Citizens Financial Group, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Citizens Financial Group, Inc. is a Providence, Rhode Island-based bank holding company with Consumer Banking and Commercial Banking segments. It operated more than 1,100 branches in 14 states and the District of Columbia and had 18,889 full-time equivalent employees at December 31, 2022. This filing covers the fiscal year ended December 31, 2022; the filing does not present a separate Q4 summary.
At year-end, Citizens reported $226.7 billion of assets, $180.7 billion of deposits and $23.7 billion of stockholders’ equity. Major 2022 transactions included the HSBC East Coast branches and national online deposit business acquisition, the Investors Bancorp acquisition, and the DH Capital acquisition.
Financial performance and key metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $8.021 billion | $6.647 billion | Up 20.7% |
| Net interest income | $6.012 billion | $4.512 billion | Up 33% |
| Net interest margin, FTE | 3.10% | 2.72% | Up 38 bps |
| Noninterest income | $2.009 billion | $2.135 billion | Down 6% |
| Noninterest expense | $4.892 billion | $4.081 billion | Up 20% |
| Provision for credit losses | $474 million | Benefit of $411 million | Unfavorable swing |
| Net income | $2.073 billion | $2.319 billion | Down $246 million |
| Net income available to common stockholders | $1.960 billion | $2.206 billion | Down $246 million |
| Diluted EPS | $4.10 | $5.16 | Down $1.06 |
| Efficiency ratio | 61.0% | 61.4% | Improved 40 bps |
| Return on tangible common equity | 13.9% | 15.4% | Down 150 bps |
Management’s non-GAAP “Underlying” net income available to common stockholders was $2.312 billion, or $4.84 diluted EPS, compared with $2.284 billion, or $5.34 diluted EPS, in 2021. Underlying results excluded $352 million of notable after-tax items in 2022, including acquisition and integration costs, TOP initiative costs, Investors loan mark-to-market losses and acquisition-related credit provision effects.
Balance sheet, credit, cash flow and liquidity
- Loans and leases increased 22% to $156.7 billion, primarily from the HSBC and Investors acquisitions. Commercial loans increased 36% to $82.2 billion; retail loans increased 10% to $74.5 billion.
- Total deposits increased 17% to $180.7 billion, with $25.4 billion of period-end balances attributable to the HSBC and Investors transactions. Estimated uninsured deposits were $88.9 billion.
- Long-term borrowed funds increased to $15.9 billion from $6.9 billion, primarily due to FHLB advances acquired from Investors and funding for loan and securities growth.
- The allowance for credit losses increased to $2.240 billion from $1.934 billion. The allowance coverage ratio was 1.43% including unfunded commitments, compared with 1.51% in 2021.
- Nonaccrual loans and leases increased 34% to $944 million, or 0.60% of total loans and leases, from $702 million, or 0.55%, in 2021. Commercial criticized loans increased to $5.5 billion, or 6.7% of commercial loans, from $3.0 billion, or 5.4%.
- Net charge-offs were $270 million, with a total loan and lease net charge-off ratio of 0.18%, down from 0.26% in 2021.
- Cash provided by operating activities was $4.119 billion. Investing activities used $12.637 billion, primarily for loan growth and securities purchases, while financing activities provided $9.907 billion. Year-end cash and cash equivalents were $10.547 billion.
- Total available liquidity was approximately $72.3 billion, including $48.1 billion of contingent liquidity and $24.2 billion of available Federal Reserve discount window capacity. The loans-to-deposits ratio, excluding loans held for sale, was 86.7%.
- Citizens’ CET1 ratio was 10.0%, total capital ratio was 12.8% and tier 1 leverage ratio was 9.3%. CBNA’s corresponding ratios were 11.2%, 12.7% and 9.4%. Both the company and CBNA were described as well-capitalized.
- Citizens paid $779 million of common dividends, $113 million of preferred dividends and repurchased $153 million of common stock during 2022.
Material changes versus the prior comparable period
- Revenue growth was driven by a 33% increase in net interest income, higher interest rates and the HSBC and Investors acquisitions. Average interest-earning assets increased 17%.
- Noninterest income declined because mortgage banking fees fell 40% and capital markets fees fell 14% amid lower mortgage production and challenging capital markets conditions. Foreign exchange and derivative products revenue increased 57%.
- Noninterest expense increased 20%, reflecting acquisition and integration costs, higher compensation, FDIC insurance, travel and advertising expenses, partially offset by efficiency initiatives.
- Credit costs shifted from a $411 million provision benefit in 2021 to a $474 million provision expense in 2022. The 2022 provision included $169 million of initial acquisition-related CECL provision expense and reflected a more adverse recessionary economic outlook.
- Net income and reported profitability declined despite higher revenue, while underlying net income was broadly stable. Tangible book value per common share decreased 19% to $27.88, partly reflecting accumulated other comprehensive losses from interest-rate-driven securities and derivative valuations.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management emphasized continued integration of Investors and HSBC, operational efficiency through the TOP 8 program, balance-sheet growth, digital and technology investment, and disciplined capital and liquidity management.
Management’s year-end credit-loss forecast incorporated a moderate recession beginning in the fourth quarter of 2022 and continuing for four quarters, with approximately 6% peak unemployment, a 1.4% peak-to-trough GDP decline and declines in home and used-vehicle collateral values. A more pessimistic modeled scenario would have increased the quantitative ACL estimate by approximately $300 million, excluding qualitative adjustments.
- Key risks include recession, inflation, labor shortages, supply-chain disruption, interest-rate volatility, deposit repricing and funding outflows.
- Commercial real estate risk increased, particularly in office properties; criticized CRE loans rose to $2.4 billion and represented 8.2% of CRE loans.
- The company remains exposed to cybersecurity, third-party technology, operational, regulatory, litigation, AML, sanctions and reputational risks.
- Regulatory capital and liquidity requirements may restrict dividends and repurchases. The company’s stress capital buffer was 3.4% through September 30, 2023, and the Investors acquisition triggered participation in the 2023 CCAR supervisory stress test.
- The transition away from U.S. dollar LIBOR was expected to continue through mid-2023 for legacy contracts, with related legal, operational, valuation and customer-contract risks.
- Off-balance-sheet commitments totaled $98.3 billion, including $96.1 billion of commitments to extend credit and $2.1 billion of letters of credit.
- Management stated that existing litigation and regulatory matters were not expected to have a material adverse effect on the consolidated financial statements, but acknowledged that outcomes, timing and potential losses may be difficult to estimate.
Most important facts for an investor to verify
- Whether acquisition-related revenue and cost synergies, particularly from Investors and HSBC, are being realized without offsetting deposit attrition or integration costs.
- Trends in deposit balances, deposit betas, uninsured deposits, funding costs and liquidity capacity as interest rates and banking-sector conditions evolve.
- Commercial real estate criticized loans, office exposure, nonaccrual trends and future ACL needs under weaker economic scenarios.
- The sustainability of the 3.10% net interest margin as deposit costs increase and the Federal Reserve changes policy rates.
- The effect of securities unrealized losses and accumulated other comprehensive losses on tangible book value and capital management.
- Future regulatory capital requirements, CCAR results and their effect on common dividends and share repurchases.
- The status and financial impact of litigation, regulatory investigations, cybersecurity events and LIBOR-related contract remediation.
- The filing’s audited financial statements and internal control report, both of which received unqualified opinions from Deloitte & Touche LLP.