Citizens Financial (CFG) - 2021 Q3 - Quarterly Report

Part I. Financial Information Financial Statements This section presents the company's unaudited interim consolidated financial statements for the period ended September 30, 2021, including core financial statements and detailed notes Notes to the Consolidated Financial Statements The notes detail accounting policies and financial data, highlighting strategic acquisitions and key financial methodologies - The company announced several strategic acquisitions in 2021: - HSBC Branches: Agreement to acquire 80 East Coast branches and the national online deposit business from HSBC, expected to close in Q1 2022[172] - Investors Bancorp, Inc.: Definitive agreement to acquire Investors in a stock and cash deal, expected to close in early Q2 2022[172] - JMP Group LLC: Definitive agreement for an all-cash acquisition to strengthen corporate finance capabilities, targeted to close in mid-Q4 2021[172] - Willamette Management Associates: Completed the acquisition on September 1, 2021, adding an estimated $15 million to goodwill[171] - The Allowance for Credit Losses (ACL) decreased from $2.7 billion at year-end 2020 to $2.0 billion as of September 30, 2021. This was driven by a credit provision benefit of $386 million and net charge-offs of $280 million, reflecting strong credit performance and an improved macroeconomic outlook[186] - During the nine months ended September 30, 2021, the company repurchased $95 million of its common stock and completed several capital actions, including issuing $300 million of Series G Preferred Stock and redeeming all outstanding Series A Preferred Stock[231][232][237] Key Financial Position Data (as of Sept 30, 2021 vs. Dec 31, 2020) | Metric | Sept 30, 2021 (in millions) | Dec 31, 2020 (in millions) | | :--- | :--- | :--- | | Total Assets | $187,007 | $183,349 | | Net Loans and Leases | $121,463 | $120,647 | | Total Deposits | $152,221 | $147,164 | | Total Liabilities | $163,584 | $160,676 | | Total Stockholders' Equity | $23,423 | $22,673 | Key Operating Results (Nine Months Ended Sept 30, 2021 vs. 2020) | Metric | Nine Months 2021 (in millions) | Nine Months 2020 (in millions) | | :--- | :--- | :--- | | Net Interest Income | $3,386 | $3,457 | | Provision for Credit Losses | ($386) | $1,492 | | Total Noninterest Income | $1,541 | $1,741 | | Net Income | $1.8B | $601M | | Diluted EPS | $3.99 | $1.23 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management analyzes the company's financial performance and condition for Q3 and the first nine months of 2021, including income, balance sheet, and strategic developments Introduction Citizens Financial Group, a major U.S. financial institution with $187.0 billion in assets, is expanding its footprint and capabilities through strategic acquisitions - As of September 30, 2021, Citizens Financial Group, Inc. had total assets of $187.0 billion[16] - The company announced four key strategic transactions in 2021: - HSBC Branches: Acquisition of 80 East Coast branches and the national online deposit business, expected to add approximately $8.4 billion in deposits and $1.9 billion in loans[16] - Investors Bancorp, Inc.: Acquisition of Investors, which will add $27.3 billion in assets and 154 branches in the greater New York City and Philadelphia metro areas[16] - Willamette Management Associates: Acquisition completed on September 1, 2021, strengthening corporate financial advisory capabilities[17] - JMP Group LLC: All-cash acquisition to further bolster corporate finance and strategic advisory capabilities, valued at approximately $149 million[17] Financial Performance Q3 2021 net income significantly increased due to a credit provision benefit, reflecting improved financial performance over the prior year Q3 2021 vs. Q3 2020 Performance | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Income | $530M | $314M | | Diluted EPS | $1.18 | $0.68 | | Underlying Net Income (Non-GAAP) | $546M | $338M | | Underlying EPS (Non-GAAP) | $1.22 | $0.73 | | ROTCE | 13.7% | 8.3% | | Underlying ROTCE (Non-GAAP) | 14.2% | 9.0% | - The significant increase in Q3 2021 net income was primarily driven by a credit provision benefit of $33 million, compared to a $428 million provision expense in Q3 2020, reflecting improved credit performance and a better macroeconomic outlook[27] Nine Months 2021 vs. Nine Months 2020 Performance | Metric | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | | Net Income | $1.8B | $601M | | Diluted EPS | $3.99 | $1.23 | | ROTCE | 16.1% | 5.1% | | Tangible Book Value per Share | $34.44 | $32.24 (as of 9/30/20) | Results of Operations Q3 2021 saw a slight increase in net interest income, a decline in noninterest income, stable expenses, and a significant credit provision benefit Net Interest Income Q3 2021 net interest