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, operating through Consumer Banking and Commercial Banking. The filing covers the unaudited three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods. The company reported $179.2 billion of assets and operated approximately 1,000 branches and 2,700 ATMs across 11 states.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $1.791 billion | $1.638 billion | $5.198 billion | $4.854 billion |
| Net interest income | $1.137 billion | $1.145 billion | $3.457 billion | $3.471 billion |
| Noninterest income | $654 million | $493 million | $1.741 billion | $1.383 billion |
| Provision for credit losses | $428 million | $101 million | $1.492 billion | $283 million |
| Net income | $314 million | $449 million | $601 million | $1.341 billion |
| Diluted EPS | $0.68 | $0.97 | $1.23 | $2.83 |
| Net interest margin, FTE | 2.83% | 3.12% | 2.93% | 3.19% |
| Efficiency ratio | 55.2% | 59.4% | 57.3% | 58.9% |
| ROTCE | 8.3% | 12.4% | 5.1% | 12.7% |
Average loans and leases increased 7% year over year to $124.9 billion in the third quarter, including $4.7 billion of Paycheck Protection Program loans. Average deposits increased 14% to $141.4 billion. Mortgage banking fees rose to $287 million from $117 million, reflecting higher originations and gain-on-sale margins.
At September 30, 2020, loans and leases totaled $124.1 billion, deposits totaled $142.9 billion, total stockholders’ equity was $22.5 billion, and long-term borrowed funds were $9.1 billion. The allowance for credit losses was $2.7 billion, or 2.21% of loans and leases, compared with 1.09% at December 31, 2019. Nonaccrual loans and leases increased to $1.3 billion, or 1.03% of loans, from $703 million, or 0.59%, at year-end 2019.
Net cash used in operating activities was $755 million for the first nine months of 2020, compared with $970 million of cash provided in the prior-year period. Net cash used in investing activities was $5.5 billion, while financing activities provided $12.1 billion. Cash and cash equivalents ended the period at $9.2 billion.
Total available liquidity was reported at $70.0 billion, consisting of $8.3 billion of cash at the Federal Reserve, $20.4 billion of unencumbered high-quality liquid securities, $13.2 billion of unused Federal Home Loan Bank capacity, and $28.1 billion of available Federal Reserve discount-window capacity. The consolidated loan-to-deposit ratio was 86.8%.
Regulatory capital remained above required levels: CET1 was 9.8%, Tier 1 capital was 11.2%, total capital was 13.3%, and the Tier 1 leverage ratio was 9.5% at September 30, 2020. The company’s stress capital buffer of 3.4% became effective October 1, 2020.
Material changes versus prior comparable periods
- Third-quarter net income declined 30% and nine-month net income declined 55%, primarily because of materially higher credit-loss provisions and lower net interest margins.
- Provision for credit losses increased $327 million in the quarter and $1.2 billion year to date. Management attributed the year-to-date increase principally to CECL adoption and approximately $990 million of COVID-19-related reserve building.
- Noninterest income increased 33% in the quarter and 26% year to date, led by mortgage banking, while service charges, card fees, and foreign exchange and interest-rate product revenue were pressured by COVID-19-related reductions in customer activity.
- Net interest income was broadly stable despite a 28-basis-point quarterly decline in reported net interest margin, as asset growth and lower funding costs offset lower rates.
- Deposits increased $17.6 billion, or 14%, from December 31, 2019, while loans and leases increased $5.0 billion, or 4%. Long-term borrowed funds declined $4.9 billion, primarily due to lower Federal Home Loan Bank advances.
- Commercial criticized loans increased to $5.7 billion, or 9.1% of commercial loans and leases, from $3.1 billion at year-end 2019. Commercial nonaccrual loans increased particularly in commercial real estate and sectors affected by the pandemic.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a conventional earnings or revenue forecast. Management’s CECL scenario assumed real GDP growth of 4.5% during 2021, a fourth-quarter 2020 unemployment rate of approximately 9% to 9.5%, and unemployment declining to approximately 7% to 7.5% by the fourth quarter of 2021. Management stated that further reserve building could be required if the recovery is weaker or slower than expected.
COVID-19 remained the principal uncertainty. At September 30, payment deferrals covered approximately $2.4 billion of retail loans, $795 million of commercial loans, and $464 million of Business Banking loans; most deferrals were not classified as troubled debt restructurings. The company identified heightened exposure in retail and hospitality, casual dining, retail trade, energy-related industries, educational services, and certain commercial real estate borrowers.
The company adopted CECL on January 1, 2020, reducing retained earnings by $337 million after tax and increasing the ACL by $451 million. It also elected fair-value accounting for all mortgage servicing rights; MSRs had a fair value of $606 million at September 30, 2020.
Third-quarter results included $24 million of after-tax notable items, principally related to TOP 6 transformation and revenue and efficiency initiatives. Excluding these items, underlying net income was $338 million and underlying diluted EPS was $0.73. The company completed a $621 million subordinated-debt exchange, issued $400 million of Series F preferred stock, issued $1.05 billion of senior notes during the year, and repurchased $270 million of common stock before suspending repurchases through December 31, 2020.
The company planned to maintain quarterly common dividends at $0.39 per share through the third quarter of 2021, subject to regulatory restrictions and quarterly evaluation. Federal Reserve limits on share repurchases and dividend distributions were extended through the fourth quarter of 2020.
Other risks include interest-rate and deposit-beta sensitivity, credit and collateral deterioration, liquidity and funding-market disruption, regulatory capital changes, litigation and regulatory investigations, cybersecurity and operational failures, mortgage servicing-rights valuation, goodwill impairment, and the uncertain duration and economic effects of COVID-19. The third-quarter goodwill assessment found that Commercial Banking fair value exceeded carrying value by approximately 5%; further economic weakening could result in impairment.
Important facts for investors to verify
- Whether commercial criticized loans, nonaccrual loans, net charge-offs, and deferrals continue to rise as government stimulus and forbearance programs expire.
- Whether the $2.7 billion ACL adequately covers losses under less favorable unemployment, GDP, collateral-value, and interest-rate scenarios.
- The sustainability of mortgage banking revenue and gain-on-sale margins after refinancing activity normalizes.
- The effect of prolonged low rates, elevated cash balances, and deposit repricing on net interest margin and earnings.
- The company’s compliance with evolving Federal Reserve capital-distribution restrictions and the sustainability of the $0.39 common dividend.
- The sensitivity of the Commercial Banking goodwill valuation, MSRs, and collateral-dependent loans to a slower economic recovery.
- The potential financial impact of disclosed litigation, regulatory investigations, off-balance-sheet commitments, and $75.5 billion of total off-balance-sheet arrangements.