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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
June 30, 20182019
[ ]☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From
(Not Applicable)
Commission File Number 001-36636
(Exact name of the registrant as specified in its charter)
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Delaware | | 05-0412693 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
One Citizens Plaza, Providence, RI02903
(Address of principal executive offices, including zip code)
(401) (401) 456-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value per share | CFG | New York Stock Exchange |
Depositary Shares, representing 6.350% Non-Cumulative Perpetual Preferred Stock, Series D
| CFG PrD | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
[ü] ☑Yes [ ]☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ü] ☑Yes [ ]☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer | [ü] ☑ | Accelerated filer | [ ]☐ |
Non-accelerated filer (Do not check if a smaller reporting company) | [ ]☐ | Smaller reporting company | [ ]☐ |
| | Emerging growth company | [ ]☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ]☐ Yes [ü]☑ No
There were 475,946,441447,086,518 shares of Registrant’s common stock ($0.01 par value) outstanding on August 1, 2018.2019.
CITIZENS FINANCIAL GROUP, INC.
GLOSSARY OF ACRONYMS AND TERMS
The following listing providesis a comprehensive referencelist of common acronyms and terms we regularly use in our financial reporting:
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ACL | | Allowance for Credit Losses |
Acquisitions | | Refers to acquisitions after second quarter 2018, including Franklin American Mortgage Company, Clarfeld Financial Advisors, LLC and Bowstring Advisors LLC |
AFS | | Available for Sale |
ALLL | | Allowance for Loan and Lease Losses |
ALM | | Asset and Liability Management |
AOCI | | Accumulated Other Comprehensive Income (Loss) |
ASU | | Accounting Standards Update |
ATM | | Automated Teller Machine |
Board of Directors | | The Board of Directors of Citizens Financial Group, Inc. |
bps | | Basis Points |
Capital Plan Rule | | Federal Reserve’s Regulation Y Capital Plan Rule |
CBNA | | Citizens Bank, National Association |
CBPA | | Citizens Bank of Pennsylvania |
CCAR | | Comprehensive Capital Analysis and Review |
CCB | | Capital Conservation Buffer |
CCMI | | Citizens Capital Markets, Inc. |
CET1 | | Common Equity Tier 1 |
CET1 capital ratio | | Common Equity Tier 1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach |
Citizens, or CFG, or the Company, we, us, or our | | Citizens Financial Group, Inc. and its Subsidiaries |
CLTV | | Combined Loan to Value |
CMO | | Collateralized Mortgage Obligation |
DFAST | | Dodd-Frank Act Stress Test |
Dodd-Frank Act | | The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 |
EGRRCPA | | Economic Growth, Regulatory Relief and Consumer Protection Act |
EPS | | Earnings Per Share |
Exchange Act | | The Securities Exchange Act of 1934 |
FAMC | | Franklin American Mortgage Company |
FAMC acquisition | | The August 1, 2018 acquisition of Franklin American Mortgage Company |
Fannie Mae (FNMA) | | Federal National Mortgage Association |
FDIA | | Federal Deposit Insurance Act |
FDIC | | Federal Deposit Insurance Corporation |
FHLB | | Federal Home Loan Bank |
FICO | | Fair Isaac Corporation (credit rating) |
FRB | | Board of Governors of the Federal Reserve System and, as applicable, Federal Reserve Bank(s)
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Freddie Mac (FHLMC) | | Federal Home Loan Mortgage Corporation |
FTP | | Funds Transfer Pricing |
GAAP | | Accounting Principles Generally Accepted in the United States of America |
Ginnie Mae (GNMA) | | Government National Mortgage Association |
HELOCGSE | | Home Equity Line of CreditGovernment Sponsored Entity |
HTM | | Held To Maturity |
LCR | | Liquidity Coverage Ratio |
LHFS | | Loans Held for Sale |
LIBOR | | London Interbank Offered Rate |
LIHTC | | Low Income Housing Tax Credit |
LTV | | Loan to Value |
MBS | | Mortgage-Backed Securities |
Mid-Atlantic | | District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia |
Midwest | | Illinois, Indiana, Michigan, and Ohio |
CITIZENS FINANCIAL GROUP, INC.
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MD&A | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
MSRs | | Mortgage Servicing Rights |
New England | | Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont |
NM | | Not meaningful |
CITIZENS FINANCIAL GROUP, INC.
