Citizens Financial Group, Inc. — 2019 Third-Quarter Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a bank holding company headquartered in Providence, Rhode Island, operating primarily through Citizens Bank, National Association. Its Consumer Banking business serves individuals, small businesses and retail customers, while Commercial Banking serves corporate, institutional and not-for-profit clients. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Total assets were $164.4 billion at September 30, 2019.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net interest income | $1.145 billion | $1.148 billion | $3.471 billion | $3.360 billion |
| Noninterest income | $493 million | $416 million | $1.383 billion | $1.175 billion |
| Total revenue | $1.638 billion | $1.564 billion | $4.854 billion | $4.535 billion |
| Provision for credit losses | $101 million | $78 million | $283 million | $241 million |
| Noninterest expense | $973 million | $910 million | $2.861 billion | $2.668 billion |
| Net income | $449 million | $443 million | $1.341 billion | $1.256 billion |
| Net income available to common stockholders | $432 million | $436 million | $1.291 billion | $1.242 billion |
| Diluted EPS | $0.97 | $0.91 | $2.83 | $2.57 |
| FTE net interest margin | 3.12% | 3.22% | 3.19% | 3.21% |
| Efficiency ratio | 59.4% | 58.2% | 58.9% | 58.8% |
| ROTCE | 12.4% | 13.3% | 12.7% | 12.6% |
Average loans and leases increased 3% year over year in the third quarter to $117.3 billion, while average deposits increased 6% to $123.9 billion. At September 30, loans and leases were $117.9 billion, deposits were $124.7 billion, and total stockholders’ equity was $21.9 billion. Tangible book value per common share was $31.48.
Revenue growth was led by noninterest income, particularly mortgage banking fees, card fees, trust and investment services fees, and foreign exchange and interest rate products. Mortgage banking fees increased to $117 million in the quarter from $49 million in the prior-year quarter. Net interest income was broadly stable because asset growth offset a 10-basis-point decline in the FTE net interest margin.
For the nine months, operating cash flow was $970 million, investing cash flow was negative $1.786 billion, and financing cash flow was $584 million, resulting in a $232 million decrease in cash and cash equivalents to $3.842 billion.
Debt, liquidity and capital
- Total borrowed funds were approximately $13.9 billion at September 30, 2019, including $12.8 billion of long-term borrowed funds and $1.1 billion of short-term borrowed funds, down from approximately $17.2 billion at December 31, 2018.
- The reduction in borrowings primarily reflected a $4.5 billion decrease in long-term Federal Home Loan Bank advances, partly offset by new senior debt issuance.
- Contingent liquidity was $31.8 billion, consisting of $20.5 billion of unencumbered high-quality liquid securities, $9.3 billion of unused FHLB capacity and $2.0 billion of cash held at the Federal Reserve.
- Available Federal Reserve discount-window capacity was $13.0 billion, and unused secured borrowing capacity was approximately $42.8 billion.
- The consolidated loan-to-deposit ratio, excluding loans held for sale, was 94.5%. The company remained compliant with the applicable liquidity coverage ratio at September 30, 2019.
- Regulatory capital ratios remained above required minimums: CET1 10.3%, Tier 1 11.1%, total capital 13.0% and Tier 1 leverage 9.9%.
Material changes versus the prior comparable periods
- Third-quarter net income increased 1%, but net income available to common stockholders declined 1% because of higher preferred stock dividends. Diluted EPS increased 7%, aided by a 6% reduction in average diluted shares.
- Nine-month net income increased 7%, diluted EPS increased 10%, and total revenue increased 7%. Noninterest income increased 18%, while net interest income increased 3%.
- Noninterest expense increased 7% in both the quarter and nine-month period, reflecting higher salaries and benefits, outside services, equipment and software costs, acquisitions and growth investments.
- The provision for credit losses increased 29% in the quarter and 17% year to date. Net charge-offs were $113 million in the quarter and $308 million year to date, compared with $86 million and $232 million, respectively, in the prior-year periods.
- Loans and leases increased $1.2 billion from year-end 2018, primarily from retail loan growth. Deposits increased $5.1 billion, or 4%, and Citizens Access deposits reached $5.6 billion.
- Consumer Banking net income increased 21% in the quarter and 16% year to date. Commercial Banking net income decreased 16% in the quarter and 7% year to date, primarily because of margin compression, higher credit costs and expense investments.
- The company issued $300 million of Series D preferred stock, repurchased $820 million of common stock and declared $459 million of common dividends during the first nine months. The Board authorized up to $1.275 billion of common repurchases for the four-quarter period beginning July 1, 2019.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a formal numerical earnings or revenue forecast. Management stated that results were affected by higher funding costs, lower long-term rates, securities premium amortization, continued investment in growth initiatives and expected seasoning of retail growth portfolios. Management also described overall credit quality as strong despite isolated commercial losses and higher retail charge-offs.
Third-quarter GAAP results included $4 million after-tax of notable items, primarily acquisition integration and strategic initiative costs. The prior-year quarter included $7 million after-tax of acquisition integration costs. The 2019 nine-month period included $13 million after-tax of notable items. A $10 million tax benefit related to an operational restructuring reduced the reported effective tax rate.
The company expects to adopt the current expected credit loss standard on January 1, 2020. Based on conditions and portfolio balances as of August 31, 2019, management estimated that adoption could increase the allowance for credit losses by approximately 30% to 35% and reduce the fully phased-in CET1 ratio by approximately 22 to 25 basis points. These estimates remain subject to changes in economic conditions, portfolio composition, models and assumptions.
Key risks include economic and housing-market deterioration, interest-rate and yield-curve changes, deposit pricing and funding costs, credit losses, mortgage servicing-rights valuation, regulatory and supervisory requirements, litigation and investigations, cybersecurity or operational failures, capital and liquidity requirements, and execution of cost-saving and growth initiatives. The filing states that management believes potential liabilities from disclosed legal and regulatory matters will not materially adversely affect the financial statements, but outcomes and losses cannot be predicted with certainty.
Subsequent to quarter-end, the company issued $450 million of Series E preferred stock on October 28, 2019. The filing also notes October 2019 regulatory changes that will alter stress-testing, resolution-planning and liquidity requirements for Category IV institutions.
Most important facts for an investor to verify
- Whether higher credit losses and net charge-offs represent temporary isolated commercial losses or a broader deterioration in consumer and commercial portfolios.
- The actual impact of January 2020 CECL adoption on the allowance, retained earnings, provision expense and CET1 capital.
- Whether deposit growth can continue without materially increasing funding costs and further compressing net interest margin.
- The sustainability of mortgage banking income, including the sensitivity of mortgage servicing rights to prepayments and interest rates.
- The pace and economic effect of common-share repurchases, dividends and additional preferred-stock issuance on capital ratios and per-share returns.
- Progress in controlling expense growth, including acquisition integration, strategic initiatives and technology investments.
- Potential exposure from $73.1 billion of off-balance-sheet commitments, including $70.8 billion of commitments to extend credit and $2.1 billion of letters of credit.
- Developments in litigation, regulatory investigations, supervisory requirements and changes to applicable capital and liquidity rules.