Citizens Financial Group, Inc. — Form 10-Q Summary
Business context and reporting period
Citizens Financial Group is a bank holding company headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking. It serves retail, small-business, middle-market, corporate and institutional customers across New England, the Mid-Atlantic and the Midwest. The filing covers the unaudited quarter ended March 31, 2019, compared primarily with the quarter ended March 31, 2018 and the balance sheet at December 31, 2018. Total assets were $161.3 billion at March 31, 2019.
Key financial metrics
| Metric | Q1 2019 | Comparable period or prior date |
|---|---|---|
| Net income | $439 million | $388 million in Q1 2018 |
| Net income available to common stockholders | $424 million | $381 million in Q1 2018 |
| Diluted EPS | $0.92 | $0.78 in Q1 2018 |
| Total revenue | $1.588 billion | $1.462 billion in Q1 2018 |
| Net interest income | $1.160 billion | $1.091 billion in Q1 2018 |
| Net interest margin | 3.23% | 3.19% in Q1 2018 |
| Noninterest income | $428 million | $371 million in Q1 2018 |
| Provision for credit losses | $85 million | $78 million in Q1 2018 |
| Noninterest expense | $937 million | $883 million in Q1 2018 |
| Efficiency ratio | 59.0% | 60.43% in Q1 2018 |
| Return on average tangible common equity | 13.0% | 11.7% in Q1 2018 |
| Loans and leases | $117.6 billion | $116.7 billion at December 31, 2018 |
| Total deposits | $123.9 billion | $119.6 billion at December 31, 2018 |
| Long-term borrowed funds | $11.7 billion | $15.9 billion at December 31, 2018 |
| Cash flow from operating activities | $472 million | $704 million in Q1 2018 |
| Cash flow used in investing activities | $1.471 billion | $1.118 billion in Q1 2018 |
| Cash flow used in financing activities | $639 million | $1.241 billion provided in Q1 2018 |
Cash and cash equivalents ended the quarter at $2.436 billion, down from $3.859 billion at March 31, 2018. Management reported $30.2 billion of contingent liquidity, including $20.3 billion of unencumbered high-quality liquid assets, $8.4 billion of unused FHLB capacity and $1.5 billion of cash held at the Federal Reserve. The company remained compliant with its modified liquidity coverage ratio.
Regulatory capital remained above required minimums: CET1 was 10.5%, Tier 1 capital was 11.3%, total capital was 13.4% and the Tier 1 leverage ratio was 10.0% at March 31, 2019.
Material changes versus the prior comparable period
- Net income increased 13%, while diluted EPS increased 18%, aided by revenue growth and a 5% reduction in average diluted common shares.
- Revenue increased 9%; net interest income rose 6% and noninterest income rose 15%. Capital markets, foreign exchange and interest-rate products, mortgage banking, trust and investment services, and letter-of-credit and loan fees contributed to noninterest income growth.
- Average loans and leases increased 6% to $117.6 billion, led by commercial lending, commercial real estate and selected retail categories. Average deposits increased 6% to $120.4 billion.
- Net interest margin expanded four basis points, although funding costs increased materially as deposit and borrowed-fund rates rose.
- Noninterest expense rose 6%, primarily from salaries and benefits, equipment and software, and outside services. Lower FDIC insurance premiums partly offset these increases.
- Net charge-offs increased to $89 million from $70 million. Commercial net charge-offs were $24 million compared with net recoveries of $3 million in Q1 2018, while retail net charge-offs declined to $65 million from $73 million.
- Nonperforming loans and leases declined to $780 million from $797 million at December 31, 2018. The allowance for loan and lease losses remained 1.06% of loans and leases.
- Deposits increased $4.3 billion from year-end, while total borrowed funds declined $4.8 billion, mainly because of a $5.0 billion reduction in long-term FHLB advances.
- Citizens issued $300 million of Series D preferred stock, repurchased $200 million of common stock and paid $149 million of common dividends. The quarterly common dividend was $0.32 per share, compared with $0.22 in Q1 2018.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative full-year earnings or revenue guidance. Management emphasized continued top-line growth, expense management, positive operating leverage and investments in strategic growth initiatives. Management characterized overall credit quality as strong, with a broadly stable commercial risk profile and improving retail asset quality.
Q1 2019 included $5 million of pretax, or $4 million after-tax, acquisition integration costs related to acquisitions, including Franklin American Mortgage Company, Clarfeld Financial Advisors and Bowstring Advisors. Underlying net income was $443 million, or $428 million available to common stockholders, excluding these items.
Citizens completed acquisitions of Clarfeld on January 1, 2019 and Bowstring on March 1, 2019; these transactions increased goodwill by an estimated $118 million at March 31, 2019. Citizens Bank of Pennsylvania was merged into Citizens Bank, National Association effective January 2, 2019, materially increasing the bank subsidiary’s risk-weighted assets.
The company adopted the new lease standard and recognized operating lease right-of-use assets of $746 million and lease liabilities of $762 million at quarter-end. The company also adopted revised hedge-accounting guidance without a material financial statement impact.
Management identified interest-rate movements, funding costs, deposit pricing, economic conditions, housing prices, employment, credit losses, regulatory requirements, litigation and investigations, cybersecurity and operational failures as principal risks. The company expects the current expected credit loss standard, effective January 1, 2020, to result in earlier recognition of credit losses and an increase in the allowance; the quantitative impact was not yet reasonably estimable.
Legal and regulatory proceedings, including matters involving fair lending, consumer protection, mortgage-related issues and product sales, remain possible contingencies. Management stated that, based on available information and established reserves, any aggregate liabilities are not expected to have a material adverse effect, although outcomes and timing cannot be predicted with certainty.
Investor verification checklist
- Verify that revenue growth and improved returns are sustainable after acquisition-related integration costs and other notable items.
- Monitor deposit pricing and funding costs, given the substantial increase in interest-bearing deposit expense and the sensitivity of net interest income to interest rates.
- Review commercial real estate losses, criticized commercial loans and net charge-offs for evidence of broader credit deterioration.
- Assess the eventual allowance impact of the January 1, 2020 current expected credit loss standard.
- Reconcile capital actions, including the Series D preferred issuance, common-stock repurchases and dividends, with future capital ratios and regulatory limits.
- Evaluate liquidity under stress, including reliance on deposits, FHLB capacity, pledged collateral and access to wholesale funding.
- Review acquisition accounting, goodwill, integration costs and the performance of the acquired mortgage, wealth-management and advisory businesses.
- Consider the potential financial and operational effects of pending litigation, regulatory matters, mortgage repurchase obligations and $70.7 billion of off-balance-sheet arrangements.