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NSFR | | Net Stable Funding Ratio |
OCC | | Office of the Comptroller of the Currency |
OCI | | Other Comprehensive Income (Loss) |
Parent Company | | Citizens Financial Group, Inc. (the Parent Company of Citizens Bank, of Pennsylvania, Citizens Bank, National Association and other subsidiaries) |
ROTCE | | Return on Average Tangible Common Equity |
RPA | | Risk Participation Agreement |
SBOSBA | | Serviced by Others portfolioSmall Business Administration |
SEC | | United States Securities and Exchange Commission |
SVaR | | Stressed Value at Risk |
TDR | | Troubled Debt Restructuring |
Tier 1 capital ratio | | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach |
Tier 1 leverage ratio | | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by quarterly adjusted average assets as defined under the U.S. Basel III Standardized approach |
Total capital ratio | | Total capital, which includes Common Equity Tier 1 capital, tier 1 capital and allowance for credit losses and qualifying subordinated debt that qualifies as tier 2 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach |
VaR | | Value at Risk |
VIE | | Variable Interest Entities |
CITIZENS FINANCIAL GROUP, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking Statements | | |
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Selected Consolidated Financial Data | | |
Results of Operations | | |
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Analysis of Financial Condition | | |
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CITIZENS FINANCIAL GROUP, INC.
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.”
Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
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• | Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; |
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• | The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment; |
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• | Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals; |
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• | Our ability to meet heightened supervisory requirements and expectations; |
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• | Liabilities and business restrictions resulting from litigation and regulatory investigations; |
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• | Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms; |
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• | The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale; |
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• | Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; |
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• | The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; |
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• | Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services; |
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• | A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and |
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• | Management’s ability to identify and manage these and other risks. |
Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense;
The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment;
Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals;
Our ability to meet heightened supervisory requirements and expectations;
Liabilities and business restrictions resulting from litigation and regulatory investigations;
Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms;
The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;
The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;
Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and
Management’s ability to identify and manage these and other risks.
In addition to the above factors, we also caution that the amountactual amounts and timing of any future common stock dividends or share repurchases will depend onbe subject to various factors, including our capital position, financial condition, earnings, cash needs,performance, capital impacts of strategic initiatives, market conditions and regulatory constraints, capital requirements (including requirements of our subsidiaries), and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.
More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $155.4$162.7 billion in assets as of June 30, 2018. 2019. Our mission is to help our customers, colleagues and communities reach their potential. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. We help our customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center and the convenience of approximately 3,2002,900 ATMs and approximately 1,1501,100 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.
The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Item 1 of this Form 10-Q, as well as other information contained in this document and our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Key Performance Metrics Used by Management and Non-GAAP Financial Measures
As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and statement of operations, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally.
The primary line items we use in our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense, net income and net income available to common stockholders. The primary line items we use in our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives.
We consider various measures when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including:
Return on average common equity, which we define as annualized net income available to common stockholders divided by average common equity;
Return on average tangible common equity, which we define as annualized net income available to common stockholders divided by average common equity excluding average goodwill (net of related deferred tax liability) and average other intangibles;
Return on average total assets, which we define as annualized net income divided by average total assets;
Return on average total tangible assets, which we define as annualized net income divided by average total assets excluding average goodwill (net of related deferred tax liability) and average other intangibles;
Efficiency ratio, which we define as the ratio of our total noninterest expense to the sum of net interest income and total noninterest income. We measure our efficiency ratio to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to our income. A decrease in our efficiency ratio represents improvement;
Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense;
Net interest margin, which we calculate by dividing annualized net interest income for the period by average total interest-earning assets, is a key measure that we use to evaluate our net interest income; and
Common equity tier 1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under U.Sthe U.S. Basel III Standardized approach.
“Underlying” results, which are non-GAAP measures, exclude certain items, as applicable, that may occur in a reporting period which management does not consider indicative of on-going financial performance.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
This document contains non-GAAP financial measures denoted as “Underlying” results. Underlying results for any given reporting period exclude certain items that may occur in that period which Management does not consider indicative of the Company’s on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because thesethey are among the measures used by our management teamManagement to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our “Underlying”Underlying results in any given reporting period reflect our operationalon-going financial performance in that periodand increase comparability of period-to-period results, and accordingly, it isare useful to consider in addition to our GAAP results and our “Underlying” results together. We believe this presentation also increases comparability of period-to-periodfinancial results.
Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by othersuch companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but instead to consider them with the most directly comparable GAAP measure.measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results as reported under GAAP.
Non-GAAP measures are denoted throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations”the MD&A by the use of the term “Underlying”Underlying and/or are followed by an asterisk (*). For additional information regarding our non-GAAP financial measures and reconciliations, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations,”Reconciliations” included in this report.Report.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL PERFORMANCE
Second Quarter 20182019 compared with Second Quarter 20172018 - Key Highlights
Second quarter 20182019 net income of $425$453 million increased 34%7% from $318$425 million in second quarter 2017,2018, with earnings per diluted common share of $0.88,$0.95, up 40%8% from $0.63$0.88 per diluted common share in second quarter 2017.2018. Second quarter 20182019 ROTCE of 12.8% compared to 12.9% improved from 9.6% in second quarter 2017.2018.
