Citizens Financial Group, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
Citizens Financial Group, Inc. (CFG) is a bank holding company headquartered in Providence, Rhode Island. Its principal banking subsidiary is Citizens Bank, N.A. The company operates through Consumer Banking and Commercial Banking, serving more than five million customers through approximately 900 branches in 11 states, 114 non-branch offices and national businesses including auto, education, point-of-sale finance, capital markets and digital deposits.
This filing reports the fiscal year ended December 31, 2021, with comparisons primarily to fiscal 2020. At year-end, CFG reported $188.4 billion of assets, $154.4 billion of deposits and $23.4 billion of stockholders’ equity.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $6.647 billion | $6.905 billion | Down 4% |
| Net income | $2.319 billion | $1.057 billion | Up 119% |
| Net income available to common stockholders | $2.206 billion | $950 million | Up 132% |
| Diluted EPS | $5.16 | $2.22 | Up 132% |
| Net interest income | $4.512 billion | $4.586 billion | Down 2% |
| Net interest margin | 2.71% | 2.88% | Down 17 bps |
| Noninterest income | $2.135 billion | $2.319 billion | Down 8% |
| Noninterest expense | $4.081 billion | $3.991 billion | Up 2% |
| Provision for credit losses | $(411) million benefit | $1.616 billion expense | Improved by $2.027 billion |
| Efficiency ratio | 61.4% | 57.8% | Up 360 bps |
| Return on tangible common equity | 15.4% | 6.9% | Up 850 bps |
Underlying, non-GAAP net income was $2.397 billion, or $5.34 diluted EPS, excluding $78 million of after-tax notable items. Underlying efficiency ratio was 59.8% and underlying ROTCE was 16.0%.
Balance sheet, credit and liquidity
- Loans and leases totaled $128.2 billion, up 4% from 2020. Retail loans increased 9%, led by residential mortgages and auto loans; commercial loans declined 1%, principally because of PPP loan runoff.
- Deposits totaled $154.4 billion, up 5%. Demand deposits increased 13%, checking with interest increased 12% and regular savings increased 22%, while term deposits declined 45%.
- The allowance for credit losses declined to $1.934 billion from $2.670 billion. The ACL coverage ratio was 1.51%, or 1.52% excluding PPP loans, compared with 2.17% and 2.24%, respectively, in 2020.
- Net charge-offs declined to $325 million, or 0.26% of average loans and leases, from $693 million, or 0.56%, in 2020. Nonaccrual loans and leases declined 31% to $702 million, or 0.55% of total loans.
- Long-term borrowed funds declined to $6.932 billion from $8.346 billion, while short-term borrowed funds declined to $74 million from $243 million.
- Year-end cash and cash equivalents were $9.158 billion. Cash balances at the Federal Reserve were $7.9 billion, total available liquidity was approximately $70.9 billion, and contingent liquidity was $45.1 billion.
- Available FHLB borrowing capacity was $15.9 billion, and available secured borrowing capacity was approximately $63.0 billion. The loans-to-deposits ratio, excluding loans held for sale, was 83.0%.
- Regulatory capital remained above applicable requirements. CFG reported CET1, tier 1 and total capital ratios of 9.9%, 11.1% and 12.7%, respectively, and a tier 1 leverage ratio of 9.7%. The company’s stress capital buffer was 3.4%.
Material changes versus the prior comparable period
- Profitability improved substantially because 2020 included a large COVID-19-related credit reserve build, while 2021 produced a $411 million credit provision benefit.
- Net interest income fell modestly as the net interest margin compressed in the low-rate environment, despite 5% growth in average interest-earning assets and lower deposit funding costs.
- Noninterest income declined primarily because mortgage banking fees fell 53% to $434 million as industry capacity increased and gain-on-sale margins narrowed. Capital markets fees increased 71% to $428 million.
- Noninterest expense increased 2%, driven by higher technology, software and outside-service costs related to growth and transformation initiatives.
- Commercial Banking net income increased to $1.086 billion from $774 million, while Consumer Banking net income decreased to $1.203 billion from $1.285 billion, primarily because of lower mortgage banking revenue.
