(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page Forward-Looking Statements 6 Introduction 7 Financial Performance 8 Selected Consolidated Financial Data 10 Results of Operations 12 Net Interest Income 12 Noninterest Income 14 Noninterest Expense 15 Provision for Credit Losses 16 Income Tax Expense 16 Business Operating Segments 17 Analysis of Financial Condition 18 Securities 18 Loans and Leases 19 Allowance for Credit Losses and Nonaccruing Loans and Leases 19 Deposits 22 Borrowed Funds 22 Capital and Regulatory Matters 23 Liquidity 27 Off-Balance Sheet Arrangements 30 Critical Accounting Estimates 30 Risk Governance 32 Market Risk 32 Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations 37
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Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment; Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals; The COVID-19 pandemic and its effects on the economic and business environments in which we operate;
Our ability to meet heightened supervisory requirements and expectations;
Liabilities and business restrictions resulting from litigation and regulatory investigations; Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms; The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale; Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses; A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and
Management's ability to identify and manage these and other risks.
In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares from or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends. Further, statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute what is
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reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.
More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the "Risk Factors" section in Part II, Item 1A of this Report and Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019.
INTRODUCTION Citizens Financial Group, Inc. is one of the nation's oldest and largest financial institutions with $176.7 billion in assets as of March 31, 2020. Our mission is to help customers, colleagues and communities each reach their potential by listening to them and understanding their needs in order to offer tailored advice, ideas and solutions. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center as well as the convenience of approximately 2,800 ATMs and 1,000 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com. The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Part I, Item 1, as well as other information contained in this document and our 2019 Form 10-K. Key Performance Metrics Used by Management and Non-GAAP Financial Measures As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition including the levels and trends of the line items included in our balance sheet and statement of operations, used in calculating various key performance metrics commonly used in our industry. We analyze these key performance metrics and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally. We consider the following key performance metrics when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including: Return on average tangible common equity, which we define as annualized net income available to common stockholders divided by average common equity excluding average goodwill (net of related deferred tax liability) and average other intangibles;
Efficiency ratio, which we define as the ratio of total noninterest expense to the sum of net interest income and total noninterest income. The efficiency ratio helps us to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to income. A decrease in the efficiency ratio represents improvement;
Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense; and
CET1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach.
This document contains non-GAAP financial measures denoted as "Underlying" results. Underlying results for any given reporting period exclude certain items that may occur in that period which Management does not consider indicative of our on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and accordingly, are useful to consider in addition to our GAAP financial results.
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Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.
FINANCIAL PERFORMANCE Net income of $34 million decreased 92% from the first quarter of 2019, with earnings per diluted common share of $0.03, down $0.89 from $0.92 per diluted common share in the first quarter of 2019. ROTCE of 0.4% declined from 13.0% in the first quarter of 2019. Net income available to common stockholders of $12 million decreased $412 million, or 97%, compared to $424 million in the first quarter of 2019. First quarter 2020 results reflected a $25 million, or $0.06 per diluted common share, after-tax reduction from notable items, largely tied to TOP 6 transformational and revenue and efficiency initiatives. In the first quarter of 2019, there were $4 million after-tax of notable items, or $0.01 per diluted common share, tied to integration costs associated with acquisitions. On an Underlying basis, which excludes notable items, first quarter 2020 net income available to common stockholders of $37 million compared with $428 million in the first quarter of 2019. Underlying EPS of $0.09 per share compares with $0.93 in the first quarter of 2019. Underlying first quarter 2020 ROTCE of 1.1% compared with 13.1% in the first quarter of 2019. Tangible book value per common share of $31.97 increased 8% from the first quarter of 2019. In the first quarter of 2020, we adopted the CECL accounting standard and recorded first quarter 2020 provision for credit losses of $600 million pre-tax, or $1.10 per share after-tax, including a reserve build of $463 million pre-tax, or $0.85 per share after-tax, tied to COVID-19 pandemic impacts.
Three Months Ended March 31, 2020 2019 Noninterest Income tax Noninterest Income tax (in millions) expense expense Net Income expense expense Net Income Reported results (GAAP) $1,012 $11 $34 $937 $127 $439 Less notable items: Total integration costs 4 (1 ) (3 ) 5 (1 ) (4 ) Other notable items(1) 29 (7 ) (22 ) - - - Total notable items 33 (8 ) (25 ) 5 (1 ) ($4 ) Underlying results* (non-GAAP) $979 $19 $59 $932 $128 $443
(1) Other notable items include noninterest expense of $29 million related to our TOP programs and other efficiency initiatives.
Total revenue of $1.7 billion increased $69 million, or 4%, from the first quarter of 2019, reflecting strength in noninterest income and stable net interest income.
Net interest income of $1.2 billion was stable, reflecting 4% growth in average interest-earning assets offset by the impact of the lower rate and challenging yield-curve environment. Net interest margin of 3.09% decreased 14 basis points from 3.23% in the first quarter of 2019, reflecting the impact of lower interest rates, which was partially offset by lower funding costs and improved deposit mix as well as the continued mix shift towards better-returning assets. - Net interest margin on a fully taxable-equivalent basis of 3.10% decreased by 15 basis points, compared to 3.25% in the first quarter of 2019. - Average loans and leases of $121.1 billion increased $3.4 billion, or 3%, from $117.6 billion in the first quarter of 2019, reflecting a $1.8 billion increase in commercial loans and leases driven by the impact of higher COVID-19 related line utilization and a $1.6 billion increase in retail loans.