There were $5 million after-tax, or $0.01 per diluted common share, of notable items recorded in second quarter 2019 tied to integration costs associated with Acquisitions. There were no notable items recorded in second quarter 2018 compared with a $26 million pre-tax impact related to impairments on aircraft lease assets in second quarter 2017, which reduced second quarter noninterest income by $11 million and increased noninterest expense by $15 million, and in addition to provision expense of $70 million, resulted in total credit-related costs of $96 million as detailed in the table below.2018.
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| 2018 | | 2017 | 2019 | | 2018 |
(in millions) | Noninterest income | | Noninterest expense | | Credit-related costs | | Net Income | | Noninterest income | | Noninterest expense | | Credit-related costs | | Net Income | Noninterest expense | | Income tax expense | | Net Income | | Noninterest expense | | Income tax expense | | Net Income |
Reported results (GAAP) |
| $388 |
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| $875 |
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| $85 |
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| $425 |
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| $370 |
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| $864 |
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| $70 |
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| $318 |
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Less Notable items: Lease impairment credit-related costs | — |
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| | (11 | ) | | 15 |
| | (26 | ) | | — |
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Reported results (GAAP): | |
| $951 |
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| $127 |
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| $453 |
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| $875 |
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| $124 |
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| $425 |
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Less notable items: | | | | | | | | | | | | |
Total integration costs | | 7 |
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Underlying results* (non-GAAP) |
| $388 |
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| $875 |
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| $85 |
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| $425 |
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| $381 |
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| $849 |
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| $96 |
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| $318 |
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| $129 |
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| $458 |
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| $875 |
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| $124 |
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| $425 |
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* Comparison to second quarter 2017 Underlying results are before a pre-tax $26 million impact related to impairments on aircraft lease assets which, reduced noninterest income by $11 million and increased noninterest expense by $15 million and, in addition to provision expense of $70 million, resulted in total credit-related costs of $96 million. Where there is a reference to “Underlying” results in a paragraph, all measures that follow these references are on the same basis when applicable. For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Introduction — Key Performance Metrics Used By Management and Non-GAAP Financial Measures” and “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations.”
Net income available to common stockholders of $425 millionincreased $107 million, or 34%, compared to $318 million in second quarter 2017, led by 8% revenue growth, with 9% growth in net interest income and noninterest income growth of 5%, and a 14% reduction in income tax expense largely related to the December 2017 Tax Legislation.
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◦• | On an Underlying basis,* excluding the impactNet income available to common stockholders of $435 millionincreased $10 million, or 2%, compared to $425 million in second quarter 2017 aircraft lease impairments,2018, driven by 8% revenue increased 7%growth, with 2%4% growth in net interest income and 19% growth in noninterest income.
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Total revenue of $1.5 billionincreased $113 million, or 8%, driven by strength in both net interest income and noninterest income. On an Underlying basis,* total revenue increased 7%.
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◦ | Net interest income of $1.1 billionincreased $95 million, or 9%, compared to $1.0 billion in second quarter 2017, driven by a 21 basis point improvement in net interest margin and 3% average loan growth.
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◦ | On an Underlying basis,* net income available to common stockholders of $440 millionincreased $15 million, or 4%, from second quarter2018. |
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• | Total revenue of $1.6 billionincreased $119 million, or 8%, from second quarter2018, reflecting strength in noninterest income and increased net interest income. |
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◦ | Net interest income of $1.2 billionincreased $45 million, or 4%, compared to $1.1 billion in second quarter2018, driven by growth in interest earning assets and stable net interest margin. |
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◦ | Net interest margin of 3.18%increased by 21 basis points,3.20% remained stable compared to 2.97% in second quarter 2017,2018, reflecting higher interest-earning asset yields tied togiven higher short-term interest rates and improvement in loancontinued mix shift towards higher-return categories, partiallyhigher-yielding assets, offset by an increase in funding costs tied to higher depositrates and funding costs.growth. |
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– | Average loans and leasesNet interest margin on a fully taxable-equivalent basis of $112.9 billionincrease3.21%decreased $3.7 billion, or 3%, from $109.1 billionby one basis point, compared to 3.22% in second quarter 2017, reflecting a $1.7 billionincrease in retail loans and a $2.1 billionincrease in commercial loans and leases.2018.
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– | Average deposits of $115.1 billionincreased $4.4 billion, or 4%, from $110.8 billion in second quarter 2017, reflecting strength in term, checking with interest, savings and demand deposits.
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◦ | Noninterest income of $388 millionincreased $18 million, or 5%, from second quarter 2017, including the $11 million impact of second quarter 2017 aircraft lease impairments.
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– | On an Underlying basis,* noninterest income increased $7 million, or 2%, driven by higher foreign exchange and interest rate products income and trust and investment services fees.
