Citizens Financial Group, Inc. — 2Q19 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. It provides consumer and commercial banking, lending, deposits, wealth management, capital markets, treasury, foreign exchange and asset finance services through approximately 1,100 branches and 2,900 ATMs across 11 states. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Condition
| Metric | 2Q19 | 2Q18 | 1H19 | 1H18 |
|---|---|---|---|---|
| Total revenue | $1.628 billion | $1.509 billion | $3.216 billion | $2.971 billion |
| Net interest income | $1.166 billion | $1.121 billion | $2.326 billion | $2.212 billion |
| Noninterest income | $462 million | $388 million | $890 million | $759 million |
| Provision for credit losses | $97 million | $85 million | $182 million | $163 million |
| Noninterest expense | $951 million | $875 million | $1.888 billion | $1.758 billion |
| Net income | $453 million | $425 million | $892 million | $813 million |
| Net income available to common stockholders | $435 million | $425 million | $859 million | $806 million |
| Diluted EPS | $0.95 | $0.88 | $1.86 | $1.65 |
| Net interest margin | 3.20% | 3.20% | 3.22% | 3.20% |
| Efficiency ratio | 58.4% | 58.0% | 58.7% | 59.2% |
- Second-quarter net income increased 7%; diluted EPS increased 8%. First-half net income increased 10%, while diluted EPS increased 13%, aided by a 6% reduction in average diluted shares.
- Average loans and leases increased 4% year over year in the quarter to $117.8 billion; average deposits increased 7% to $123.2 billion. Period-end loans and leases were $116.8 billion and deposits were $124.0 billion.
- Noninterest income increased 19% in the quarter, led by mortgage banking, capital markets, trust and investment services, and card fees. First-half noninterest income increased 17%.
- Net interest margin was stable in the quarter and increased two basis points for the first half, although funding costs rose faster than asset yields.
- Return on average tangible common equity was 12.8% in the quarter and 12.9% for the first half. Tangible book value per common share was $30.88.
- At June 30, 2019, total assets were $162.7 billion, stockholders’ equity was $22.0 billion and total borrowed funds were approximately $12.98 billion, comprising $1.44 billion of short-term and $11.54 billion of long-term borrowings.
- Six-month operating cash flow was $577 million, compared with $1.415 billion in the prior-year period. Investing activities used $1.288 billion and financing activities used $328 million, resulting in a $1.039 billion decrease in cash and cash equivalents to $3.035 billion.
Material Changes Versus Prior Comparable Period
- Revenue growth exceeded expense growth for the first half, improving the efficiency ratio to 58.7% from 59.2%. In the quarter, however, the efficiency ratio increased modestly because expenses grew 9% versus revenue growth of 8%.
- Noninterest expense reflected investments in growth initiatives, higher salaries and benefits, equipment and software, and outside services. FDIC insurance and advertising costs declined.
- Provision for credit losses increased 14% in the quarter and 12% for the first half. Net charge-offs increased to $106 million in the quarter and $195 million for the first half, primarily because of commercial idiosyncratic losses and seasoning in retail growth portfolios.
- Commercial Banking second-quarter net income declined 9% to $216 million as higher provision expense and expenses offset revenue growth. Consumer Banking net income increased 8% to $213 million.
- Period-end deposits increased 4% from December 31, 2018, while long-term borrowings declined $4.4 billion, largely because of a $5.3 billion reduction in FHLB advances. Citizens issued $1.5 billion of CBNA senior notes during the first half.
- The company issued $300 million of Series D preferred stock, repurchased $320 million of common stock and declared $0.64 per share of common dividends during the first half.
- Goodwill increased to $7.04 billion from $6.92 billion at year-end, primarily reflecting acquisitions. Second-quarter after-tax integration costs were $5 million; first-half integration costs were $9 million. Underlying, non-GAAP net income available to common stockholders was $440 million for the quarter and $868 million for the first half.
Credit, Capital, Liquidity, Outlook and Risks
- Management described overall credit quality as strong. Nonperforming loans and leases declined to $770 million, or 0.66% of loans and leases, from $797 million, or 0.68%, at December 31, 2018. The allowance for loan and lease losses was $1.227 billion, and total allowance for credit losses was $1.320 billion.
- Commercial nonperforming loans and leases increased to $219 million from $201 million at year-end, while commercial criticized loans declined to $2.7 billion from $2.8 billion. Retail asset quality was generally stable, although unsecured portfolio seasoning increased charge-offs.
- June 30 regulatory capital ratios were 10.5% CET1, 11.3% Tier 1, 13.4% total capital and 10.1% Tier 1 leverage, all above applicable minimums plus the capital conservation buffer.
- Liquidity remained strong: contingent liquidity was $31.3 billion, including $20.3 billion of unencumbered high-quality liquid securities, $9.0 billion of unused FHLB capacity and $2.0 billion of cash at the Federal Reserve. The company stated that it remained compliant with the Liquidity Coverage Ratio.
- Management did not provide a specific quantitative earnings or revenue outlook in the supplied filing text. The balance sheet was asset-sensitive, but the company reduced sensitivity to falling rates in anticipation of potential Federal Reserve rate cuts. A gradual 200-basis-point increase in rates was estimated to increase 12-month net interest income by 2.9%, while a gradual 100-basis-point decline was estimated to reduce it by 2.3%.
- The company expects the Current Expected Credit Loss standard, effective January 1, 2020, to result in earlier recognition of credit losses and an overall increase in the allowance. The quantitative impact could not yet be reasonably estimated as of June 30, 2019.
- Key risks include economic and housing-market weakness, rising charge-offs, interest-rate and deposit-cost pressure, liquidity and funding-market disruption, regulatory and supervisory requirements, litigation and investigations, cyber and operational failures, mortgage servicing-rights valuation risk, and execution risk associated with acquisitions and growth initiatives.
- Off-balance-sheet commitments totaled $72.6 billion, including $70.2 billion of commitments to extend credit and $2.3 billion of letters of credit. Management stated that legal and regulatory matters could result in settlements, fines, penalties, remediation or business restrictions, but believed currently established liabilities would not materially adversely affect the financial statements.
Important Facts for Investors to Verify
- Verify sustainability of revenue growth, particularly mortgage banking and capital markets fees, after acquisition-related benefits and favorable market conditions.
- Monitor deposit pricing, funding costs and net interest margin as interest rates change and competition for deposits intensifies.
- Track commercial criticized loans, commercial charge-offs and retail portfolio seasoning, especially as the allowance transitions to the CECL methodology.
- Assess the effect of the $1.275 billion common-share repurchase authorization for the four quarters beginning July 1, 2019 on capital ratios and tangible book value.
- Review acquisition integration costs, goodwill and other intangible balances, and the operating performance of acquired businesses.
- Consider near-term debt maturities, including approximately $747 million due in 2019 and $4.75 billion due in 2020, together with the company’s available secured borrowing capacity.
- Confirm subsequent events disclosed after quarter-end, including the July 25, 2019 issuance of $500 million of seven-year senior notes and the July 2019 credit-rating upgrades announced by Fitch.