Citizens Financial Group, Inc. — Third-Quarter 2022 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. reported results for the three and nine months ended September 30, 2022. The company operates through Consumer Banking and Commercial Banking, with $224.7 billion of assets at quarter-end. Results include the February 2022 acquisition of HSBC’s East Coast branches and national online deposit business, the April 2022 acquisition of Investors Bancorp, and the June 2022 acquisition of DH Capital.
Financial performance and condition
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $2.177 billion, up 31% | $5.821 billion, up 18% |
| Net income | $636 million, versus $530 million | $1.420 billion, versus $1.789 billion |
| Net income available to common stockholders | $611 million; diluted EPS $1.23 | $1.339 billion; diluted EPS $2.84 |
| Net interest income | $1.665 billion, up 45% | $4.317 billion, up 27% |
| Net interest margin, FTE | 3.25%, up 53 basis points | 3.03%, up 30 basis points |
| Noninterest income | $512 million, essentially flat | $1.504 billion, down 2% |
| Noninterest expense | $1.241 billion, up 23% | $3.652 billion, up 21% |
| Provision for credit losses | $123 million expense | $342 million expense |
| Efficiency ratio | 57.0% | 62.7% |
| Return on average tangible common equity | 17.0% | 12.5% |
Underlying, non-GAAP diluted EPS was $1.30 for the quarter and $3.52 for the nine-month period. Underlying net income available to common stockholders was $644 million and $1.659 billion, respectively. These measures exclude notable items, principally acquisition and integration costs, transformation initiatives, and a $169 million initial credit provision associated with acquired loans.
- Total loans and leases were $156.1 billion, up 22% from December 31, 2021, driven primarily by the HSBC and Investors transactions.
- Total deposits were $178.6 billion, up 16% from year-end 2021, including approximately $25.6 billion of period-end balances from the acquisitions.
- The allowance for credit losses was $2.2 billion, or 1.41% of loans and unfunded commitments, compared with $1.9 billion and 1.51% at year-end 2021.
- Nonaccrual loans and leases increased to $852 million from $702 million, while the ratio to total loans remained 0.55%.
- Third-quarter net charge-offs were $74 million, or 0.19% of average loans, compared with 0.14% in the prior-year quarter. The nine-month ratio declined to 0.17% from 0.30%.
- Common equity tier 1, tier 1, total capital, and tier 1 leverage ratios were 9.8%, 10.9%, 12.6%, and 9.2%, respectively. Each risk-based ratio exceeded the applicable required minimum by approximately 120 to 190 basis points.
- Long-term borrowed funds totaled $16.3 billion, up from $6.9 billion at year-end 2021, primarily due to increased Federal Home Loan Bank advances, acquisition-related funding, and loan and securities growth.
- Total available liquidity was approximately $69.5 billion, including $44.0 billion of contingent liquidity and $25.5 billion of available Federal Reserve discount-window capacity. The period-end loan-to-deposit ratio, excluding loans held for sale, was 87.4%.
- Operating cash flow for the first nine months was $2.678 billion. Investing activities used $12.479 billion, primarily for loan growth and securities purchases, while financing activities provided $8.803 billion. Cash and cash equivalents ended at $8.160 billion, down from $9.158 billion at year-end 2021.
Material changes versus the prior comparable period
- Quarterly net income increased 20%, but nine-month net income declined 21% because the prior-year period benefited from a $386 million credit provision benefit, while 2022 included a $342 million provision expense.
- Net interest income and margin benefited from higher market rates, larger earning-asset balances, and the acquisitions. Average interest-earning assets increased 22% in the quarter and 15% year to date.
- Noninterest income was pressured by a 39% quarterly and 42% year-to-date decline in mortgage banking fees, partly offset by stronger capital markets, card, and foreign exchange and derivative revenues.
- Noninterest expense rose substantially because of acquisition and integration costs, higher compensation, occupancy, outside services, FDIC insurance, travel, and advertising costs.
- Tangible book value per common share fell 23% from year-end 2021 to $26.62, primarily reflecting significant unrealized losses in accumulated other comprehensive income from higher interest rates. Accumulated other comprehensive loss increased to $4.823 billion from $665 million.
- Commercial criticized loans increased to $4.6 billion, or 5.6% of commercial loans, from $3.3 billion, or 5.4%, at year-end, with increases primarily related to the Investors acquisition and pressure in commercial real estate.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide a specific quantified earnings or revenue outlook in the filing. The allowance for credit losses incorporated an expected shallow recession beginning in the fourth quarter of 2022, estimated 2023 real GDP decline of approximately 0.5%, and average unemployment of approximately 6%. A more adverse modeled scenario could increase the quantitative modeled allowance by approximately $310 million, excluding qualitative adjustments.
- Key risks include recessionary conditions, inflation, aggressive Federal Reserve tightening, higher funding costs, deposit migration, interest-rate and market-liquidity volatility, mortgage-market weakness, commercial real estate exposure, cybersecurity, regulatory requirements, and litigation.
- Integration of Investors and the HSBC branches could result in greater-than-expected costs, execution difficulties, or customer and employee attrition. Investors loan valuations remained preliminary at September 30, 2022.
- The company had $97.6 billion of off-balance-sheet commitments, including $95.2 billion of commitments to extend credit and $2.1 billion of letters of credit.
- Legal and regulatory proceedings include matters involving fair lending, unfair or deceptive practices, and mortgage-related issues. Management stated that currently available information and established reserves do not indicate a material adverse effect, but outcomes remain uncertain.
- The Board authorized up to $1.0 billion of common share repurchases; future repurchases and dividends remain subject to capital, regulatory, market, and financial-performance considerations.
- The company expects to adopt accounting amendments concerning troubled debt restructurings and vintage disclosures, and portfolio-layer hedging, on January 1, 2023. The filing does not expect a material financial statement impact.
Important facts for investors to verify
- Whether loan growth and higher net interest margin persist as deposit pricing and wholesale funding costs increase.
- Whether credit losses, criticized commercial loans, nonaccrual balances, and commercial real estate risk continue to normalize or deteriorate.
- The final purchase-accounting valuations and integration costs related to Investors, including the effect on goodwill, capital, and future earnings.
- The sustainability of capital ratios and planned dividends or share repurchases after continued asset and risk-weighted-asset growth.
- The effect of higher rates on securities’ unrealized losses, accumulated other comprehensive income, tangible book value, and liquidity.
- The company’s subsequent filings for quantified guidance, acquisition synergies, litigation developments, and changes in regulatory or liquidity requirements.