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Noninterest expense of $875 millionincreased $11 million, or 1%, compared to $864 million in second quarter 2017, which included the $15 million impact of second quarter 2017 aircraft lease impairments.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
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– | Average loans and leases of $117.8 billionincreased $4.9 billion, or 4%, from $112.9 billion in second quarter2018, reflecting a $3.3 billionincrease in commercial loans and leases and a $1.6 billionincrease in retail loans. |
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– | Average deposits of $123.2 billionincreased $8.0 billion, or 7%, from $115.1 billion in second quarter2018, reflecting growth in term deposits, savings and checking with interest, partially offset by a reduction in money market accounts and demand deposits. |
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◦ | Noninterest income of $462 millionincreased $74 million, or 19%, from second quarter2018, driven by growth in mortgage banking fees, capital market fees, trust and investment services fees and card fees. |
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• | Noninterest expense of $951 millionincreased $76 million, or 9%, compared to $875 million in second quarter2018, reflecting the impact of our investments in growth initiatives, partially offset by lower other operating expense, largely tied to a reduction in FDIC insurance and advertising expense. |
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◦ | On an Underlying basis,* noninterest expense increased 3%$69 million, or 8%, from second quarter2018. |
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• | The efficiency ratio increased to 58.4% from 58.0% in second quarter2018, and operating leverage declined 1% from second quarter2018, both primarily driven by higher salariesthe impact of notable items and employee benefits costs and outside services expense, largely tied to continuing investment to drive top-line growth. Results also reflect lower other expense due to a reduction in insurance expense.Acquisitions. |
Strong focus on top-line growth and expense management helped drive positive operating leverage of 7.0% and a 4.0% improvement in the efficiency ratio.
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◦ | On an Underlying basis,* excluding the impact of second quarter 2017 aircraft lease impairments, operating leverage was 4.3% and the efficiency ratio improved 2.4%of 58.0% remained stable with second quarter2018, despite a 38 basis point drag related to 58.0%.Acquisitions. |
ROTCE of 12.9% improved from 9.6%.
Tangible book value per common share improved 4% to $27.67. Fully diluted average common shares outstanding decreased 4%, or 21.3 million shares.
Provision for credit losses of $85 millionincreased $15 million, or 21%, from $70 million in second quarter 2017.
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◦ | On an Underlying basis,* includingoperating leverage was stable despite a 68 basis point drag related to Acquisitions. |
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• | Provision for credit losses of $97 millionincreased $12 million, or 14%, from $85 million in second quarter2018, reflecting 4% average loan growth, continued seasoning in retail growth portfolios and several idiosyncratic losses in commercial, with key metrics continuing to reflect strong credit quality. |
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• | ROTCE of 12.8% decreased slightly from 12.9% in second quarter2018 as an approximately 50 basis point drag from higher equity value, given the benefit on securities valuations from lower long-term rates, offset the benefit of profitability growth. |
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◦ | On an Underlying basis,* ROTCE of 12.9% was stable with second quarter 2017 aircraft lease impairments2018. |
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• | Tangible book value per common share of $26$30.88 increased 12% from second quarter2018. Fully diluted average common shares outstanding decreased 6%, or 26.8 million total credit-related costs improved $11 million from $96 million. shares, over the same period. |
The effective income tax rate decreased to 22.6% from 31.1% in second quarter 2017, primarily driven by the impact of tax reform.
Net charge-offs of $76 million remained relatively stable compared to second quarter 2017. The ALLL of $1.3 billion increased $17 million compared to December 31, 2017. ALLL to total loans and leases of 1.10% as of June 30, 2018 compared with 1.12% as of December 31, 2017. ALLL to nonperforming loans and leases ratio of 148% as of June 30, 2018, compared with 142% as of December 31, 2017.
First Half 20182019 compared with First Half 20172018 - Key Highlights
First half 2018 netNet income of $892 million increased 10% from $813 million increased 27% from $638 million in the first half 2017,of 2018, with earnings per diluted common share of $1.65,$1.86, up 33%13% from $1.24$1.65 per diluted common share inover the first half 2017. First half 2018of 2018. ROTCE of 12.3%12.9% improved from 9.6%12.3% in the first half 2017.of 2018.
