Citizens Financial (CFG) - 2024 Q2 - Quarterly Report

Part I. Financial Information Financial Statements The company's financial position showed a decrease in total assets and stockholders' equity, while net income and diluted earnings per share declined in the second quarter of 2024 Consolidated Balance Sheet Highlights (Unaudited) | (in millions) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $219,938 | $221,964 | | Net Loans and Leases | $139,717 | $143,861 | | Total Debt Securities | $40,833 | $38,961 | | Goodwill | $8,187 | $8,188 | | Total Liabilities | $196,069 | $197,622 | | Total Deposits | $176,352 | $177,342 | | Total Borrowed Funds | $13,084 | $13,972 | | Total Stockholders' Equity | $23,869 | $24,342 | Consolidated Statement of Operations Highlights (Unaudited) | (in millions, except per share data) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $1,410 | $1,588 | $2,852 | $3,231 | | Provision for Credit Losses | $182 | $176 | $353 | $344 | | Noninterest Income | $553 | $506 | $1,070 | $991 | | Noninterest Expense | $1,301 | $1,306 | $2,659 | $2,602 | | Net Income | $392 | $478 | $726 | $989 | | Diluted Earnings Per Share | $0.78 | $0.92 | $1.44 | $1.92 | Consolidated Statement of Cash Flows Highlights (Unaudited) | (in millions) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net change due to operating activities | $1,388 | $1,276 | | Net change due to investing activities | $1,218 | $4,641 | | Net change due to financing activities | ($2,463) | ($4,897) | | Net change in cash and cash equivalents | $143 | $1,020 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The company's financial performance in the first half of 2024 was characterized by decreased net interest income and net income, alongside balance sheet optimization and stable capital ratios Financial Performance Second quarter 2024 financial performance saw a year-over-year decline in net income and diluted EPS, alongside a worsening efficiency ratio and decreased Return on Average Tangible Common Equity Q2 2024 vs Q2 2023 Performance Highlights | Metric | Q2 2024 (Reported) | Q2 2023 (Reported) | Q2 2024 (Underlying) | Q2 2023 (Underlying) | | :--- | :--- | :--- | :--- | :--- | | Net Income (millions) | $392 | $478 | $408 | $531 | | Diluted EPS | $0.78 | $0.92 | $0.82 | $1.04 | | ROTCE | 10.6% | 12.4% | 11.1% | 13.9% | | Efficiency Ratio | 66.3% | 62.3% | 64.6% | 58.9% | - Notable items for Q2 2024 totaled $16 million after tax, primarily related to TOP initiatives and integration costs, compared to $53 million in Q2 2023[14] Results of Operations Operating results were primarily affected by an 11% decline in net interest income due to higher funding costs, partially offset by a 9% increase in noninterest income and stable noninterest expenses - Net Interest Income (NII): Decreased 11% year-over-year to $1.41 billion in Q2 2024, with Net Interest Margin (NIM) contracting by 30 basis points to 2.86% due to higher funding costs[19] - Noninterest Income: Increased 9% year-over-year to $553 million in Q2 2024, driven by a 63% rise in capital markets fees and a 15% increase in card fees[23] - Noninterest Expense: Remained stable year-over-year at $1.301 billion in Q2 2024, with a 2% increase for the first six months due to Private Bank investments and a $40 million FDIC special assessment[24] - Provision for Credit Losses: Was $182 million in Q2 2024, up from $176 million year-over-year, mainly due to increased reserves for the CRE office portfolio[25] - Income Tax Expense: The effective tax rate for Q2 2024 was 18.5%, down from 22.1% year-over-year, due to lower pre-tax income and benefits from tax-advantaged investments[26] Business Operating Segments Second quarter 2024 saw Consumer Banking net income grow, Commercial Banking net income decline, and the Non-Core segment continue its planned portfolio runoff Segment Net Income (Loss) - Q2 2024 vs Q2 2023 | Segment (in millions) | Q2 2024 | Q2 2023 | Change | | :--- | :--- | :--- | :--- | | Consumer Banking | $296 | $257 | $39 | | Commercial Banking | $259 | $305 | ($46) | | Non-Core | ($50) | ($55) | $5 | - Consumer Banking: Net Interest Income increased due to higher asset yields and growth, partially offset by higher funding costs, while noninterest income rose slightly from wealth and card fees[29] - Commercial Banking: Net Interest Income decreased due to lower Net Interest Margin and a decline in average assets, despite growth in noninterest income from M&A advisory, loan syndication, and underwriting fees[32][33] - Non-Core: Average loans and leases decreased by $5.0 billion year-over-year, reflecting the planned portfolio runoff[34] Analysis of Financial Condition As of June 30, 2024, total loans and leases decreased due to balance sheet optimization, while credit quality showed stress with rising nonaccrual loans, and deposits remained stable - Total loans and leases decreased by $4.1 billion (3%) to $141.8 billion since December 31, 2023, reflecting a $2.5 billion decrease in commercial loans and a $1.6 billion decrease in retail loans[35] - Nonaccrual loans increased by $163 million (12%) to $1.53 billion since year-end 