income increased slightly year-over-year, though net interest margin declined due to elevated cash and lower rates Net Interest Income and Margin (FTE) - Quarterly Trend | Quarter | Net Interest Income (in millions) | Net Interest Margin (FTE) | | :--- | :--- | :--- | | 3Q20 | $1,137 | 2.83% | | 4Q20 | $1,117 | 2.75% | | 1Q21 | $1,124 | 2.76% | | 2Q21 | $1,129 | 2.72% | | 3Q21 | $1,145 | 2.72% | - Average deposits increased by $10.5 billion (7%) YoY, driven by growth in demand deposits, money market accounts, and savings, while term deposits decreased[44] - Average loans and leases decreased by $2.3 billion (2%) YoY, driven by a $5.2 billion decrease in commercial loans (including a $1.9 billion decrease in PPP loans), partially offset by a $2.9 billion increase in retail loans[24] Noninterest Income Noninterest income in Q3 2021 decreased significantly, primarily due to lower mortgage banking fees, partially offset by other fee income growth Noninterest Income Breakdown (Q3 2021 vs Q3 2020) | Category | Q3 2021 (in millions) | Q3 2020 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Mortgage banking fees | $108 | $287 | (62%) | | Service charges and fees | $110 | $97 | 13% | | Capital markets fees | $72 | $58 | 24% | | Card fees | $66 | $57 | 16% | | Trust and investment services fees | $61 | $53 | 15% | | Total Noninterest Income | $514 | $654 | (21%) | - The decrease in mortgage banking fees was driven by lower gain-on-sale margins and production volumes[49] - Capital markets fees increased due to higher loan syndication and M&A advisory fees[49] Noninterest Expense Noninterest expense in Q3 2021 saw a slight increase, driven by higher salaries and operating costs Noninterest Expense Breakdown (Q3 2021 vs Q3 2020) | Category | Q3 2021 (in millions) | Q3 2020 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $509 | $524 | (3%) | | Equipment and software | $157 | $149 | 5% | | Outside services | $144 | $139 | 4% | | Other operating expense | $124 | $95 | 31% | | Total Noninterest Expense | $1,011 | $988 | 2% | - On an Underlying (non-GAAP) basis, noninterest expense increased 3% YoY, driven by higher salaries (revenue-based compensation and merit), outside services (growth initiatives), and other operating expenses (travel and advertising)[52][54] Provision for Credit Losses A credit provision benefit was recorded in Q3 2021, a significant reversal from the prior year, reflecting improved credit performance and outlook Provision for Credit Losses | Period | Provision for Credit Losses (in millions) | | :--- | :--- | | Q3 2021 | ($33) | | Q3 2020 | $428 | | Nine Months 2021 | ($386) | | Nine Months 2020 | $1,492 | - The provision benefit in 2021 is attributed to strong credit performance and an improving macroeconomic outlook, whereas the 2020 expense was driven by the adverse impacts of the COVID-19 pandemic[56] Business Operating Segments Consumer Banking's net income decreased in Q3 2021, while Commercial Banking's net income grew significantly due to reduced net charge-offs Consumer Banking Selected Financials (Q3 2021 vs Q3 2020) | Metric (in millions) | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Interest Income | $919 | $845 | | Noninterest Income | $315 | $495 | | Net Charge-offs | $35 | $55 | | Net Income | $336 | $407 | Commercial Banking Selected Financials (Q3 2021 vs Q3 2020) | Metric (in millions) | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Interest Income | $428 | $421 | | Noninterest Income | $168 | $144 | | Net Charge-offs | $15 | $161 | | Net Income | $274 | $153 | - Commercial Banking net charge-offs decreased by $146 million YoY, reflecting stabilization from the effects of the COVID-19 pandemic[61] Analysis of Financial Condition As of September 30, 2021, total assets were $187.0 billion, with stable loans, improved asset quality, growing deposits, and strong capital Loans and Leases Total loans and leases remained stable, with retail growth offsetting a commercial decline driven by payoffs and reduced PPP loans Composition of Loans and Leases (in millions) | Portfolio | Sept 30, 2021 | Dec 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Total Commercial | $57,955 | $60,793 | ($2,838) | | Total Retail | $65,363 | $62,297 | $3,066 | | Total Loans and Leases | $123,318 | $123,090 | $228 | - The commercial loan decrease was driven by payoffs and a reduction in PPP loans from $4.2 billion to $1.9 billion[69] - The retail loan increase was driven by growth in residential mortgages (+10%), automobile (+11%), and education (+6%)[69] Allowance for Credit Losses and Nonaccrual Loans and Leases Asset quality significantly improved, with the Allowance for Credit Losses decreasing and nonaccrual loans falling due to strong credit performance ACL and NPL Ratios | Metric | Sept 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Allowance