There were $9 million after-tax, or $0.02 per diluted common share, of notable items in the first half of 2019 tied to integration costs related to Acquisitions. There were no notable items recorded in the first half 2018 compared with a first half 2017 $23 million benefit related to the settlement of certain state tax matters as well as a $26 million pre-tax impact related to impairments on aircraft lease assets, which reduced first half 2017 noninterest income by $11 million and increased noninterest expense by $15 million, and in addition to provision expense of $166 million, resulted in total credit-related costs of $192 million as detailed in the table below.2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
(in millions) | Noninterest income | | Noninterest expense | | Credit-related costs | | Income tax expense | | Net Income | | Noninterest income | | Noninterest expense | | Credit-related costs | | Income tax expense | | Net Income |
Reported results (GAAP) |
| $759 |
| |
| $1,758 |
| |
| $163 |
| |
| $237 |
| |
| $813 |
| |
| $749 |
| |
| $1,718 |
| |
| $166 |
| |
| $258 |
| |
| $638 |
|
Less: Notable items | | | | | | | | | | | | | | | | | | | |
Lease impairment credit-related costs | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | 15 |
| | (26 | ) | | — |
| | — |
|
Settlement of certain state tax matters | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (23 | ) | | 23 |
|
Total Notable items |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| ($11 | ) | |
| $15 |
| |
| ($26 | ) | |
| ($23 | ) | |
| $23 |
|
Underlying results* (non-GAAP) |
| $759 |
| |
| $1,758 |
| |
| $163 |
| |
| $237 |
| |
| $813 |
| |
| $760 |
| |
| $1,703 |
| |
| $192 |
| |
| $281 |
| |
| $615 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
(in millions) | Noninterest expense | | Income tax expense | | Net Income | | Noninterest expense | | Income tax expense | | Net Income |
Reported results (GAAP) |
| $1,888 |
| |
| $254 |
| |
| $892 |
| |
| $1,758 |
| |
| $237 |
| |
| $813 |
|
Less notable items: | | | | | | | | | | | |
Total integration costs | 12 |
| | (3 | ) | | (9 | ) | | — |
| | — |
| | — |
|
Underlying results* (non-GAAP) |
| $1,876 |
| |
| $257 |
| |
| $901 |
| |
| $1,758 |
| |
| $237 |
| |
| $813 |
|
* “Underlying” results, as applicable, exclude a first quarter 2017 $23 million benefit related to the settlement of certain state tax matters and are before a pre-tax $26 million impact related to impairments on aircraft lease assets which, reduced noninterest income by $11 million and increased noninterest expense by $15 million and, in addition to provision expense of $166 million, resulted in total credit-related costs of $192 million.Where there is a reference to “Underlying” results in a paragraph, all measures that follow these references are on the same basis when applicable. For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Introduction — Key Performance Metrics Used By Management and Non-GAAP Financial Measures” and “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations.”
Net income available to common stockholders of $806 millionincreased $175 million, or 28%, compared to $631 million in first half 2017.
| |
• | Net income available to common stockholders of $859 millionincreased $53 million, or 7%, compared to $806 million in the first half of 2018. Earnings per diluted common share increased $0.21, or 13%, from the first half of 2018. |
| |
◦ | On an Underlying basis,* net income available to common stockholders increasedof $868 millionincreased by 33%8%, led by 6%8% revenue growth with 9%5% growth in net interest income, given 3% average loan growth and a 20 basisincome. |
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
point increase in net interest margin. First half 2017 results included a $23 million benefit, or $0.05 per diluted common share, related to the settlement of certain state tax matters.
Total revenue of $3.0 billionincreased $191 million, or 7%, driven by strong net interest income growth:
| |
◦ | Net interest incomeOn an Underlying basis,* earnings per diluted common share of $2.2 billion1.88increased $181 million0.23, or 9%14%, compared to $2.0 billion in from the first half 2017, of 2018.
|
| |
• | Total revenue of $3.2 billionincreased $245 million, or 8%, from the first half of 2018, driven by a 20 basis point improvement instrong net interest margin and 3% average loannoninterest income growth. |
| |
◦ | Net interest income of $2.3 billionincreased $114 million, or 5%, compared to $2.2 billion in the first half of 2018, driven by higher loan yields and 5% average loan growth. |
| |
◦ | Net interest margin of 3.17%3.22%increased 20two basis points compared to 2.97%from 3.20% in the first half 2017, reflecting of 2018, driven by higher interest-earning asset yields tied togiven higher short-term interest rates and improving loancontinued mix towards higher-return categories, partially offset by higher deposit and funding costs.shift toward more attractive risk-adjusted return portfolios. |
| |
– | Average loans and leasesNet interest margin on a fully taxable-equivalent basis of $112.0 billion3.23%increased $3.4 billion, or 3%, from $108.6 billionby two basis points, compared to 3.21% in the first half 2017, reflecting a $2.1 billionincrease in retail loans and a $1.3 billionincrease in commercial loans and leases. of 2018.
|
| |
– | Average loans and leases of $117.7 billionincreased $5.7 billion, or 5%, from $112.0 billion in the first half of 2018, reflecting a $4.2 billionincrease in commercial loans and leases and a $1.5 billionincrease in retail loans. |
| |
– | Average deposits of $121.8 billionincreased $7.5 billion, or 7%, from $114.3 billionincreased $3.9 billion, or 4%, from $110.4 billion in the first half 2017, of 2018, reflecting strengthgrowth in term deposits, regular savings and checking with interest, savings and demand deposits.interest. |
| |
◦ | Noninterest income of $759890 millionincreased $10131 million, or 1%17%, from the first half 2017, which included the $11 million impact of second quarter 2017 aircraft lease impairments.2018, driven by growth in mortgage banking fees, capital market fees, trust and investment services fees and foreign exchange and interest rate products fees. |
| |
–• | On an Underlying basis,* noninterest income decreaseNoninterest expense of $1.9 billionincreased $1130 million, or 7%, from $760 million1.8 billion in the first half 2017, driven by a decrease of 2018, reflecting the impact of our investments in capital market fees and other income,growth initiatives, partially offset by higher foreign exchange and interest rate products income and trust and investment services fees.lower other operating expense.
