Citizens Financial Group, Inc. — 2018 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, serving more than five million customers through approximately 1,100 branches in 11 states, retail and commercial offices, ATMs, digital channels, and national specialty businesses. Its two reportable segments are Consumer Banking and Commercial Banking. This Form 10-K covers the fiscal year ended December 31, 2018; fourth-quarter information is presented as supplementary unaudited quarterly data.
At December 31, 2018, Citizens reported $160.5 billion of assets, $119.6 billion of deposits, $20.8 billion of stockholders’ equity, and approximately 18,100 full-time equivalent employees. On January 2, 2019, Citizens merged Citizens Bank of Pennsylvania into Citizens Bank, N.A., leaving CBNA as its sole banking subsidiary.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $6.128 billion | $5.707 billion | Up 7% |
| Net interest income | $4.532 billion | $4.173 billion | Up 9% |
| Noninterest income | $1.596 billion | $1.534 billion | Up 4% |
| Provision for credit losses | $326 million | $321 million | Up 2% |
| Noninterest expense | $3.619 billion | $3.474 billion | Up 4% |
| Net income | $1.721 billion | $1.652 billion | Up 4% |
| Net income available to common stockholders | $1.692 billion | $1.638 billion | Up 3% |
| Diluted EPS | $3.52 | $3.25 | Up 8% |
| Net interest margin | 3.19% | 3.02% | Up 17 bps |
| Efficiency ratio | 59.06% | 60.87% | Improved 181 bps |
| Return on average tangible common equity | 12.94% | 12.35% | Up 59 bps |
Higher loan yields, rising interest rates, a favorable asset mix, and loan growth drove net interest income. Average loans and leases increased 4% to $113.5 billion, while average deposits increased 4% to $115.9 billion. Higher deposit and wholesale funding costs partially offset asset yield expansion.
Consumer Banking generated $767 million of net income, up 70%, on 14% revenue growth. Commercial Banking generated $927 million, up 20%, on 5% revenue growth. Other segment net income fell to $27 million from $426 million, primarily because 2017 included a $331 million tax benefit from the deferred tax liability revaluation under the Tax Cuts and Jobs Act.
Balance sheet, credit quality, debt, liquidity, and cash flow
- Total loans and leases increased 5% to $116.7 billion, including 9% growth in commercial loans and leases and 2% growth in retail loans.
- Total deposits increased 4% to $119.6 billion. Regular savings, term deposits, and interest-bearing checking grew, while money-market deposits declined.
- Long-term borrowed funds increased to $14.4 billion from $11.8 billion, mainly due to higher FHLB advances. Short-term borrowed funds were $2.8 billion.
- Loan quality improved: nonperforming loans and leases declined to $797 million from $871 million, or 0.68% of loans versus 0.79%. Net charge-offs increased to $317 million, but the net charge-off rate remained stable at 0.28%.
- The allowance for loan and lease losses was $1.242 billion, or 1.06% of loans, compared with 1.12% in 2017. The total allowance for credit losses, including unfunded commitments, was $1.333 billion.
- Regulatory capital remained strong. CET1, Tier 1, total capital, and Tier 1 leverage ratios were 10.6%, 11.3%, 13.3%, and 10.0%, respectively. Management stated that the company and CBNA were well-capitalized.
- Cash flow from operating activities was $1.767 billion. Investing activities used $7.077 billion, primarily from loan growth and securities purchases. Financing activities provided $6.352 billion, primarily from debt issuance, deposit growth, and preferred stock issuance. Ending cash and cash equivalents were $4.074 billion.
- Liquidity included $26.9 billion of contingent liquidity, comprising $19.1 billion of unencumbered high-quality liquid assets, $4.8 billion of unused FHLB capacity, and $3.0 billion held at the Federal Reserve. Unused secured borrowing capacity was approximately $36.2 billion.
Material changes versus the prior comparable period
- Revenue and earnings increased, supported by higher net interest income, improved net interest margin, loan growth, and stronger mortgage banking, foreign exchange, card, trust, and investment-services fees.
- Expense growth remained below revenue growth, producing positive operating leverage of 3.19% and an improved efficiency ratio.
