Citizens Financial Group, Inc. — Fiscal Year 2020 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. It operates primarily through Consumer Banking and Commercial Banking, serving more than five million customers through approximately 1,000 branches in 11 states, alongside national digital, mortgage, education finance, capital markets and advisory activities. The filing covers the fiscal year ended December 31, 2020, with comparisons primarily to 2019.
At December 31, 2020, Citizens reported total assets of $183.3 billion, deposits of $147.2 billion and stockholders’ equity of $22.7 billion.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $6.905 billion | $6.491 billion | +6% |
| Net interest income | $4.586 billion | $4.614 billion | -1% |
| Noninterest income | $2.319 billion | $1.877 billion | +24% |
| Provision for credit losses | $1.616 billion | $393 million | +$1.223 billion |
| Noninterest expense | $3.991 billion | $3.847 billion | +4% |
| Net income | $1.057 billion | $1.791 billion | -41% |
| Net income available to common stockholders | $950 million | $1.718 billion | -45% |
| Diluted EPS | $2.22 | $3.81 | -42% |
| Net interest margin, FTE | 2.89% | 3.16% | -27 bps |
| Return on average tangible common equity | 6.93% | 12.64% | -571 bps |
| Efficiency ratio | 57.80% | 59.28% | Improved |
| Net charge-offs | $693 million | $430 million | +61% |
Revenue growth was driven primarily by a 203% increase in mortgage banking fees to $915 million and higher capital markets fees. This more than offset lower net interest income caused by the low-rate environment. The provision for credit losses rose sharply because of CECL adoption and COVID-19-related economic deterioration.
Average loans and leases increased 6% to $124.5 billion, including approximately $3.2 billion of average PPP loans. Period-end loans and leases rose 3% to $123.1 billion. Average deposits increased 13% to $138.7 billion, while period-end deposits increased 17% to $147.2 billion, reflecting government stimulus and customers’ liquidity-building efforts.
Cash flow from operating activities was $111 million, compared with $1.697 billion in 2019. Investing activities used $6.136 billion, principally due to loan growth and securities purchases, while financing activities provided $15.372 billion, primarily from deposit growth. Cash and cash equivalents increased to $12.733 billion from $3.386 billion.
Balance sheet, credit quality, debt and liquidity
- The allowance for credit losses increased to $2.670 billion from $1.296 billion, including a $451 million CECL adoption increase and an additional $923 million reserve build during 2020.
- The allowance for credit losses represented 2.17% of loans and leases, versus 1.09% in 2019. Excluding PPP loans, the ratio was 2.24%.
- Nonaccrual loans and leases increased to $1.019 billion from $703 million; nonaccrual loans were 0.83% of loans and leases.
- Commercial criticized loans increased to $4.6 billion, or 7.6% of commercial loans, from $3.0 billion, or 5.3%, primarily reflecting hospitality, retail real estate, casual dining and energy-related exposures.
- Short-term borrowed funds declined to $243 million from $274 million. Long-term borrowed funds declined to $8.346 billion from $14.047 billion, largely because strong deposits reduced reliance on FHLB borrowings.
- Year-end contingent liquidity was $47.3 billion, consisting of $11.7 billion of cash at the Federal Reserve, $21.8 billion of unencumbered high-quality liquid securities and $13.9 billion of unused FHLB capacity. Unused secured borrowing capacity was approximately $64.6 billion.
- The consolidated loans-to-deposits ratio, excluding loans held for sale, was 83.6%.
- Regulatory capital remained above requirements: CET1 was 10.0%, tier 1 capital was 11.3%, total capital was 13.4% and the tier 1 leverage ratio was 9.4%. The company and CBNA were described as well-capitalized.
Material changes versus the prior comparable period
- COVID-19 and CECL: The company adopted CECL on January 1, 2020, reducing retained earnings by $337 million after tax and increasing the ACL by $451 million. COVID-19-related reserve additions further reduced earnings.
- Revenue mix: Mortgage banking fees increased from $302 million to $915 million, while service charges, card fees and foreign exchange and interest rate products revenue declined.
- Funding mix: Deposits grew substantially, allowing the company to reduce long-term borrowings by $5.7 billion and lower interest expense.
- Credit deterioration: Commercial net charge-offs increased to $425 million from $116 million, while retail net charge-offs decreased to $268 million from $314 million, aided by forbearance and government stimulus.
- Capital actions: Citizens issued $400 million of Series F preferred stock, repurchased $270 million of common stock, paid $672 million of common dividends and completed $621 million of subordinated debt exchange offers.
- Mortgage servicing rights: The company elected fair value accounting for all MSRs beginning January 1, 2020. Year-end MSR fair value was $658 million.
Guidance, outlook, management commentary and risks
The filing does not provide a formal earnings or revenue forecast. Management stated that the recovery path from COVID-19 had improved but remained uncertain, particularly regarding vaccines, fiscal and monetary stimulus, unemployment, GDP and customer credit performance. The year-end ACL forecast assumed approximately 4% real GDP growth in 2021 and unemployment of approximately 7% to 7.5%. A more pessimistic scenario would have increased the modeled ACL by approximately $450 million, excluding qualitative adjustments.
Citizens emphasized its multiyear TOP 6 transformation program, digitization, technology investment, operating efficiency, balance-sheet optimization and development of fee-based businesses. The company stated that the program remained on target despite the pandemic.
The Federal Reserve’s stress-test results received in December 2020 exceeded capital requirements under severe stress scenarios. Citizens reiterated quarterly common dividends of $0.39 per share through the third quarter of 2021. In January 2021, the board authorized up to $750 million of common stock repurchases beginning in the first quarter of 2021, subject to regulatory and board approval and applicable capital-distribution limits.
Principal risks include prolonged or renewed COVID-19 effects, higher credit losses, commercial real estate and industry-sector deterioration, interest-rate and net interest margin pressure, deposit outflows, liquidity and funding costs, regulatory restrictions on dividends and repurchases, LIBOR transition, cybersecurity and third-party technology risks, litigation and regulatory investigations, model risk and execution risk related to the transformation program.
The filing also reports $76.6 billion of off-balance-sheet arrangements, including $74.2 billion of commitments to extend credit and $2.2 billion of letters of credit. Management believes currently known litigation and regulatory matters are not expected to have a material adverse effect, but outcomes and potential losses may be difficult to estimate.
Most important facts for investors to verify
- Whether commercial criticized loans, nonaccrual loans and net charge-offs continue to rise after the expiration of pandemic support programs and loan deferrals.
- Whether the $2.7 billion ACL remains adequate under actual unemployment, GDP, collateral-value and industry-sector outcomes.
- The sustainability of unusually strong mortgage banking revenue and the effect of low interest rates on net interest margin.
- Whether deposits remain elevated and continue to support lower wholesale borrowing and favorable liquidity metrics.
- Whether regulatory capital-distribution restrictions permit the planned $750 million repurchase authorization and continued $0.39 quarterly common dividend.
- Progress and realized savings from the TOP 6 transformation and technology investments, including associated one-time costs.
- Exposure to hospitality, retail real estate, casual dining, energy, metals and mining, and other pandemic-sensitive commercial sectors.
- Execution of the LIBOR transition and potential effects on contracts, systems, derivatives, earnings and customer relationships.
- Material developments in litigation, regulatory investigations, cybersecurity incidents and third-party service-provider risks.