|
Noninterest expense of $1.8 billionincreased $40 million, or 2%, compared to $1.7 billion in first half 2017, which included the $15 million impact of second quarter 2017 aircraft lease impairments.
| |
◦ | On an Underlying basis,* noninterest expense increased 3%, driven by higher salaries and employee benefits cost, higher outside services expense, largely tied to continuing investment to drive top-line growth, partially offset by lower other expense due to a reduction in insurance expense.7% from the first half of 2018. |
Generated positive operating leverage of 4.6%, a 2.6% improvement in the efficiency ratio to 59.2% and ROTCE of 12.3%, despite the impact of continued investing to drive future growth.
| |
• | Operating leverage for the first half of 2019 was 1%. The efficiency ratio decreased by 47 basis points to 58.7% compared to the first half of 2018, and ROTCE improved 55 basis points to 12.9%. |
| |
◦ | On an Underlying basis,* operating leverage was 3.2%1.5%, the efficiency ratio improved 1.9%83 basis points from 61.0%59.2% in the first half 2017 of 2018 and ROTCE increased 3.0%68 basis points from 9.3%12.3%. |
Return on average common equity was 8.2% compared to 6.5% for first half 2017.
| |
◦• | On an Underlying basis,* return onProvision for credit losses of $182 millionincreased $19 million, or 12%, from $163 million for the first half of 2018, reflecting 5% average common equity improved 2.0% from 6.3% for first half 2017.loan growth, continued seasoning in retail growth portfolios and several idiosyncratic losses in commercial.
|
Diluted earnings per common share increased $0.41, or 33%.
| |
◦• | On an Underlying basis,*Tangible book value per common share of $30.88 increased 12% from the first half of 2018. Fully diluted earnings per share increaseaverage common shares outstanding decreased $0.466%, or 39%.26.8 million shares, over the same period.
|
Tangible book value per common share improved 4% to $27.67. Fully diluted average common shares outstanding decreased by 21.7 million shares.
Provision for credit losses of $163 milliondecreased $3 million, or 2%, from $166 million.
| |
◦ | On an Underlying basis,* total credit-related costs decreased $29 million, or 15%, from $192 million in first half 2017, driven primarily by the $26 million impact of aircraft lease impairments in first half 2017.
|
The effective income tax rate decreased to 22.6% from 28.8% in first half 2017, primarily driven by the impact of tax reform, partially offset by the prior year settlement of certain state tax matters.
| |
◦ | On an Underlying basis,* the effective income tax rate decreased from 31.3% to 22.6%, primarily due to the impact of tax reform.
|
Net charge-offs of $146 million decreased $16 million, or 10%, from $162 million in first half 2017. The ALLL of $1.3 billion increased $17 million compared to December 31, 2017. ALLL to total loans and leases of 1.10% as of June 30, 2018 compared with 1.12% as of December 31, 2017. ALLL to nonperforming loans and leases ratio of 148% as of June 30, 2018, compared with 142% as of December 31, 2017.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SELECTED CONSOLIDATED FINANCIAL DATA
The summary Consolidated Operating Data for the three and six months ended June 30, 20182019 and 20172018 and the summary Consolidated Balance Sheet data as of June 30, 20182019 and December 31, 20172018 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1 — Financial Statements of this report.Report. Our historical results are not necessarily indicative of the results expected for any future period.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in millions, except per-share amounts) | 2018 |
| | 2017 |
| | 2018 | | 2017 | |
(dollars in millions, except per share amounts) | | 2019 |
| | 2018 |
| | 2019 | | 2018 |
OPERATING DATA: | | | | | | | | | | | | | | |
Net interest income |
| $1,121 |
| |
| $1,026 |
| |
| $2,212 |
| |
| $2,031 |
|
| $1,166 |
| |
| $1,121 |
| |
| $2,326 |
| |
| $2,212 |
|
Noninterest income | 388 |
| | 370 |
| | 759 |
| | 749 |
| 462 |
| | 388 |
| | 890 |
| | 759 |
|
Total revenue | 1,509 |
| | 1,396 |
| | 2,971 |
| | 2,780 |
| 1,628 |
| | 1,509 |
| | 3,216 |
| | 2,971 |
|
Provision for credit losses | 85 |
| | 70 |
| | 163 |
| | 166 |
| 97 |
| | 85 |
| | 182 |
| | 163 |
|