- The August 1, 2018 acquisition of Franklin American Mortgage Company expanded mortgage origination and servicing capabilities. The transaction added approximately $600 million of mortgage servicing rights at year-end and contributed $57 million to mortgage banking fees, while generating $60 million of operating costs and $21 million of integration costs.
- Citizens issued $300 million each of Series B and Series C preferred stock, redeemed $333 million of subordinated debt, paid $471 million of common dividends, and repurchased $1.025 billion of common stock.
- Common shares outstanding declined materially as a result of repurchases; diluted weighted-average shares fell to approximately 480.4 million from 503.7 million.
- The 2018 effective tax rate increased to 21.2% from 13.6% because 2017 included the significant deferred tax liability revaluation benefit. Excluding notable items, the 2018 effective tax rate was 22.5% versus 32.2% in 2017.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide a clear numerical 2019 revenue or earnings forecast. Management emphasized continued investment in customer experience, digital capabilities, technology, efficiency initiatives, balance-sheet optimization, and risk management. The company commenced the fifth phase of its Tapping our Potential efficiency program in the second half of 2018.
The 2018 capital plan, which received no objection from the Federal Reserve, contemplated common dividends of $0.27 per share in the third and fourth quarters of 2018, $0.32 per share in the first and second quarters of 2019, and common share repurchases of up to $1.02 billion through the second quarter of 2019. Future distributions remain subject to capital, earnings, liquidity, market conditions, regulatory requirements, and Board approval.
- Interest-rate risk is material. Management estimated that a gradual 200-basis-point increase in rates would increase 12-month net interest income by 4.9%, while a gradual 100-basis-point decline would reduce it by 1.1%.
- Deposit pricing and competition could pressure net interest margin and funding costs. The filing also identifies risks from the expected discontinuation or replacement of LIBOR after 2021.
- Credit risk is concentrated primarily in the New England, Mid-Atlantic, and Midwest regions. Commercial real estate, consumer unsecured lending, education lending, auto lending, HELOC payment resets, and housing values require continued monitoring.
- Citizens expects adoption of the current expected credit loss standard on January 1, 2020. Management expects earlier recognition of credit losses and an increase in the allowance, but the quantitative impact was not yet reasonably estimable.
- Other material risks include heightened regulatory supervision, capital and liquidity requirements, litigation and investigations, cybersecurity and third-party technology risk, operational failures, competition from banks and fintech companies, and the requirement to support CBNA as a source of financial strength.
- Off-balance-sheet commitments totaled $71.7 billion, including $69.6 billion of undrawn commitments to extend credit and $2.1 billion of letters of credit.
- The filing describes ongoing legal, regulatory, fair-lending, consumer-practices, mortgage-related, and product-mis-selling matters. Management stated that established reserves and currently available information did not indicate a material adverse effect, but ultimate outcomes and losses may be uncertain.
Most important facts for investors to verify
- Reconcile GAAP earnings with the company’s non-GAAP “Underlying” results, particularly the effects of FAMC integration costs, TOP efficiency initiatives, and tax-related items.
- Assess whether deposit costs continue to rise faster than loan yields and whether net interest margin remains resilient as interest rates change.
- Review the credit performance of consumer unsecured, education, auto, commercial real estate, HELOC, and other growing portfolios, including the adequacy of the $1.333 billion total allowance for credit losses.
- Evaluate the effect of the FAMC acquisition on mortgage banking revenue, mortgage servicing-right valuations, operating costs, and capital requirements.
- Monitor CET1 and other regulatory capital ratios after dividends, share repurchases, balance-sheet growth, the fully phased-in capital conservation buffer, and the 2020 CECL adoption.
- Verify liquidity coverage, deposit stability, FHLB reliance, debt maturities, credit ratings, and the availability of secured borrowing capacity.
- Review the final regulatory treatment of enhanced prudential standards, stress testing, resolution planning, liquidity requirements, and other pending rulemakings.
- Review Note 18 for developments in litigation, regulatory investigations, commitments, guarantees, and other contingencies not fully quantified in the filing.