | $85 million |
| Noninterest expense | $1.012 billion | $937 million, up 8% |
| Net income | $34 million | $439 million |
| Net income available to common stockholders | $12 million | $424 million |
| Diluted EPS | $0.03 | $0.92 |
| Net interest margin | 3.09% | 3.23% |
| Efficiency ratio | 61.1% | 59.0% |
| Return on average tangible common equity | 0.4% | 13.0% |
| Total assets at period end | $176.719 billion | $165.733 billion at December 31, 2019 |
| Loans and leases at period end | $127.528 billion | $119.088 billion at December 31, 2019 |
| Total deposits at period end | $133.475 billion | $125.313 billion at December 31, 2019 |
| Long-term borrowed funds | $16.437 billion | $14.047 billion at December 31, 2019 |
- Revenue growth was driven primarily by mortgage banking fees, which increased to $159 million from $43 million, and higher trust and investment services fees. These gains were partially offset by lower service charges, card fees, capital markets fees, and foreign exchange and interest-rate products revenue due to COVID-19-related disruption.
- Net interest income was stable despite lower interest rates. Average interest-earning assets increased 4%, while the fully taxable-equivalent net interest margin declined 15 basis points to 3.10%.
- The $600 million provision for credit losses included a $463 million reserve build attributed to COVID-19. Net charge-offs were $137 million, compared with $89 million in the first quarter of 2019.
- At March 31, 2020, the allowance for credit losses was approximately $2.2 billion, or 1.73% of loans and leases, compared with $1.3 billion and 1.09% at December 31, 2019. Nonaccruing loans and leases increased to $780 million from $703 million.
- Commercial loans and leases increased 15% from year-end to $66.032 billion, including an estimated $7.2 billion of higher COVID-19-related line utilization. Retail loans were essentially unchanged at $61.496 billion.
- Deposits increased 7% from year-end, primarily because commercial customers retained proceeds from credit-line draws. The period-end loans-to-deposits ratio, excluding loans held for sale, was 95.5%.
- Cash flow from operating activities was negative $1.327 billion, compared with positive $472 million in the prior-year quarter. Investing cash flow was negative $8.768 billion, primarily reflecting a $7.630 billion increase in loans and leases. Financing cash flow was positive $10.767 billion, driven by deposit growth and borrowings. Cash and cash equivalents ended at $4.058 billion.
- Regulatory capital remained above minimum requirements, although ratios declined from year-end: CET1 was 9.4% versus 10.0%, Tier 1 was 10.5% versus 11.1%, total capital was 12.5% versus 13.0%, and Tier 1 leverage was 9.6% versus 10.0%.
- Total available liquidity was $39.6 billion at March 31, 2020, comprising $2.7 billion of cash, $20.7 billion of unencumbered high-quality liquid securities, $4.0 billion of unused FHLB capacity and $12.2 billion of available discount-window capacity. Management reported $58.7 billion of available liquidity as of April 30, 2020.
Material changes versus comparable periods
- GAAP net income declined 92% year over year, while net income available to common stockholders declined 97%, primarily because of the COVID-19-related credit-loss provision, CECL adoption effects and higher expenses.
- Underlying net income available to common stockholders, excluding notable items, was $37 million versus $428 million in the first quarter of 2019. Underlying diluted EPS was $0.09 versus $0.93.
- Citizens adopted the CECL accounting standard on January 1, 2020. Adoption reduced retained earnings by $337 million after tax and increased the allowance for credit losses by $451 million.
- Noninterest expense increased 8%, reflecting higher salaries and benefits, technology and software investment, and outside services. Underlying noninterest expense increased 5%.
- Common stockholders’ equity declined to $20.380 billion from $20.631 billion at year-end, reflecting dividends, share repurchases and the effects of lower earnings, partly offset by other comprehensive income.
- The company repurchased $270 million of common stock and paid $168 million of common dividends during the quarter. On April 17, 2020, it announced suspension of share repurchases through December 31, 2020.
Outlook, management commentary, risks and unusual items
- Management’s CECL scenarios assumed a deep recession in the second quarter of 2020, significantly declining GDP and elevated unemployment, followed by a strong recovery in the second half of 2020. The filing does not provide conventional earnings or revenue guidance.
- Management cautioned that a deeper recession or slower recovery than assumed could require materially higher future provisions. The allowance methodology is highly dependent on economic forecasts, collateral values, unemployment, GDP, interest rates, customer payment behavior and management judgment.
- As of April 30, 2020, approximately 6% of retail and business banking loans, or $4.1 billion, had payment deferrals. Citizens had registered approximately 45,000 PPP applications representing $4.8 billion of commitments, of which approximately 34,000 loans totaling $4.0 billion were funded as of May 5, 2020.
- Commercial criticized loans increased 23% from year-end to $3.7 billion, or 5.7% of commercial loans and leases. Commercial real estate criticized loans increased to $757 million, or 5.2% of that portfolio.
- Mortgage banking performance benefited from higher origination volume and gain-on-sale margins, but mortgage servicing rights declined in fair value to $577 million from $642 million, primarily due to market-driven changes in interest rates and prepayment speeds.
- The company identified COVID-19 risks involving credit deterioration, higher charge-offs, lower net interest margins, reduced fee income, liquidity and capital pressure, operational disruption, cybersecurity, third-party service providers, litigation and regulatory scrutiny.
- Goodwill impairment was not recorded. Management concluded that reporting-unit fair values exceeded carrying values at March 31, 2020, but noted that continued economic deterioration could result in a future impairment charge.
- Outstanding off-balance-sheet arrangements totaled $67.077 billion, including $64.827 billion of commitments to extend credit and $2.064 billion of letters of credit. The company also disclosed ongoing litigation, investigations and regulatory matters, although management did not expect aggregate liabilities to have a material adverse effect based on information then available.
Important facts for investors to verify
- Whether COVID-19-related deferrals, PPP loans, commercial line utilization and criticized loans translate into higher delinquencies, charge-offs and additional provision expense.
- Whether the company’s assumed second-quarter recession and second-half recovery are consistent with subsequent economic data and actual portfolio performance.
- Changes in the allowance for credit losses, nonaccrual loans, criticized assets, net charge-offs and the loans-to-deposits ratio.
- Quarterly trends in net interest margin, deposit pricing, mortgage banking income and mortgage servicing rights valuations.
- Capital ratios after the full effects of CECL, loan growth, dividends and the suspension or resumption of share repurchases.
- Actual liquidity availability, FHLB and discount-window capacity, wholesale funding maturities and deposit stability.
- Potential financial effects of litigation, regulatory investigations, PPP participation, customer accommodations and other COVID-19-related contingencies.