Citizens Financial Group, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Citizens Financial Group, Inc. is a U.S. bank holding company headquartered in Providence, Rhode Island, operating approximately 1,150 branches across 11 states in New England, the Mid-Atlantic and Midwest. Its two reportable segments are Consumer Banking and Commercial Banking. This Form 10-K covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. The filing was signed February 22, 2018.
At year-end, Citizens reported $152.3 billion of assets, $115.1 billion of deposits, $110.6 billion of loans and leases, and $20.3 billion of stockholders’ equity.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net interest income | $4.173 billion | $3.758 billion | +11% |
| Noninterest income | $1.534 billion | $1.497 billion | +2% |
| Total revenue | $5.707 billion | $5.255 billion | +9% |
| Provision for credit losses | $321 million | $369 million | -13% |
| Noninterest expense | $3.474 billion | $3.352 billion | +4% |
| Net income | $1.652 billion | $1.045 billion | +58% |
| Net income available to common stockholders | $1.638 billion | $1.031 billion | +59% |
| Diluted EPS | $3.25 | $1.97 | +65% |
| Net interest margin | 3.02% | 2.86% | +16 bps |
| Efficiency ratio | 60.87% | 63.80% | Improved |
| Return on average tangible common equity | 12.35% | 7.74% | +461 bps |
Underlying, non-GAAP net income available to common stockholders was $1.298 billion, or $2.58 diluted EPS, excluding notable items. Underlying revenue increased 10%, underlying expenses increased 3%, and underlying efficiency improved to 59.96%.
- Average loans and leases increased 6% to $109.3 billion, while average deposits increased 6% to $111.9 billion.
- Year-end loans and leases increased 3% to $110.6 billion. Retail loans rose 5%, led by education loans and residential mortgages; commercial loans and leases rose 1%.
- Year-end deposits increased 5% to $115.1 billion, primarily from term deposits, checking with interest, demand deposits and regular savings.
- Nonperforming loans and leases declined to $871 million, or 0.79% of loans, from $1.045 billion, or 0.97%, in 2016.
- Net charge-offs declined 9% to $305 million, or 0.28% of average loans. The allowance for loan and lease losses remained $1.236 billion, equal to 1.12% of loans and 142% of nonperforming loans.
- Capital ratios remained strong: CET1 11.2%, tier 1 capital 11.4%, total capital 13.9% and tier 1 leverage 10.0% at December 31, 2017. The company and its banking subsidiaries were reported as well-capitalized.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $1.883 billion. Investing activities used $3.984 billion, primarily due to loan growth and securities purchases. Financing activities provided $1.429 billion.
- Cash and cash equivalents declined to $3.032 billion from $3.704 billion at year-end 2016.
- Long-term borrowed funds were $11.765 billion, down from $12.790 billion; short-term borrowed funds were $2.671 billion, down from $4.359 billion.
- Citizens issued $3.25 billion of senior bank debt during 2017 and reduced FHLB borrowings. Unused secured borrowing capacity was approximately $41.2 billion, including FHLB and Federal Reserve discount-window capacity.
- Contingent liquidity was $30.3 billion, including $20.3 billion of unencumbered high-quality liquid assets, $8.0 billion of unused FHLB capacity and $2.0 billion of cash at the Federal Reserve. The modified liquidity coverage ratio was above its regulatory minimum.
- Contractual obligations totaled $129.648 billion, including deposits, long-term borrowings, contractual interest, operating leases and purchase obligations.
Material changes versus the prior comparable period
- Profitability improved substantially because of loan growth, higher loan yields, a 16-basis-point increase in net interest margin, stronger capital markets and card fees, lower credit costs and operating-efficiency initiatives.
- The effective tax rate fell to 13.6% from 31.9%, largely because the Tax Cuts and Jobs Act generated a $331 million after-tax deferred-tax remeasurement benefit. Management’s underlying tax rate was 32.2% versus 31.7% in 2016.
- Consumer Banking net income increased 31% to $452 million; Commercial Banking net income increased 23% to $774 million.
- Non-core assets declined 24% to $2.090 billion, including runoff of legacy aircraft-related leases and home-equity portfolios.
- Citizens repurchased $820 million of common stock, or 22.4 million shares, and paid $322 million of common dividends. The 2017 capital plan allowed up to $850 million of repurchases through the second quarter of 2018.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide a detailed full-year 2018 earnings or revenue forecast. Management’s strategy emphasizes sustainable loan and deposit growth, continued operating efficiency, digital and technology investment, balance-sheet optimization and enhanced risk management.
- The 2017 capital plan contemplated quarterly common dividends of $0.22 per share in 2018 and share repurchases through the second quarter of 2018, subject to regulatory non-objection, capital levels, financial performance and market conditions.
- Notable 2017 items included the $331 million tax-law benefit, a $17 million pretax gain on a mortgage/home-equity TDR portfolio transaction, $26 million of aircraft lease impairments, $22 million of colleague and community reinvestment, and $15 million of TOP IV efficiency-initiative costs.
- Citizens retrospectively adopted ASU 2018-02 and reclassified $145 million from accumulated other comprehensive income to retained earnings related to the tax-law change.
- Key risks include interest-rate and deposit-cost pressure, credit deterioration in the company’s regional markets, commercial real estate and consumer credit exposure, liquidity and funding access, regulatory and supervisory requirements, litigation, cybersecurity and third-party technology dependence.
- Approximately $1.0 billion of HELOC balances were scheduled to enter principal-and-interest repayment in 2018. Management identified payment-reset risk but cited strong credit scores, collateral metrics and loss-mitigation activity.
- Off-balance-sheet commitments totaled $65.159 billion, including $62.959 billion of undrawn commitments to extend credit and $2.036 billion of financial standby letters of credit.
- Management stated that liabilities potentially arising from legal and regulatory proceedings were not expected to materially affect the consolidated financial statements, although outcomes and timing can be uncertain. A 2015 OCC consent-order matter relating to past billing practices was reported as paid and completed.
- Management and Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal control over financial reporting. No unresolved SEC staff comments were reported.
Most important facts for investors to verify
- Separate GAAP earnings from underlying earnings: the $1.652 billion GAAP net income included a $331 million tax-law benefit and other notable items.
- Assess whether net interest margin and earnings remain resilient as deposit costs and wholesale funding rates rise.
- Review consumer credit trends, particularly auto, education, unsecured retail, HELOC repayment resets and commercial real estate criticized loans.
- Confirm the sustainability of loan and deposit growth and the effect of continued balance-sheet optimization and non-core asset runoff.
- Verify capital-plan execution, including the planned $0.22 quarterly dividend and authorized repurchases, against regulatory approval and capital requirements.
- Evaluate liquidity coverage, funding concentration, FHLB reliance, debt maturities and the $65.2 billion of off-balance-sheet commitments.
- Monitor the impact of the forthcoming current expected credit loss standard, which management expected could increase the allowance for credit losses at adoption.