Citizens Financial Group, Inc. 2016 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 through Consumer Banking and Commercial Banking. At December 31, 2016, the company reported $149.5 billion of assets, approximately 17,600 employees, approximately 1,200 branches across 11 states, and more than five million customers. This Form 10-K covers the fiscal year ended December 31, 2016; comparable results are primarily for 2015.
Financial performance and condition
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net interest income | $3.758 billion | $3.402 billion | Up 10% |
| Noninterest income | $1.497 billion | $1.422 billion | Up 5% |
| Total revenue | $5.255 billion | $4.824 billion | Up 9% |
| Provision for credit losses | $369 million | $302 million | Up 22% |
| Noninterest expense | $3.352 billion | $3.259 billion | Up 3% |
| Net income | $1.045 billion | $840 million | Up 24% |
| Net income available to common stockholders | $1.031 billion | $833 million | Up 24% |
| Diluted EPS | $1.97 | $1.55 | Up $0.42 |
| Net interest margin | 2.86% | 2.75% | Up 11 bps |
| Efficiency ratio | 63.80% | 67.56% | Improved 376 bps |
| Return on average tangible common equity | 7.74% | 6.45% | Up 129 bps |
Average loans and leases increased 8% to $103.4 billion, while average deposits increased 6% to $105.4 billion. At year-end, loans and leases were $107.7 billion, up 9%, and deposits were $109.8 billion, up 7%. Noninterest-bearing deposits represented approximately 26% of total deposits. The company’s total deposit cost increased to 0.26% from 0.24%.
Consumer Banking generated $345 million of net income, up 32%, with average loans up 7% and average deposits up 3. Commercial Banking generated $631 million, up 9%, with average loans up 10% and average deposits up 14%. Commercial Banking’s return on average tangible common equity was 12.44%, compared with 6.68% for Consumer Banking.
Net cash provided by operating activities was $1.490 billion. Investing activities used $11.326 billion, primarily due to loan growth and securities purchases. Financing activities provided $10.455 billion, driven by deposit growth and long-term borrowings. Cash and cash equivalents increased to $3.704 billion from $3.085 billion.
Long-term borrowed funds increased to $12.790 billion from $9.886 billion, while short-term borrowed funds increased to $4.359 billion from $3.432 billion. Total stockholders’ equity was $19.747 billion. The company issued senior debt, repurchased $625 million of subordinated debt, repurchased 17.3 million common shares for $430 million, and paid $241 million of common dividends.
Material changes versus the prior comparable period
- Revenue growth was led by loan growth, improved loan yields, balance-sheet optimization, higher rates, and stronger capital markets fees.
- Net interest margin increased 11 basis points, despite higher deposit and borrowing costs and lower investment-security yields.
- Provision expense increased $67 million, reflecting higher commercial charge-offs, particularly in commodities-related credits, and loan growth.
- Net charge-offs increased 18% to $335 million, although the net charge-off ratio remained relatively stable at 0.32% versus 0.30%.
- Nonperforming loans and leases declined modestly to $1.045 billion from $1.060 billion. Nonperforming assets as a percentage of total assets improved to 0.73% from 0.80%.
- The allowance for loan and lease losses increased to $1.236 billion from $1.216 billion; coverage of nonperforming loans improved to 118% from 115%.
- Non-core assets increased 18% to $2.760 billion, primarily because a $1.2 billion legacy RBS aircraft lease and loan portfolio was transferred to runoff. Retail non-core assets declined.
- Common equity tier 1 capital declined to 11.2% from 11.7%, primarily reflecting dividends, common share repurchases, and debt-related capital actions, but remained well above regulatory minimums.
Guidance, outlook, commentary, risks and unusual items
Management’s medium-term targets include return on tangible common equity above 10% and an efficiency ratio in the 60% range. The filing cautions that these targets depend on assumptions regarding interest rates, the yield curve, economic conditions, competition, regulatory requirements, and successful execution of the strategic plan.
The TOP II efficiency initiative delivered a $105 million pretax benefit in 2016. TOP III was targeted to produce a $100 million to $115 million annualized pretax benefit by the end of 2017. Management also planned continued investments in digital capabilities, technology, commercial banking, wealth management, mortgage, student lending, and unsecured lending.
2016 included a $72 million pretax gain from a mortgage and home-equity troubled-debt-restructuring transaction, partially offset by home-equity operational items, asset-finance repositioning costs, and TOP III costs. Total 2016 notable items produced a $31 million pretax benefit and a $19 million after-tax benefit. The company also recorded a $16 million pretax impairment-related impact associated with the repositioning of legacy aircraft leasing exposures.
The company stated that its modified liquidity coverage ratio was above the minimum requirement and that it remained fully compliant with the LCR at year-end. Contingent liquidity was $24.0 billion, consisting of $2.2 billion of net cash at the Federal Reserve, $19.0 billion of unencumbered high-quality liquid assets, and $2.8 billion of unused Federal Home Loan Bank capacity. Including discount-window capacity, total available liquidity was approximately $35.8 billion.
- Key risks include economic deterioration, credit losses, commodities-related exposures, commercial real estate, HELOC payment resets, interest-rate changes, deposit pricing pressure, liquidity and funding access, and credit-rating downgrades.
- Regulatory and compliance risks remain significant. The company and its banking subsidiaries continued remediation related to consumer compliance, fair lending, mortgage servicing, operational risk, liquidity risk, model risk, vendor oversight, and information security.
- All financial penalties associated with 2015 consent orders had been paid and substantially all related legacy remediation was resolved by year-end, but future restitution and penalties could exceed established reserves.
- CBNA had completed undertakings under an OCC remediation plan relating to financial-subsidiary ownership, but restrictions remained pending OCC approval.
- Cybersecurity, operational failures, litigation, regulatory investigations, changing banking rules, and dependence on third-party technology providers could materially affect results.
- The company’s $6.9 billion goodwill balance was not impaired at the October 31, 2016 testing date, but future impairment remains possible if operating performance, market conditions, or valuation assumptions deteriorate.
Most important facts for investors to verify
- Whether loan growth, margin expansion, and efficiency gains continue without a disproportionate increase in credit losses or funding costs.
- Trends in commodities-related commercial credit, criticized loans, commercial nonperforming assets, and commercial real estate exposure.
- Performance of HELOCs subject to payment resets or balloon payments, including the $1.1 billion scheduled to reset during 2017.
- Progress and final benefits from TOP III, including the targeted $100 million to $115 million pretax run-rate benefit.
- Regulatory approval of CBNA’s remediation plan and any continuing or new supervisory restrictions, restitution obligations, or penalties.
- Capital-plan approval and the sustainability of proposed dividends and share repurchases under CCAR and fully phased-in Basel III requirements.
- The effect of rising interest rates on net interest income, deposit costs, securities duration, mortgage servicing rights, and liquidity.
- Future credit-loss provisioning under the forthcoming current expected credit loss methodology, which management expected could increase the allowance.
- Legal and regulatory contingencies, off-balance-sheet commitments of $62.9 billion, and contractual obligations of $125.1 billion.