Citizens Financial Group, Inc. — 2021 Q3 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group is a regional banking organization headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking. The filing covers the three and nine months ended September 30, 2021. Total assets were $187.0 billion at period-end, compared with $183.3 billion at December 31, 2020.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $1.659 billion | $1.791 billion | $4.927 billion | $5.198 billion |
| Net interest income | $1.145 billion | $1.137 billion | $3.386 billion | $3.457 billion |
| Noninterest income | $514 million | $654 million | $1.541 billion | $1.741 billion |
| Net income | $530 million | $314 million | $1.789 billion | $601 million |
| Diluted EPS | $1.18 | $0.68 | $3.99 | $1.23 |
| Net interest margin | 2.72% | 2.82% | 2.73% | 2.93% |
| Efficiency ratio | 60.9% | 55.2% | 61.3% | 57.3% |
| Return on average tangible common equity | 13.7% | 8.3% | 16.1% | 5.1% |
| Provision for credit losses | $(33) million | $428 million expense | $(386) million | $1.492 billion expense |
- Revenue and earnings: Q3 net income increased 69%, while diluted EPS rose 74%. Nine-month net income nearly tripled, primarily reflecting the reversal of pandemic-related credit provisioning.
- Margins and balance sheet: Net interest income increased 1% in Q3 despite a 10-basis-point margin decline. Average interest-earning assets increased 4%, but average loans and leases declined 2% to $122.6 billion. Average deposits increased 7% to $151.9 billion.
- Credit quality: Net charge-offs were $44 million in Q3, or 0.14% of average loans, compared with $219 million and 0.70% in Q3 2020. Nonaccrual loans declined to $747 million, or 0.61% of loans, from $1.019 billion, or 0.83%, at December 31, 2020.
- Reserves: The allowance for credit losses declined to $2.004 billion, or 1.63% of loans, from $2.670 billion, or 2.17%, at year-end 2020. Management recorded a $386 million credit provision benefit for the first nine months.
- Cash flow: Operating activities generated $1.170 billion of cash in the first nine months, compared with cash usage of $755 million in the prior-year period. Investing activities used $2.987 billion, while financing activities provided $2.800 billion. Cash and cash equivalents ended at $13.716 billion.
- Liquidity: Period-end deposits were $152.2 billion, up 3% from December 31, 2020. The loan-to-deposit ratio, excluding loans held for sale, was 81.0%. Cash held at the Federal Reserve was $12.5 billion, total available liquidity was approximately $76.1 billion, and contingent liquidity was $48.7 billion.
- Debt: Long-term borrowed funds were $6.947 billion, down from $8.346 billion at year-end. Total borrowed funds declined as deposit growth supported repayment of senior debt and short-term borrowings. Approximately $1.933 billion of long-term debt was scheduled to mature in 2022.
- Capital: CET1, Tier 1, total capital, and Tier 1 leverage ratios were 10.3%, 11.6%, 13.4%, and 9.7%, respectively. The company repurchased $95 million of common stock and paid $502 million of common dividends during the first nine months.
Material changes versus comparable periods
- Q3 total revenue decreased 7%, driven by a 21% decline in noninterest income. Mortgage banking fees fell 62% because of lower gain-on-sale margins and production volumes.
- Capital markets fees increased 24% in Q3 and 51% year to date, supported by loan syndication and merger and acquisition advisory activity. Card, service-charge, and trust and investment services fees also improved.
- Reported noninterest expense increased 2% in Q3 and 1% year to date. Underlying expense increased 3% in Q3 and 2% year to date, reflecting higher compensation, technology, outside services, and growth-related costs.
- The net interest margin declined because of elevated cash balances, lower interest-earning asset yields, and the low-rate environment. Improved deposit pricing, funding mix, and accelerated PPP loan forgiveness partly offset the pressure.
- Commercial loans declined 5% from year-end, while retail loans increased 5%. PPP loans declined to $1.9 billion from $4.2 billion at December 31, 2020.
- The company completed its acquisition of Willamette on September 1, 2021, recording an estimated $15 million increase to goodwill.
Outlook, commentary, risks, and unusual items
- Management’s reserve forecast assumed approximately 5.8% real GDP growth during 2021 and unemployment of approximately 5.3% to 6.3%. A more pessimistic modeled scenario would increase the quantitative period-end ACL estimate by approximately $230 million, excluding qualitative adjustments.
- Management identified continuing risks from COVID-19 variants, supply-chain constraints, inflation, and the potential end of monetary and fiscal stimulus programs.
- Interest-rate risk remains material. The company estimated that a gradual 200-basis-point increase in rates would increase net interest income by 9.8% over 12 months, while a gradual 25-basis-point decline would reduce it by 1.2%.
- Pending strategic transactions included the planned acquisition of 80 HSBC East Coast branches and the national online deposit business, expected to close in Q1 2022; the Investors Bancorp merger, expected to close in early Q2 2022; and the JMP acquisition, targeted for mid-Q4 2021. These transactions remained subject to approvals and other closing conditions.
- Notable Q3 items reduced net income by $16 million after tax and included a pension settlement charge, a compensation-related tax credit, and transformation and efficiency initiatives. Underlying net income available to common stockholders was $520 million, or $1.22 per diluted share.
- The filing describes ongoing litigation, regulatory investigations, and matters involving fair lending, unfair or deceptive practices, mortgage issues, and product sales. Management stated that currently established reserves and available information do not indicate a material adverse effect, but outcomes and potential losses may be uncertain.
- The company continued its LIBOR transition program, with certain U.S. dollar LIBOR settings scheduled to cease at the end of 2021 and remaining tenors scheduled to cease by June 2023.
Investor verification priorities
- Verify whether the sharp improvement in earnings and credit results is sustainable after reserve releases, government stimulus effects, and pandemic-related forbearance benefits normalize.
- Monitor net interest margin, deposit pricing, excess cash balances, loan growth, and the effect of eventual interest-rate changes on earnings.
- Assess mortgage banking performance after the significant decline in gain-on-sale margins and production volumes.
- Review criticized commercial loans, commercial real estate exposure, delinquency trends, and ACL sensitivity to weaker economic scenarios.
- Confirm the closing dates, purchase accounting, financing, capital impacts, and integration costs associated with the HSBC, Investors, and JMP transactions.
- Evaluate liquidity and debt maturities, including 2022 maturities and reliance on deposits and secured borrowing capacity.
- Review legal and regulatory contingencies, off-balance-sheet commitments of $82.7 billion, and potential changes in capital distribution capacity.