CITIZENS FINANCIAL GROUP INC annual report, FY2019

Citizens Financial Group, Inc. — FY2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 10-K, not a standalone quarterly filing, although fourth-quarter results are disclosed. Citizens is a regional bank holding company headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking. At year-end, it had approximately 1,100 branches, $165.7 billion of assets, $125.3 billion of deposits, and $22.2 billion of stockholders’ equity.

Financial performance and condition

Metric	2019	2018	Change
Total revenue	$6.491 billion	$6.128 billion	+6%
Net interest income	$4.614 billion	$4.532 billion	+2%
Noninterest income	$1.877 billion	$1.596 billion	+18%
Provision for credit losses	$393 million	$326 million	+21%
Noninterest expense	$3.847 billion	$3.619 billion	+6%
Net income	$1.791 billion	$1.721 billion	+4%
Net income available to common stockholders	$1.718 billion	$1.692 billion	+2%
Diluted EPS	$3.81	$3.52	+8%
Net interest margin, FTE	3.16%	3.22%	-6 bps
Efficiency ratio	59.28%	59.06%	+22 bps
Return on average tangible common equity	12.64%	12.94%	Down 30 bps

Balance sheet: Total assets increased 3% to $165.7 billion. Loans and leases increased 2% to $119.1 billion, while deposits increased 5% to $125.3 billion. Average loans increased 4% to $117.9 billion and average deposits increased 6% to $123.3 billion.
Credit quality: The allowance for loan and lease losses was $1.252 billion, or 1.05% of loans. Total allowance for credit losses, including unfunded commitments, was $1.296 billion. Nonperforming loans and leases declined to $703 million, or 0.59% of loans, from $766 million, or 0.66%, in 2018.
Credit costs: Net charge-offs increased to $430 million from $317 million, and the net charge-off rate rose to 0.36% from 0.28%. Management attributed the increase to several uncorrelated commercial losses and seasoning in retail growth portfolios.
Liquidity: Year-end cash and cash equivalents were $3.386 billion. Contingent liquidity was $28.5 billion, consisting of $19.2 billion of unencumbered high-quality liquid securities, $7.2 billion of unused FHLB capacity, and $2.1 billion of cash held at the Federal Reserve. The loans-to-deposits ratio, excluding loans held for sale, was 95.0%.
Debt: Long-term borrowed funds declined to $14.047 billion from $15.925 billion, primarily due to lower FHLB borrowings. Short-term borrowed funds declined to $274 million from $1.317 billion.
Capital: The company reported a 10.0% CET1 ratio, 11.1% Tier 1 ratio, 13.0% total capital ratio, and 10.0% Tier 1 leverage ratio. Each remained above applicable regulatory minimums plus the capital conservation buffer. The company issued $300 million of Series D preferred stock and $450 million of Series E preferred stock, and repurchased $1.220 billion of common stock.
Cash flow: Operating activities provided $1.697 billion, investing activities used $3.875 billion, and financing activities provided $1.490 billion. Cash and cash equivalents decreased $688 million during the year.
Margins and revenue mix: Net interest income benefited from asset growth but was pressured by higher funding costs and lower securities yields. Noninterest income growth was led by mortgage banking, capital markets, trust and investment services, foreign exchange and interest-rate products, and card fees.

Material changes versus the prior comparable period

Net income increased 4%, while diluted EPS increased 8%, aided by a 6% decline in diluted average shares outstanding.
Noninterest income increased 18%, including mortgage banking fees of $302 million versus $152 million in 2018.
Noninterest expense increased 6%, driven by salaries and benefits, outside services, and equipment and software investment. The efficiency ratio was broadly stable but slightly higher.
Commercial Banking net income declined to $870 million from $927 million as higher fee revenue was more than offset by higher credit provisions and expenses. Consumer Banking net income increased to $875 million from $767 million.
Citizens consolidated CBPA into CBNA effective January 2, 2019 to streamline governance, enterprise risk management, and operations.
The company acquired Clarfeld Financial Advisors for $110 million and certain assets and liabilities of Bowstring Advisors for $40 million, increasing goodwill by $118 million in aggregate.
The company launched its sixth multi-year “Tapping our Potential” program, including a broader transformation initiative. 2019 notable items reduced GAAP net income by $17 million after tax.
Common dividends increased to $1.36 per share from $0.98 per share. The board authorized up to $1.275 billion of common share repurchases for the four-quarter period ending in the second quarter of 2020; $1.220 billion was repurchased during 2019.

Guidance, outlook, risks and unusual items

The filing does not provide a specific quantitative earnings, revenue, margin, or credit-loss outlook for 2020.
Management emphasized sustainable growth, balance-sheet optimization, digital and technology investment, efficiency initiatives, and continued development of Consumer and Commercial Banking capabilities.
Citizens became subject to Category IV regulatory treatment under the 2019 tailoring rules. It was no longer subject to an LCR requirement or company-run stress testing, and supervisory stress testing moved to a biennial cycle. It remained subject to annual capital planning and liquidity risk-management requirements.
Citizens adopted the current expected credit loss standard on January 1, 2020. Management expected an approximately $450 million increase in the allowance for credit losses, reducing fully phased-in CET1 capital by approximately 24 basis points; the capital effect was expected to be phased in over three years.
Key risks include economic deterioration, borrower credit quality, regional concentration in New England, the Mid-Atlantic and Midwest, interest-rate and deposit-cost pressure, liquidity and funding access, regulatory supervision, litigation, cybersecurity and third-party technology risk, competition from banks and fintech firms, and the transition away from LIBOR.
The filing discloses ongoing litigation, investigations, subpoenas and regulatory matters arising in the ordinary course, including matters involving fair lending, unfair or deceptive practices, mortgage-related issues and product sales. Management stated that established reserves and currently available information did not indicate a material adverse effect, but the timing and ultimate cost of some matters remain uncertain.
Management and Deloitte concluded that internal control over financial reporting was effective as of December 31, 2019. Deloitte issued unqualified opinions on the consolidated financial statements and internal controls.

Most important facts for an investor to verify

Reconcile the $450 million estimated CECL day-one allowance increase and its effect on 2020 earnings, capital ratios and credit provisions.
Assess whether higher net charge-offs, criticized commercial loans and retail portfolio seasoning represent a temporary normalization or an emerging credit trend.
Monitor net interest margin, deposit pricing, deposit mix and the effect of lower interest rates on net interest income and mortgage servicing rights.
Evaluate the sustainability of the 2019 increase in mortgage banking, capital markets and wealth-management fee revenue.
Confirm that capital levels support the planned dividend and share-repurchase program after CECL adoption, acquisitions and balance-sheet growth.
Review the maturity and refinancing profile of the $14.0 billion of long-term borrowed funds, including $2.5 billion maturing in 2020 and $6.3 billion in 2021.
Review Note 18 for developments in litigation, regulatory matters, mortgage repurchase exposure and the $75.0 billion of off-balance-sheet commitments.
Track LIBOR replacement planning, cybersecurity controls, regulatory expectations and the implementation of the company’s transformation and efficiency programs.