Noninterest expense | 875 |
| | 864 |
| | 1,758 |
| | 1,718 |
| 951 |
| | 875 |
| | 1,888 |
| | 1,758 |
|
Income before income tax expense | 549 |
| | 462 |
| | 1,050 |
| | 896 |
| 580 |
| | 549 |
| | 1,146 |
| | 1,050 |
|
Income tax expense | 124 |
| | 144 |
| | 237 |
| | 258 |
| 127 |
| | 124 |
| | 254 |
| | 237 |
|
Net income |
| $425 |
| |
| $318 |
| |
| $813 |
| |
| $638 |
|
| $453 |
| |
| $425 |
| |
| $892 |
| |
| $813 |
|
Net income available to common stockholders |
| $425 |
| |
| $318 |
| |
| $806 |
| |
| $631 |
|
| $435 |
| |
| $425 |
| |
| $859 |
| |
| $806 |
|
Net income per common share - basic |
| $0.88 |
| |
| $0.63 |
| |
| $1.66 |
| |
| $1.24 |
|
| $0.95 |
| |
| $0.88 |
| |
| $1.87 |
| |
| $1.66 |
|
Net income per common share - diluted |
| $0.88 |
| |
| $0.63 |
| |
| $1.65 |
| |
| $1.24 |
|
| $0.95 |
| |
| $0.88 |
| |
| $1.86 |
| |
| $1.65 |
|
OTHER OPERATING DATA: | | | | | | | | |
OTHER OPERATING DATA(1): | | | | | | | | |
Return on average common equity | 8.65 | % | | 6.48 | % | | 8.24 | % | | 6.50 | % | 8.54 | % | | 8.65 | % | | 8.58 | % | | 8.24 | % |
Return on average tangible common equity | 12.93 |
| | 9.57 |
| | 12.32 |
| | 9.62 |
| 12.75 |
| | 12.93 |
| | 12.87 |
| | 12.32 |
|
Return on average total assets | 1.11 |
| | 0.85 |
| | 1.08 |
| | 0.86 |
| 1.13 |
| | 1.11 |
| | 1.12 |
| | 1.08 |
|
Return on average total tangible assets | 1.16 |
| | 0.89 |
| | 1.12 |
| | 0.90 |
| 1.17 |
| | 1.16 |
| | 1.17 |
| | 1.12 |
|
Efficiency ratio | 57.95 |
| | 61.94 |
| | 59.17 |
| | 61.81 |
| 58.41 |
| | 57.95 |
| | 58.70 |
| | 59.17 |
|
Operating leverage(2) | 6.96 |
| | 4.76 |
| | 4.56 |
| | 5.79 |
| (0.85 | ) | | 6.96 |
| | 0.86 |
| | 4.56 |
|
Net interest margin(3) | 3.18 |
| | 2.97 |
| | 3.17 |
| | 2.97 |
| 3.20 |
| | 3.20 |
| | 3.22 |
| | 3.20 |
|
Effective income tax rate | 22.58 |
| | 31.13 |
| | 22.55 |
| | 28.82 |
| 21.86 |
| | 22.58 |
| | 22.14 |
| | 22.55 |
|
(1) See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.
(2) “Operating leverage” represents the period-over-period percent change in total revenue, less the period-over-period percent change in noninterest expense.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of
days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | (dollars in millions) | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
BALANCE SHEET DATA: | | | | | | |
Total assets |
| $155,431 |
| |
| $152,336 |
|
| $162,749 |
| |
| $160,518 |
|
Loans held for sale, at fair value | 521 |
| | 497 |
| 1,750 |
| | 1,219 |
|
Other loans held for sale | 189 |
| | 221 |
| 455 |
| | 101 |
|
Loans and leases | 113,407 |
| | 110,617 |
| 116,838 |
| | 116,660 |
|
Allowance for loan and lease losses | (1,253 | ) | | (1,236 | ) | (1,227 | ) | | (1,242 | ) |
Total securities | 25,513 |
| | 25,733 |
| 25,898 |
| | 25,075 |
|
Goodwill | 6,887 |
| | 6,887 |
| 7,040 |
| | 6,923 |
|
Total liabilities | 134,964 |
| | 132,066 |
| 140,732 |
| | 139,701 |
|
Total deposits | 117,073 |
| | 115,089 |
| 124,004 |
| | 119,575 |
|
Federal funds purchased and securities sold under agreements to repurchase | 326 |
| | 815 |
| 1,132 |
| | 1,156 |
|
Other short-term borrowed funds(1) | 1,499 |
| | 1,856 |
| 309 |
| | 161 |
|
Long-term borrowed funds(1) | 13,641 |
| | 11,765 |
| 11,538 |
| | 15,925 |
|
Total stockholders’ equity | 20,467 |
| | 20,270 |
| 22,017 |
| | 20,817 |
|
OTHER BALANCE SHEET DATA: | | | | | | |
Asset Quality Ratios: | | | | | | |
Allowance for loan and lease losses as a percentage of total loans and leases | 1.10 | % | | 1.12 | % | |
Allowance for loan and lease losses as a percentage of loans and leases | | 1.05 | % | | 1.06 | % |
Allowance for loan and lease losses as a percentage of nonperforming loans and leases | 148.20 |
| | 141.96 |
| 159.43 |
| | 155.99 |
|
Nonperforming loans and leases as a percentage of total loans and leases | 0.75 |
| | 0.79 |
| |
Nonperforming loans and leases as a percentage of loans and leases | | 0.66 |
| | 0.68 |
|
Capital Ratios: | | | | | | |
CET1 capital ratio (1)(2) | 11.2 | % | | 11.2 | % | 10.5 | % | | 10.6 | % |
Tier 1 capital ratio (2) | 11.6 |
| | 11.4 |
| 11.3 |
| | 11.3 |
|
Total capital ratio (3) | 13.8 |
| | 13.9 |
| 13.4 |
| | 13.3 |
|
Tier 1 leverage ratio (4) | 10.2 |
| | 10.0 |
| 10.1 |
| | 10.0 |
|
(1) “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.