2023, primarily driven by a $201 million increase in nonaccrual Commercial Real Estate loans[38] - Total deposits decreased slightly by $1.0 billion to $176.4 billion since year-end 2023, with an estimated 70% of deposits insured or secured[46][47] - Total borrowed funds decreased by $888 million to $13.1 billion since year-end 2023, mainly due to a $3.7 billion decline in FHLB advances[47] Capital and Regulatory Matters The company maintained strong capital ratios, with the CET1 ratio increasing to 10.7%, and continued its capital return program through common stock repurchases Regulatory Capital Ratios (CFG) | Ratio | June 30, 2024 | Dec 31, 2023 | Required Minimum | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 10.7% | 10.6% | 8.5% | | Tier 1 Capital Ratio | 12.0% | 11.8% | 10.0% | | Total Capital Ratio | 14.0% | 13.7% | 12.0% | | Tier 1 Leverage Ratio | 9.4% | 9.3% | 4.0% | - The Federal Reserve communicated a preliminary Stress Capital Buffer (SCB) of 4.5% associated with the 2024 CCAR supervisory stress test, effective October 1, 2024[49] - In H1 2024, the company repurchased $500 million of common stock, and on June 28, 2024, the Board increased the share repurchase program capacity to $1.25 billion[53] Liquidity The company maintains a robust liquidity position with $80.4 billion in total available liquidity, supported by strong contingent liquidity and a healthy loan-to-deposit ratio Available Liquidity as of June 30, 2024 | Liquidity Source (in billions) | Amount | | :--- | :--- | | Unencumbered high-quality liquid securities | $32.1 | | Unused FHLB capacity | $19.8 | | Cash balances at the FRB | $10.5 | | Total Contingent Liquidity | $62.4 | | Available discount window capacity | $18.0 | | Total Available Liquidity | $80.4 | - Organically generated deposits are the primary funding source, resulting in a consolidated period-end loans-to-deposits ratio of 80.4%[65] - The Parent Company's cash and cash equivalents totaled $3.2 billion as of June 30, 2024[60] Critical Accounting Estimates Critical accounting estimates, including the Allowance for Credit Losses, are based on a mild recession forecast, with sensitivity analysis indicating potential increases under more pessimistic scenarios - The Allowance for Credit Losses (ACL) economic forecast as of June 30, 2024, assumes a mild recession with peak unemployment of approximately 5.0% and a real GDP decline of about 0.4% over two years[69] - A sensitivity analysis using a more pessimistic forecast (peak unemployment of 5.8%) would result in a quantitative lifetime loss estimate approximately 1.2 times the current modeled ACL, an increase of about $392 million, before qualitative adjustments[70] Market Risk The company's market risk primarily stems from non-trading interest rate risk, which is actively hedged using derivatives, with the balance sheet remaining marginally asset-sensitive Net Interest Income Sensitivity (Instantaneous Change) | Basis Points Change | % Change in NII (June 30, 2024) | | :--- | :--- | | +200 | 0.3% | | +100 | 0.5% | | -100 | (1.1)% | | -200 | (2.8)% | - The company uses interest rate derivatives to manage non-trading risk, including $39.0 billion notional of receive-fixed/pay-SOFR cash flow hedges and $7.7 billion of pay-fixed/receive-SOFR fair value hedges as of June 30, 2024[79] - For trading risk, the average total Value at Risk (VaR) for Q2 2024 was $5 million, and the total Stressed VaR was $7 million, with total market risk regulatory capital at $58 million[86] Quantitative and Qualitative Disclosures about Market Risk This section incorporates by reference the detailed disclosures about market risk from the Management's Discussion and Analysis of Financial Condition and Results of Operations - Disclosures about market risk are presented in the "Market Risk" section of the MD&A (Part I, Item 2)[199] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[200] - No material changes to internal control over financial reporting were identified during the quarter[200] Part II. Other Information Legal Proceedings The company is involved in various legal proceedings and regulatory matters, with management not expecting a materially adverse effect on financial statements - Information regarding legal proceedings is presented in Note 11 of the financial statements[201] - Management does not expect the outcome of current legal proceedings to have a materially adverse effect on the company's financial condition[175] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023 - The company refers to the risk factors described in its 2023 Form 10-K[202] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2024, the company repurchased approximately 5.8 million shares of common stock and increased its share repurchase program authorization to $1.25 billion Share Repurchases for Q2 2024 | Period | Total Shares Repurchased | Average Price Paid | | :--- | :--- | :--- | | April 2024 | 4,765,352 | $34.77 | | May 2024 | 177 | $34.11 | | June 2024 | 989,720 | $34.75 | - On June 28, 2024, the Board of Directors increased the capacity of the common share repurchase program to $1.25 billion[203]