- CFG repurchased $295 million of common stock and paid $670 million of common dividends in 2021. The company ended the year with $455 million remaining under its $750 million repurchase authorization.
- CFG completed acquisitions of Willamette Management Associates and JMP Group during 2021. It also entered into agreements for the HSBC branch and online deposit acquisition and the Investors Bancorp merger.
Cash flow, outlook and management commentary
- Operating activities generated $2.275 billion of cash, compared with $111 million in 2020. Investing activities used $10.486 billion, principally for securities purchases, loans and bank-owned life insurance. Financing activities generated $4.636 billion, primarily from deposit growth.
- Management’s strategy emphasizes customer growth, digital transformation, fee-based businesses, efficiency, balance-sheet optimization and continued investment in technology and risk management. The TOP 6 efficiency program was completed, and TOP 7 was launched for 2022.
- Management’s year-end ACL forecast assumed real GDP growth of approximately 1.3% in 2022 and unemployment of approximately 5.2% to 6.6%. A more pessimistic modeled scenario would have increased the modeled ACL by approximately $170 million, before qualitative adjustments.
- The HSBC acquisition closed on February 18, 2022. The Investors acquisition was expected to close in early second quarter 2022, subject to regulatory approvals and other closing conditions.
- The filing does not provide formal numerical earnings or revenue guidance for 2022. Management expects higher short-term rates to benefit net interest income because the balance sheet is asset-sensitive, but recognizes risks from deposit repricing, competition and mortgage-market conditions.
Risks, contingencies and unusual items
- Key risks include COVID-19 variants, inflation, supply-chain disruption, changes in fiscal and monetary stimulus, higher credit losses, regional economic deterioration and commercial real estate exposure, particularly office properties.
- Interest-rate changes could affect net interest income, deposit costs, mortgage originations, mortgage servicing rights and the value of securities. A gradual 200-basis-point rate increase was estimated to increase 12-month net interest income by 10.1%; a gradual 25-basis-point decline was estimated to reduce it by 1.5%.
- The company continues its transition from LIBOR to alternative reference rates such as SOFR. Legacy contract remediation extends through mid-2023, and remaining contract, legal, operational and customer-disclosure risks remain.
- Cybersecurity, technology infrastructure, third-party service-provider, operational, regulatory, litigation, fair-lending, consumer-protection and anti-money-laundering risks could result in financial penalties, remediation costs, restrictions or reputational harm.
- Pending acquisitions create execution, regulatory-approval, employee-retention, customer-retention, integration-cost and litigation risks. The Investors transaction could be terminated if conditions are not satisfied by the contractual deadline.
- Off-balance-sheet commitments totaled $86.351 billion, including $84.206 billion of commitments to extend credit and $1.998 billion of letters of credit.
- Management stated that, based on information currently available and established reserves, potential liabilities from legal and regulatory proceedings are not expected to have a material adverse effect on the consolidated financial statements; however, the timing and amount of some matters cannot be estimated reliably.
- Notable 2021 items included $35 million of integration costs and $70 million of other notable expenses, producing a total after-tax reduction to net income of $78 million.
Most important facts for investors to verify
- Whether the credit provision benefit and materially lower charge-offs persist after government support programs expire and economic conditions normalize.
- The sensitivity of net interest income and deposit costs to Federal Reserve rate increases, deposit beta assumptions and balance-sheet growth.
- The effect of mortgage-market competition and prepayment behavior on mortgage banking revenue and the $1.029 billion mortgage servicing-rights portfolio.
- The closing, regulatory conditions, purchase accounting and integration costs associated with the Investors transaction, and the realized benefits from the HSBC acquisition.
- Whether capital ratios remain comfortably above regulatory minimums after acquisitions, goodwill and intangible additions, dividends and share repurchases.
- Potential losses or remediation costs from legal proceedings, regulatory investigations, cybersecurity incidents and third-party technology disruptions.
- The company’s ongoing LIBOR remediation, including the treatment of legacy contracts and the effect on preferred stock, loans, derivatives and other financial instruments.