Citizens Financial Group, Inc. — Third-Quarter 2017 Form 10-Q Summary
Business Context and Reporting Period
Citizens Financial Group, Inc. is a bank holding company operating primarily through Citizens Bank, N.A. and Citizens Bank of Pennsylvania. Its principal businesses are Consumer Banking and Commercial Banking, serving customers across New England, the Mid-Atlantic, and the Midwest. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared primarily with the corresponding 2016 periods. Total assets were $151.4 billion at September 30, 2017.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income | $1.062 billion, up 12% | $3.093 billion, up 12% |
| Noninterest income | $381 million, down 12% | $1.130 billion, up 1% |
| Total revenue | $1.443 billion, up 5% | $4.223 billion, up 9% |
| Provision for credit losses | $72 million, down 16% | $238 million, down 11% |
| Noninterest expense | $858 million, down 1% | $2.576 billion, up 3% |
| Net income | $348 million, up 17% | $986 million, up 29% |
| Net income available to common stockholders | $341 million, up 18% | $972 million, up 30% |
| Diluted EPS | $0.68, versus $0.56 | $1.92, versus $1.42 |
| Net interest margin | 3.05%, versus 2.84% | 3.00%, versus 2.85% |
| Efficiency ratio | 59.41%, versus 62.88% | 60.99%, versus 64.36% |
| Return on average tangible common equity | 10.13%, versus 8.58% | 9.80%, versus 7.51% |
Average loans and leases increased 5% year over year in the third quarter and 6% for the first nine months. Average deposits increased 6% and 7%, respectively. Period-end loans and leases were $110.2 billion, up 2% from December 31, 2016, while total deposits were $113.2 billion, up 3%.
Credit performance improved. Third-quarter net charge-offs were $65 million, down 22% year over year; nine-month net charge-offs were $227 million, down 2%. Nonperforming loans and leases declined to $932 million, or 0.85% of total loans and leases, from $1.045 billion, or 0.97%, at December 31, 2016. The allowance for loan and lease losses was $1.224 billion, or 1.11% of loans and leases, and 131% of nonperforming loans and leases.
Capital remained strong. At September 30, 2017, the company reported a CET1 ratio of 11.1%, Tier 1 capital ratio of 11.3%, total capital ratio of 13.8%, and Tier 1 leverage ratio of 9.9%. Total stockholders’ equity was $20.1 billion.
Cash provided by operating activities was $1.45 billion for the first nine months. Investing activities used $3.92 billion, primarily because of securities purchases and loan growth. Financing activities provided $890 million. Cash and cash equivalents declined from $3.70 billion at year-end 2016 to $2.12 billion at September 30, 2017.
Liquidity included $27.7 billion of contingent liquidity, consisting of $20.3 billion of unencumbered high-quality liquid securities, $6.1 billion of unused FHLB capacity, and $1.3 billion of cash at the Federal Reserve. Available secured discount-window capacity was $12.7 billion. The company stated that it remained fully compliant with the applicable liquidity coverage ratio.
Material Changes Versus Prior Comparable Period
- Net interest income benefited from loan growth, higher loan yields, balance-sheet optimization, and higher short-term interest rates. Funding and deposit costs also increased.
- Reported third-quarter noninterest income declined because the 2016 period included a significant gain from a mortgage and home-equity troubled-debt-restructuring transaction. Excluding notable items, third-quarter noninterest income increased 4%.
- Commercial Banking revenue increased 9% in the third quarter and 12% for the first nine months; Consumer Banking revenue increased 6% and 8%, respectively.
- Non-core assets declined 19% from year-end 2016 to $2.2 billion, including a reduction in legacy aircraft-related loans and leases.
- The company sold $596 million of lower-return, non-strategic commercial loans and leases during the second quarter as part of balance-sheet optimization.
- First-nine-month results included a $23 million benefit from the settlement of certain state tax matters. Results also included $26 million of aircraft lease impairments, consisting of an $11 million reduction to noninterest income and $15 million of noninterest expense.
- The company repurchased $485 million of common stock during the first nine months and paid $233 million of common dividends. Average diluted shares outstanding declined by approximately 20 million year over year for the nine-month period.
Guidance, Outlook, Management Commentary, Risks, and Unusual Items
The Federal Reserve did not object to the company’s 2017 capital plan. The plan included quarterly common dividends of $0.18 per share through the end of 2017, potential for a $0.22 quarterly dividend in 2018, and share repurchases through the second quarter of 2018. Future distributions remain subject to capital, earnings, liquidity, regulatory, and market considerations. A fourth-quarter 2017 common dividend of $0.18 per share was declared after the quarter-end.
Management described credit quality as strong, although the allowance included estimated exposure from Hurricanes Harvey and Irma. Commercial criticized loans increased to $3.2 billion, or 6.1% of the commercial portfolio, from 5.6% at year-end, with a notable increase in criticized commercial real estate loans.
The balance sheet remained asset-sensitive to interest rates. Management estimated that a gradual 200-basis-point increase in rates would increase one-year net interest income by 5.4%, while an instantaneous 200-basis-point decline would reduce it by 12.0%. A flatter yield curve, higher deposit costs, weaker market liquidity, or declining long-term rates could pressure net interest income and margins.
Other principal risks include economic deterioration, higher charge-offs and provision expense, regulatory or supervisory actions, litigation and regulatory investigations, capital and liquidity requirements, mortgage and mortgage-servicing-right volatility, cyber or operational failures, changing legislation, and the ability to execute efficiency and growth initiatives. The company stated that legacy consent orders related to past deposit reconciliation practices had been terminated after regulators determined required actions were satisfied; however, ongoing regulatory and legal matters remain possible.
The company expects no material impact from the pending stock-compensation, premium-amortization, goodwill, and revenue-recognition standards identified in the filing. It expects the future credit-loss standard to result in earlier recognition of losses and a higher allowance, although the amount was not yet determinable.
Most Important Facts for Investors to Verify
- Whether loan and deposit growth can continue without materially increasing funding costs or credit risk.
- The sustainability of the 3.00% net interest margin and the sensitivity of earnings to future Federal Reserve actions and yield-curve changes.
- Trends in criticized commercial real estate exposures, nonperforming loans, auto losses, HELOC resets, and the allowance under the forthcoming expected-credit-loss framework.
- The recurring earnings impact of the $23 million tax settlement benefit, 2017 lease impairments, and other non-GAAP adjustments.
- Execution of the capital plan, including dividends, repurchases, and the effect of these actions on CET1 and other regulatory ratios.
- Liquidity coverage, reliance on FHLB and other wholesale funding, and maturities of approximately $4.1 billion of long-term borrowings in 2018.
- Outstanding off-balance-sheet commitments of $64.2 billion, including $61.9 billion of undrawn credit commitments and $2.1 billion of financial standby letters of credit.
- Potential costs or restrictions arising from litigation, regulatory matters, operational controls, cybersecurity, and the proposed NSFR framework.