Citizens Financial (US:CFG)2023-08-07 16:00Part I. Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, condition, and risks, highlighting income growth and challenges in the current rate environment Financial Performance Net income and key performance metrics showed significant year-over-year growth in the first half of 2023 - For the six months ended June 30, 2023, net income available to common stockholders increased by $204 million YoY to $932 million, with diluted EPS rising to $1.92 from $1.58139164 - Tangible book value per common share increased 3% to $28.72 from December 31, 2022139 Key Performance Metrics (Six Months Ended June 30) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $4,222M | $3,644M | +15.9% | | Net Income | $989M | $784M | +26.1% | | Diluted EPS | $1.92 | $1.58 | +$0.34 | | Efficiency Ratio (Underlying) | 58.3% | 60.9% | -2.6 bps | | ROTCE (Underlying) | 14.8% | 14.2% | +0.6 bps | Results of Operations Revenue grew due to higher net interest income, while credit loss provisions increased, particularly for commercial real estate - For the six months ended June 30, 2023, total revenue grew 15.9% YoY, primarily due to a 22% increase in net interest income, reflecting higher market interest rates and the impact of acquisitions139145 - The provision for credit losses for the first six months of 2023 was $344 million, up from $219 million in the same period of 2022, reflecting increased net charge-offs, particularly in the Commercial Real Estate Office portfolio146 Analysis of Financial Condition The company experienced a decrease in total loans and deposits, alongside an increase in the allowance for credit losses - Total loans and leases decreased by $5.3 billion (3%) to $151.3 billion at June 30, 2023, from December 31, 2022, driven by commercial loan sales and retail portfolio runoff154214 - Total deposits decreased to $177.7 billion as of June 30, 2023, from $180.7 billion at year-end 2022, driven by seasonal and rate-related outflows and a migration to higher-yielding products7190 - The Allowance for Credit Losses (ACL) increased to $2.3 billion at June 30, 2023, with the ACL to total loans ratio rising to 1.52% from 1.43%2155 Capital and Regulatory Matters Capital ratios remain above required minimums despite share repurchases, with upcoming regulatory changes expected to increase requirements - The company's Stress Capital Buffer (SCB) will increase from 3.4% to 4.0% effective October 1, 2023221 - The company repurchased $656 million of common stock and paid $410 million in common dividends during the first half of 202312195225 - Proposed regulatory changes, including Basel III "Endgame," are expected to increase capital requirements, with the pro-forma CET1 ratio estimated at 8.5% including AOCI impact1617200 Regulatory Capital Ratios | Ratio | June 30, 2023 | Dec 31, 2022 | Required Minimum | | :--- | :--- | :--- | :--- | | CET1 Capital (CFG) | 10.3% | 10.0% | 7.9% | | Tier 1 Capital (CFG) | 11.4% | 11.1% | 9.4% | | Total Capital (CFG) | 13.3% | 12.8% | 11.4% | | Tier 1 Leverage (CFG) | 9.4% | 9.3% | 4.0% | Liquidity The company maintains a strong liquidity position with substantial available funds and a high percentage of insured deposits - As of June 30, 2023, the company maintained total available liquidity of approximately $78.8 billion268 - Estimated insured and secured deposits represented 70% of the total consolidated deposit base of $177.7 billion207220 - The Parent Company's cash and cash equivalents increased to $2.5 billion as of June 30, 2023, from $1.6 billion at year-end 2022202 Market Risk The company's asset-sensitive balance sheet benefits from rising interest rates, with market risk managed through derivatives - The company's balance sheet is asset-sensitive, with a gradual 200 basis point rate increase estimated to increase Net Interest Income by 1.3% over the next 12 months57241 - The total notional amount of interest rate contracts used for non-trading exposure was $70.5 billion, up from $40.8 billion at year-end 202229242 Net Interest Income Sensitivity (as of June 30, 2023) | Rate Change Scenario | Estimated % Change in NII (next 12 months) | | :--- | :--- | | +200 bps (Instantaneous) | +3.1% | | +100 bps (Instantaneous) | +1.7% | | -100 bps (Instantaneous) | -2.6% | | -200 bps (Instantaneous) | -6.1% | Financial Statements This section presents the unaudited interim consolidated financial statements, detailing assets, operations, and credit quality Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets, driven by a reduction in net loans and leases Consolidated Balance Sheet Summary (in millions) | Account | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Net Loans and Leases | $149,276 | $154,679 | | Debt Securities | $34,275 | $33,841 | | Total Assets | $223,066 | $226,733 | | Liabilities & Equity | | | | Total Deposits | $177,667 | $180,724 | | Total Borrowed Funds | $15,199 | $15,890 | | Total Liabilities | $199,481 | $203,043 | | Total Stockholders' Equity | $23,585 | $23,690 | Consolidated Statements of Operations The income statement reflects strong growth in net interest income and net income for the first half of the year Consolidated Statement of Operations Summary (Six Months Ended June 30, in millions) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $3,231 | $2,652 | | Provision for Credit Losses | $344 | $219 | | Noninterest Income | $991 | $992 | | Noninterest Expense | $2,602 | $2,411 | | Net Income | $989 | $784 | Consolidated Statements of Cash Flows Cash flows show a significant positive shift in operating activities and a net increase in cash for the period Consolidated Statement of Cash Flows Summary (Six Months Ended June 30, in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $1,283 | ($322) | | Net Cash from Investing Activities | $4,641 | ($13,362) | | Net Cash from Financing Activities | ($4,904) | $11,040 | | Net Change in Cash | $1,020 | ($2,644) | Note 2 - Securities The debt securities portfolio holds significant unrealized losses due to interest rate changes but is not considered impaired - As of June 30, 2023, the total debt securities portfolio had a fair value of $33.5 billion, with a net unrealized loss of $3.1 billion primarily attributed to changes in interest rates49183 - The company determined that none of its Available-for-Sale (AFS) debt securities were impaired as it does not intend to sell them before recovery of their cost basis49 Note 4 - Credit Quality and the Allowance for Credit Losses Credit quality analysis reveals an increase in the allowance for credit losses and a notable rise in nonaccrual loans - Nonaccrual loans increased by 26% to $1.19 billion at June 30, 2023, primarily driven by a 242% rise in nonaccrual commercial real estate loans186 - Credit quality is monitored using regulatory classification ratings for commercial loans and FICO scores for retail loans, with the portfolio average at 7725354159 Allowance for Credit Losses (ACL) Roll-Forward (Six Months Ended June 30, 2023, in millions) | Description | Amount | | :--- | :--- | | Beginning ACL (Jan 1, 2023) | $2,240 | | Net Charge-offs | ($285) | | Provision Expense | $344 | | Ending ACL (June 30, 2023) | $2,299 | Part II. Other Information Other Information (Items 1-6) This section details share repurchase activity and incorporates by reference discussions on legal proceedings and risk factors - The company refers to Note 11 for information on legal proceedings and its 2022 Form 10-K for a discussion of risk factors325427 - On February 17, 2023, the Board increased the common share repurchase authorization by $1.15 billion, with $1.34 billion remaining available under the program as of June 30, 2023326428 Share Repurchases (Q2 2023) | Month | Total Shares Repurchased | Average Price Paid | | :--- | :--- | :--- | | April 2023 | 3,353 | $30.74 | | May 2023 | 7,603,174 | $26.41 | | June 2023 | 2,040,965 | $27.08 |