for Credit Losses (ACL) | $2,004M | $2,670M | | ACL to Loans and Leases | 1.63% | 2.17% | | Nonaccrual Loans and Leases (NPLs) | $747M | $1,019M | | NPLs to Loans and Leases | 0.61% | 0.83% | Net Charge-offs (NCOs) | Period | Total NCOs (in millions) | NCO Ratio (annualized) | | :--- | :--- | :--- | | Q3 2021 | $44 | 0.14% | | Q3 2020 | $219 | 0.70% | | Nine Months 2021 | $280 | 0.30% | | Nine Months 2020 | $503 | 0.54% | - Total commercial criticized balances decreased by $565 million to $4.1 billion from year-end 2020[78] Capital and Regulatory Matters The company maintained strong capital ratios well above regulatory minimums, with the CET1 ratio increasing due to strong earnings Regulatory Capital Ratios | Ratio | Sept 30, 2021 | Dec 31, 2020 | Required Minimum + SCB | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 10.3% | 10.0% | 7.9% | | Tier 1 Capital Ratio | 11.6% | 11.3% | 9.4% | | Total Capital Ratio | 13.4% | 13.4% | 11.4% | | Tier 1 Leverage Ratio | 9.7% | 9.4% | 4.0% | - The company's Stress Capital Buffer (SCB) was unchanged at 3.4% for the period from October 1, 2021, through September 30, 2022[94] - The company temporarily suspended share repurchases due to the pending acquisition of Investors but is poised to resume them after the shareholder vote. $655 million remains available under the current repurchase authorization[95] Liquidity The company maintains a robust liquidity position, primarily funded by stable deposits, with significant available liquidity - Total available liquidity was approximately $76.1 billion as of September 30, 2021[121] - Key liquidity metrics as of September 30, 2021: - Loan-to-deposit ratio: 81.0% - Cash at Federal Reserve: $12.5 billion - Contingent liquidity: $48.7 billion - Available discount window capacity: $27.4 billion[121] Credit Ratings (as of Sept 30, 2021) | Entity | Moody's (Long-term) | S&P (Long-term) | Fitch (Long-term) | | :--- | :--- | :--- | :--- | | Citizens Financial Group, Inc. | NR | BBB+ | BBB+ | | Citizens Bank, N.A. | Baa1 | A- | BBB+ | Critical Accounting Estimates The Allowance for Credit Losses (ACL) is a critical accounting estimate, determined using an economic forecast reflecting an improved outlook - The ACL determination for Q3 2021 used an economic forecast with ~5.8% real GDP growth and an unemployment rate between 5.3% and 6.3% for 2021[123] - A sensitivity analysis under a more pessimistic scenario (slower recovery, higher unemployment) would result in a quantitative lifetime loss estimate approximately 1.2x the modeled period-end ACL, an increase of about $230 million, before qualitative adjustments[123] - Management continues to apply qualitative judgment to adjust reserves, particularly for commercial sectors most impacted by the pandemic, such as CRE retail, office, hospitality, and casual dining[123] Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to non-trading interest rate risk, with an asset-sensitive balance sheet, and actively manages this risk using derivatives Sensitivity of Net Interest Income to Interest Rate Changes | Rate Change Scenario (Instantaneous) | Estimated % Change in NII (over 12 months) | | :--- | :--- | | +200 bps | 20.8% | | +100 bps | 10.9% | | -25 bps | (2.4%) | - The company is actively managing the transition away from LIBOR, with plans to stop entering new U.S. Dollar LIBOR contracts by the end of 2021 and remediate legacy contracts by mid-2023[135] - Market risk from MSRs is economically hedged using freestanding derivatives. As of September 30, 2021, the fair value of MSRs was $978 million, with related derivative hedges having a notional amount of $15.4 billion[137] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, ensuring timely and accurate SEC reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report[265] Part II. Other Information Legal Proceedings The company is involved in various legal and regulatory proceedings, with no material adverse effect on financial statements expected - The company is involved in legal proceedings and regulatory matters typical for its business. Based on current information and established reserves, management does not expect a materially adverse effect on its financial condition[245][268] Risk Factors No new risk factors are disclosed in this report, with reference made to previously described risks in prior SEC filings - The report directs readers to consider the risks described in the Company's 2020 Form 10-K and the Q2 2021 Form 10-Q[269] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[270] Exhibits This section lists the exhibits filed with the Form 10-Q, including key agreements and required certifications - Key exhibits filed include the merger agreement with Investors Bancorp, Inc., and CEO/CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[271]