Citizens Financial Group, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a regional and national banking organization providing consumer and commercial banking, lending, deposit, wealth management, capital markets and related financial services. The filing covers the quarter and six months ended June 30, 2022, with approximately $226.7 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. Investors added 154 branches and contributed $114 million of net income from the closing date through June 30, 2022.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net income | $364 million, versus $648 million | $784 million, versus $1.259 billion |
| Net income available to common stockholders | $332 million, versus $616 million | $728 million, versus $1.204 billion |
| Diluted EPS | $0.67, versus $1.44 | $1.58, versus $2.81 |
| Total revenue | $1.999 billion, up 24% | $3.644 billion, up 12% |
| Net interest income | $1.505 billion, up 34% | $2.652 billion, up 18% |
| Noninterest income | $494 million, up 2% | $992 million, down 3% |
| Noninterest expense | $1.305 billion, up 32% | $2.411 billion, up 20% |
| Provision for credit losses | $216 million expense, versus $213 million benefit | $219 million expense, versus $353 million benefit |
Net interest margin on a fully taxable equivalent basis was 3.04% in the quarter and 2.91% for the first six months, compared with 2.72% and 2.74%, respectively, in the prior-year periods. Higher market rates, loan growth and the acquisitions supported net interest income, partially offset by higher funding costs.
The GAAP efficiency ratio was 65.3% for the quarter and 66.2% year to date, compared with 61.6% and 61.5% in the prior-year periods. Underlying efficiency ratios excluding notable items were 58.2% and 60.9%, respectively. GAAP ROTCE was 9.1% for the quarter and 10.2% year to date; underlying ROTCE was 15.5% and 14.2%.
Notable items reduced second-quarter net income by $231 million, or $0.47 per diluted share, primarily reflecting acquisition-related and other costs and the initial credit-loss provision associated with the acquisitions. Underlying net income available to common stockholders was $563 million, or $1.14 per diluted share, versus $624 million, or $1.46 per diluted share, in the prior-year quarter.
Balance sheet, credit, debt and liquidity
- Total assets were $226.7 billion, up from $188.4 billion at December 31, 2021.
- Loans and leases were $156.2 billion, up 22% from year-end, led by 35% growth in commercial loans and 10% growth in retail loans.
- Total deposits were $178.9 billion, up 16% from year-end, primarily reflecting the Investors and HSBC transactions. The period-end loan-to-deposit ratio, excluding loans held for sale, was 87.3%.
- Total borrowed funds were $18.2 billion, up $11.2 billion from year-end, largely due to increased Federal Home Loan Bank borrowings. Long-term borrowed funds were $14.4 billion.
- The allowance for credit losses was $2.147 billion, up from $1.934 billion at year-end. Coverage of loans and leases, including unfunded commitments, was 1.37%, versus 1.51%.
- Nonaccrual loans and leases increased 20% to $839 million, primarily because of the Investors acquisition, while the nonaccrual ratio improved slightly to 0.54% from 0.55%.
- Annualized net charge-offs were 0.13% of average loans and leases in the quarter and 0.15% for the first six months, compared with 0.25% and 0.39% in the respective prior-year periods.
- Regulatory capital ratios remained above requirements: CET1 was 9.6%, Tier 1 capital was 10.6%, total capital was 12.3%, and Tier 1 leverage was 9.3%. The stress capital buffer requirement through September 30, 2022 was 3.4%.
- Total available liquidity was approximately $66.5 billion, including $39.8 billion of contingent liquidity and $26.7 billion of available Federal Reserve discount-window capacity. Parent-company cash and cash equivalents were $2.0 billion.
- Six-month operating cash flow was an outflow of $322 million, compared with an outflow of $110 million in the prior-year period. Investing cash flow was an outflow of $13.4 billion, while financing cash flow was an inflow of $11.0 billion. Cash and cash equivalents ended at $6.5 billion.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a 34% quarterly and 18% year-to-date increase in net interest income, reflecting higher rates, balance-sheet growth and the HSBC and Investors acquisitions.
- Profitability declined materially because the prior-year periods benefited from credit-provision reversals, while 2022 included credit-provision expense, acquisition-related costs, higher compensation and operating expenses, and other notable items.
- Mortgage banking fees declined 15% in the quarter and 44% year to date because of lower gain-on-sale margins and production volumes.
- Foreign exchange and derivative products revenue increased substantially, reflecting higher client hedging activity.
- Accumulated other comprehensive loss increased to $3.218 billion from $665 million at year-end, largely due to unrealized losses on debt securities and derivatives as interest rates rose. Tangible book value per common share declined 16% from year-end to $29.14.
- The company issued $400 million of subordinated notes, declared $0.78 per common share of dividends during the first six months, and increased its common-share repurchase authorization to $1.0 billion. No material open-market repurchases were made during the period.
Outlook, management commentary, risks and unusual items
The filing does not provide a clear quantitative earnings or revenue guidance range. Management described an economic forecast incorporating 2.1% average 2022 real GDP growth, 4.3% average unemployment and the possibility of a mild recession beginning in the second half of 2022. A more adverse modeled scenario would increase the quantitative lifetime credit-loss estimate by approximately $175 million before qualitative adjustments.
Key risks include economic deterioration, inflation, aggressive Federal Reserve tightening, higher interest rates, Russia’s invasion of Ukraine, supply-chain disruptions, credit losses, deposit pricing and funding costs, acquisition integration, retention of acquired customers and employees, regulatory and supervisory requirements, litigation, cybersecurity, market liquidity, mortgage production and mortgage-servicing-rights valuation.
Acquisition-related items were significant. Second-quarter notable items included $145 million of initial credit-loss provision tied to acquired loans, $104 million of integration-related costs, $31 million of mark-to-market losses on Investors loans held for sale, and $21 million of other initiative-related costs. The Investors purchase accounting and valuation allocations remained preliminary at June 30, 2022.
The company stated that it does not expect pending accounting standards on troubled debt restructurings and portfolio-layer hedging to have a material effect on the consolidated financial statements, although the TDR standard is expected to materially affect disclosures.
Important facts for investors to verify
- Whether acquired Investors and HSBC balances produce expected revenue synergies and whether integration costs decline as planned.
- Future credit performance, particularly criticized commercial real estate and commercial loans, nonaccrual trends and the adequacy of the $2.147 billion ACL.
- The effect of continued rate increases on net interest margin, deposit betas, funding costs, securities valuations and accumulated other comprehensive loss.
- The sustainability of underlying profitability after excluding acquisition, transformation and purchase-accounting items.
- Capital effects of loan growth, goodwill and intangible assets, dividends, share repurchases and the 2023 CCAR stress-testing requirement.
- Liquidity and refinancing needs, including the significant 2023 borrowed-fund maturities and reliance on Federal Home Loan Bank funding.
- Potential losses or restrictions arising from litigation, regulatory investigations, commitments to extend credit and mortgage representations and warranties.