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- Period-end loan growth of $8.4 billion, or 7%, from the fourth quarter of 2019, reflected 15% growth in total commercial loans and leases, which included the estimated $7.2 billion impact of higher line of credit utilization tied to COVID-19 disruption. As of April 30, 2020, estimated COVID-19-related credit utilization fell to approximately $6.4 billion.
- Average deposits of $126.6 billion increased $6.2 billion, or 5%, from $120.4 billion in the first quarter of 2019, reflecting growth in money market accounts, savings, checking with interest and demand deposits, partially offset by a decrease in term deposits.
- Period-end deposit growth of $8.2 billion, or 7%, from the fourth quarter of 2019, kept pace with loan growth as most commercial customers left their funds from line draws on deposit with us.
Noninterest income of $497 million increased $69 million, or 16%, from the first quarter of 2019, driven by record results in mortgage banking and trust and investment services fees, partially offset by COVID-19 impacts that resulted in lower service charges and fees, card fees, capital market fees and foreign exchange and interest rate products revenue. Noninterest expense of $1.0 billion increased $75 million, or 8%, from $937 million in the first quarter of 2019, driven by higher salaries and employee benefits, outside services, and equipment and software expense. On an Underlying basis, noninterest expense increased 5% from the first quarter of 2019. The efficiency ratio of 61.1% compared to 59.0% for the first quarter of 2019, and ROTCE of 0.4% compared to 13.0%. On an Underlying basis, operating leverage was (0.7%), the efficiency ratio of 59.1% compared to 58.7% for the first quarter of 2019 and ROTCE of 1.1% compared to 13.1%, reflecting the challenging environment presented by COVID-19, in particular the CECL provision impact. Provision for credit losses of $600 million increased $515 million from $85 million for the first quarter of 2019, driven by a $463 million CECL reserve build tied to COVID-19 impacts. Tangible book value per common share of $31.97 increased 8% from the first quarter of 2019. Fully diluted average common shares outstanding decreased 33.1 million shares, or 7%, over the same period.
Citizens Financial Group, Inc. | 9 -------------------------------------------------------------------------------- SELECTED CONSOLIDATED FINANCIAL DATA The summary Consolidated Operating Data for the three months ended March 31, 2020 and 2019 and the summary Consolidated Balance Sheet data as of March 31, 2020 and December 31, 2019 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1. Our historical results are not necessarily indicative of the results expected for any future period. Three Months Ended March 31, (dollars in millions, except per share amounts) 2020 2019 OPERATING DATA: Net interest income $1,160 $1,160 Noninterest income 497 428 Total revenue 1,657 1,588 Provision for credit losses 600 85 Noninterest expense 1,012 937 Income before income tax expense 45 566 Income tax expense 11 127 Net income $34 $439 Net income available to common stockholders $12 $424 Net income per common share - basic $0.03 $0.92 Net income per common share - diluted $0.03 $0.92 OTHER OPERATING DATA(1): Return on average common equity 0.24 % 8.62 % Return on average tangible common equity 0.36 13.00 Return on average total assets 0.08 1.11 Return on average total tangible assets 0.09 1.16 Efficiency ratio 61.10 59.00 Operating leverage(2) (3.71 ) 2.57 Net interest margin, FTE(3) 3.10 3.25 Effective income tax rate 24.13 22.42
(1) See "-Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations" for definitions of our key performance metrics.
Citizens Financial Group, Inc. | 10 -------------------------------------------------------------------------------- March 31, December 31, (dollars in millions) 2020 2019 BALANCE SHEET DATA: Total assets $176,719 $165,733 Loans held for sale, at fair value 2,911 1,946 Other loans held for sale 350 1,384 Loans and leases 127,528 119,088 Allowance for loan and lease losses (2,171 ) (1,252 ) Total securities 26,352 24,669 Goodwill 7,050 7,044 Total liabilities 154,769 143,532 Total deposits 133,475 125,313 Short-term borrowed funds(1) 1,059 274 Long-term borrowed funds 16,437 14,047 Total stockholders' equity 21,950 22,201 OTHER BALANCE SHEET DATA: Asset Quality Ratios: Allowance for credit losses as a percentage of loans and leases 1.73 % 1.09 % Allowance for credit losses as a percentage of nonaccruing loans and leases 283.48 184.31 Nonaccruing loans and leases as a percentage of loans and leases 0.61 0.59 Capital Ratios: CET1 capital ratio(2) 9.4 % 10.0 % Tier 1 capital ratio 10.5 11.1 Total capital ratio 12.5 13.0 Tier 1 leverage ratio 9.6 10.0
(1) In the first quarter of 2020, we reclassified federal funds purchased and securities sold under agreement to repurchase and other short-term borrowed funds to short-term borrowed funds. Prior periods have been adjusted to conform with the current period presentation.
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RESULTS OF OPERATIONS
Citizens Financial Group, Inc. | 12 -------------------------------------------------------------------------------- The following table presents the major components of net interest income and net interest margin: Three Months Ended March 31, 2020 2019 Change Average Income/ Yields/ Average Income/ Yields/ Average Yields/ (dollars in millions) Balances Expense Rates Balances Expense Rates Balances Rates (bps) Assets: Interest-bearing cash and due from banks and deposits in banks $1,859 $5 1.12 % $1,497 $8 2.19 % $362 (107) bps Taxable investment securities 25,339 147 2.32 25,136 166 2.64 203 (32 ) Non-taxable investment securities 4 - 2.60 5 - 2.60 (1 ) - Total investment securities 25,343 147 2.32 25,141 166 2.64 202 (32 ) . . .
May 07, 2020
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