Citizens Financial Group, Inc. — Q2 2021 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, middle-market, corporate, institutional, and not-for-profit customers through approximately 1,000 branches and 3,000 ATMs.
This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods. Total assets were $185.1 billion at June 30, 2021.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $1.609 billion | $1.750 billion | $3.268 billion | $3.407 billion |
| Net interest income | $1.124 billion | $1.160 billion | $2.241 billion | $2.320 billion |
| Noninterest income | $485 million | $590 million | $1.027 billion | $1.087 billion |
| Provision for credit losses | $(213) million benefit | $464 million expense | $(353) million benefit | $1.064 billion expense |
| Noninterest expense | $991 million | $979 million | $2.009 billion | $1.991 billion |
| Net income | $648 million | $253 million | $1.259 billion | $287 million |
| Net income available to common stockholders | $616 million | $225 million | $1.204 billion | $237 million |
| Diluted EPS | $1.44 | $0.53 | $2.81 | $0.55 |
| Net interest margin, FTE | 2.72% | 2.88% | 2.74% | 2.99% |
| ROTCE | 17.5% | 6.6% | 17.3% | 3.5% |
| Efficiency ratio | 61.6% | 55.9% | 61.5% | 58.4% |
Underlying Q2 net income available to common stockholders, excluding notable items, was $624 million, or $1.46 diluted EPS. Notable items were primarily transformation, efficiency, and integration costs.
Balance sheet, credit, debt, and liquidity
- Loans and leases were $122.6 billion, down $509 million from December 31, 2020. Commercial loans declined 3%, while retail loans increased 2%. PPP loans were $3.5 billion.
- Total deposits were $150.6 billion, up $3.5 billion, or 2%, from year-end 2020. The increase was driven by demand deposits, savings, and checking balances, partly offset by lower term deposits.
- Long-term borrowed funds were $7.0 billion, down from $8.3 billion at December 31, 2020; short-term borrowed funds were $62 million.
- The allowance for credit losses was $2.1 billion, or 1.70% of loans, compared with $2.7 billion, or 2.17%, at year-end. Excluding PPP loans, coverage was 1.75%.
- Nonaccrual loans and leases declined to $779 million, or 0.64% of loans, from $1.019 billion, or 0.83%, at year-end.
- Q2 net charge-offs were $78 million, or 0.25% annualized; first-half net charge-offs were $236 million, or 0.39% annualized.
- Regulatory capital remained strong: CET1 10.3%, Tier 1 capital 11.6%, total capital 13.5%, and Tier 1 leverage 9.7%.
- Cash and cash equivalents were $12.6 billion at June 30, 2021. The company reported $11.5 billion of cash held at the Federal Reserve, $46.9 billion of contingent liquidity, and approximately $75.8 billion of total available liquidity including discount-window capacity.
- Operating cash flow was negative $110 million for the first half of 2021, compared with negative $1.413 billion in the prior-year period. Investing cash flow was negative $1.703 billion, while financing cash flow was positive $1.721 billion, primarily reflecting deposit growth.
Material changes versus prior comparable periods
- Q2 net income increased 156% year over year, primarily because the prior-year period reflected substantial COVID-19-related credit provisioning, while 2021 included a $213 million credit provision benefit.
- Revenue declined 8% in Q2 and 4% for the first half, principally because mortgage banking fees fell 69% in Q2 and 43% year to date. Lower gain-on-sale margins and mortgage servicing rights hedging results offset higher capital markets, card, trust, and investment services fees.
- Net interest income declined 3% in both Q2 and the first half. The FTE net interest margin contracted 16 basis points in Q2 and 25 basis points year to date due to the low-rate environment, lower asset yields, and elevated cash balances.
- Average Q2 deposits increased 6% to $150.3 billion, while average loans and leases decreased 4% to $123.5 billion. Strong deposit inflows enabled repayment of wholesale funding.
- Noninterest expense was broadly stable on a GAAP basis but underlying expense increased 2% year over year, reflecting higher technology, outside services, salaries, and employee benefits.
- Commercial Banking Q2 net income increased to $265 million from $221 million, while Consumer Banking net income decreased to $286 million from $320 million, mainly because of lower mortgage banking revenue.
Outlook, transactions, commentary, and risks
Management described credit performance and the macroeconomic outlook as improving and used a 2021 forecast of approximately 5.7% real GDP growth and unemployment of 5.9% to 6.6% in calculating the allowance. A hypothetical more pessimistic scenario would increase the modeled ACL estimate by approximately $175 million, excluding qualitative adjustments. The filing does not provide a clear numerical earnings or revenue guidance target.
- On May 26, 2021, Citizens agreed to acquire 80 HSBC branches and HSBC’s national online deposit business, including approximately $9.0 billion of deposits and $2.2 billion of loans, for a 2.0% premium on deposits. Closing was expected in the first quarter of 2022, subject to approvals.
- On July 28, 2021, Citizens agreed to acquire Investors Bancorp for approximately $3.5 billion in stock and cash. Investors had reported approximately $26.8 billion of assets, $21.1 billion of loans, and $19.4 billion of deposits at June 30, 2021. Closing was expected in the first or second quarter of 2022, subject to shareholder and regulatory approvals.
- Management suspended share repurchases pending the Investors shareholder vote. During the first half, Citizens repurchased $95 million of common stock and paid $335 million of common dividends.
- Key risks include COVID-19 developments, economic and interest-rate conditions, credit losses, deposit pricing and funding costs, regulatory capital and liquidity requirements, cyber and operational risks, litigation and regulatory investigations, LIBOR transition, and execution and integration risks related to the HSBC and Investors transactions.
- Off-balance-sheet commitments totaled $78.8 billion, including $76.8 billion of commitments to extend credit and $1.9 billion of letters of credit.
Important facts for investors to verify
- Whether the improvement in earnings remains after COVID-19-related reserve releases normalize and government stimulus and forbearance effects diminish.
- The sustainability of net interest margin amid elevated cash balances, a low-rate environment, deposit repricing, and expected interest-rate changes.
- Future mortgage banking revenue and mortgage servicing rights valuations, which are sensitive to gain-on-sale margins, prepayments, and interest rates.
- Credit performance in commercial real estate, hospitality, retail, and other COVID-19-sensitive sectors, including the effect of criticized loans and future ACL releases or builds.
- Regulatory approvals, closing conditions, purchase accounting, integration costs, dilution, and expected benefits for the HSBC branch and Investors acquisitions.
- The status and terms of future common dividends and share repurchases, which remain subject to capital, regulatory, strategic, and market considerations.
- The eventual impact of LIBOR discontinuation and the remediation of legacy contracts through the planned transition period.