Citizens Financial Group, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a regional bank holding company headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking. It serves retail, small-business, commercial, institutional and nonprofit customers across New England, the Mid-Atlantic and the Midwest through approximately 1,000 branches and 2,700 ATMs. This unaudited Form 10-Q covers the three and six months ended June 30, 2020. Total assets were $179.9 billion at June 30, 2020.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $1.750 billion | $1.628 billion | $3.407 billion | $3.216 billion |
| Net interest income | $1.160 billion | $1.166 billion | $2.320 billion | $2.326 billion |
| Noninterest income | $590 million | $462 million | $1.087 billion | $890 million |
| Provision for credit losses | $464 million | $97 million | $1.064 billion | $182 million |
| Noninterest expense | $979 million | $951 million | $1.991 billion | $1.888 billion |
| Net income | $253 million | $453 million | $287 million | $892 million |
| Net income available to common stockholders | $225 million | $435 million | $237 million | $859 million |
| Diluted EPS | $0.53 | $0.95 | $0.55 | $1.86 |
| Net interest margin | 2.87% | 3.20% | 2.98% | 3.22% |
| Efficiency ratio | 55.9% | 58.4% | 58.4% | 58.7% |
- Q2 ROTCE was 6.6%, compared with 12.8% in the prior-year quarter; first-half ROTCE was 3.5%, compared with 12.9%.
- Mortgage banking fees rose to $276 million in Q2 and $435 million for the first half, driven by higher refinancing activity, origination volumes and gain-on-sale margins.
- Average loans and leases increased 9% year over year to $128.8 billion in Q2; average deposits increased 15% to $141.6 billion.
- Period-end loans and leases were $125.7 billion, up 6% from December 31, 2019. Deposits were $143.6 billion, up 15%; demand deposits increased 39% while term deposits declined 24%.
- The allowance for credit losses was $2.5 billion, or 2.01% of loans and leases, compared with 1.09% at December 31, 2019. Nonaccruing loans and leases increased to $990 million from $703 million.
- Cash and cash equivalents increased to $7.446 billion at June 30, 2020 from $3.386 billion at December 31, 2019.
- Net cash used in operating activities was $1.413 billion, net cash used in investing activities was $7.599 billion, and net cash provided by financing activities was $13.072 billion for the first six months.
- Long-term borrowed funds declined to $9.202 billion from $14.047 billion at year-end, primarily because of lower FHLB advances. Stockholders’ equity was $22.418 billion.
- Regulatory capital remained above required levels: CET1 was 9.6%, Tier 1 capital was 10.9%, total capital was 13.1%, and Tier 1 leverage was 9.3%.
Material changes versus comparable periods
- Q2 net income declined 44%, while first-half net income declined 68%, primarily because of the COVID-19-related credit reserve build and higher charge-offs.
- Q2 provision for credit losses increased $367 million year over year. The provision included a $317 million reserve build primarily related to COVID-19; the first-half provision included a $780 million COVID-19-related reserve build.
- Net interest income was broadly stable, but net interest margin compressed 33 basis points in Q2 and 24 basis points for the first half because of lower interest rates, excess cash balances and the low-rate yield curve.
- Noninterest income increased 28% in Q2 and 22% for the first half, largely due to record mortgage banking results. COVID-19 reduced service charges, card fees and trust and investment services revenue.
- Commercial criticized loans increased to $5.3 billion, or 8.2% of commercial loans and leases, from $3.0 billion, or 5.3%, at December 31, 2019. Deterioration was concentrated in industries including oil and gas, accommodation and food services, retail, hospitality and transportation.
- Citizens adopted CECL on January 1, 2020, recording a $337 million after-tax reduction to retained earnings and a $451 million increase in the ACL.
- The company issued $400 million of Series F preferred stock and $1.05 billion of senior notes during the first half. It repurchased $270 million of common stock during the first half but suspended further repurchases through December 31, 2020.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide a clear formal earnings or revenue forecast. Management emphasized that future results remain highly uncertain because of the scope and duration of COVID-19, economic conditions, government assistance and customer behavior.
- Citizens originated approximately $4.7 billion of PPP loans at June 30, 2020, with an average loan size of approximately $98,000. The loans were 100% SBA-guaranteed. The company also deferred payments on approximately $3.5 billion, or 6%, of its retail portfolio.
- The CECL estimate used a Moody’s May 13 baseline scenario assuming an approximately 33% second-quarter GDP decline, peak unemployment of approximately 15%, a 7% cumulative 2020 GDP decline and year-end unemployment of 9%. Management stated that a weaker recovery could require additional reserve building.
- Total available liquidity was $68.2 billion, consisting of $6.4 billion of cash at the Federal Reserve, $20.2 billion of unencumbered high-quality liquid securities, $13.0 billion of unused FHLB capacity and $28.6 billion of available discount-window capacity.
- The Federal Reserve communicated a preliminary 3.4% stress capital buffer requirement. Citizens requested reconsideration, with the final requirement expected by August 31, 2020. The company planned to maintain its quarterly common dividend at $0.39 per share through the third quarter 2021 window period, subject to regulatory and capital restrictions.
- Q2 reported results included $10 million after-tax of notable items, primarily related to TOP transformational, revenue and efficiency initiatives. First-half results included $35 million after-tax of notable items.
- Key risks include further COVID-19-related credit deterioration, higher charge-offs and provisions, reduced net interest margin, declining fee income, liquidity and capital pressures, loan modification and PPP-related regulatory scrutiny, cybersecurity and operational disruption, litigation and regulatory investigations, and potential goodwill or mortgage-servicing-rights valuation changes.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2020. The filing states that currently available information and established reserves did not indicate that legal and regulatory matters would have a materially adverse effect, although outcomes remain uncertain.
Important facts for investors to verify
- Whether the $2.5 billion ACL adequately covers losses under alternative or more severe COVID-19 economic scenarios.
- Trends in criticized commercial loans, nonaccrual loans, charge-offs, retail payment deferrals and commercial loan modifications as government support expires.
- The final stress capital buffer requirement and its effect on dividends, repurchases and other capital distributions.
- The sustainability of exceptionally strong mortgage banking income and the potential effect of refinancing and prepayment speeds on the $568 million MSR portfolio.
- The effect of prolonged low interest rates and elevated cash balances on net interest margin and earnings.
- PPP loan forgiveness, fee recognition, credit exposure and the effect of PPP balances on reported loan growth and asset-quality ratios.
- Liquidity availability, deposit retention, wholesale funding access and upcoming debt maturities, including $756 million due in 2020 and $1.364 billion due in 2021.