(2)“Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.
divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(3) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(4) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Income
Net income totaled $425 million, up $107 million, or 34%, from $318 million in second quarter 2017. Net income of $813 million increased $175 million, or 27%, from $638 million in first half 2017. The following table presents the significant components of our net income:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
(dollars in millions) | 2018 |
| | 2017 |
| | Change |
| | Percent |
| | 2018 |
| | 2017 |
| | Change | | Percent |
|
Operating Data: | | | | | | | | | | | | | | | |
Net interest income |
| $1,121 |
| |
| $1,026 |
| |
| $95 |
| | 9 | % | |
| $2,212 |
| |
| $2,031 |
| |
| $181 |
| | 9 | % |
Noninterest income | 388 |
| | 370 |
| | 18 |
| | 5 |
| | 759 |
| | 749 |
| | 10 |
| | 1 |
|
Total revenue | 1,509 |
| | 1,396 |
| | 113 |
| | 8 |
| | 2,971 |
| | 2,780 |
| | 191 |
| | 7 |
|
Provision for credit losses | 85 |
| | 70 |
| | 15 |
| | 21 |
| | 163 |
| | 166 |
| | (3 | ) | | (2 | ) |
Noninterest expense | 875 |
| | 864 |
| | 11 |
| | 1 |
| | 1,758 |
| | 1,718 |
| | 40 |
| | 2 |
|
Income before income tax expense | 549 |
| | 462 |
| | 87 |
| | 19 |
| | 1,050 |
| | 896 |
| | 154 |
| | 17 |
|
Income tax expense | 124 |
| | 144 |
| | (20 | ) | | (14 | ) | | 237 |
| | 258 |
| | (21 | ) | | (8 | ) |
Net income |
| $425 |
| |
| $318 |
| |
| $107 |
| | 34 |
| |
| $813 |
| |
| $638 |
| |
| $175 |
| | 27 |
|
Net income available to common stockholders |
| $425 |
| |
| $318 |
| |
| $107 |
| | 34 | % | |
| $806 |
| |
| $631 |
| |
| $175 |
| | 28 | % |
Return on average common equity | 8.65 | % | | 6.48 | % | | 217 | bps | | | | 8.24 | % | | 6.50 | % | | 174 | bps | | |
Return on average tangible common equity | 12.93 | % | | 9.57 | % | | 336 | bps | | | | 12.32 | % | | 9.62 | % | | 270 | bps | | |
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (usually(generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually(generally deposits and borrowings)borrowed funds). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spreaddifference between the effective yield on suchour average interest-earning assets and the effective cost of suchour interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Market Risk — Non-Trading Risk,” included in this reportReport and “—Risk Governance” as described in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the major components of net interest income and net interest margin:
| | | Three Months Ended June 30, | | | Three Months Ended June 30, | | |
2018 | | 2017 | | Change | 2019 | | 2018 | | Change |
(dollars in millions) | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Yields/ Rates |
Assets | | | | | | | | | | | | | | | | |
Interest-bearing cash and due from banks and deposits in banks |
| $1,801 |
|
| $8 |
| 1.77 | % | |
| $2,081 |
|
| $5 |
| 0.88 | % | |
| ($280 | ) | 89 bps |
| $1,229 |
|
| $7 |
| 2.16 | % | |
| $1,801 |
|
| $8 |
| 1.77 | % | |
| ($572 | ) | 39 bps |
Taxable investment securities | 25,197 |
| 165 |
| 2.62 |
| | 25,732 |
| 154 |
| 2.39 |
| | (535 | ) | 23 |
| 25,620 |
| 164 |
| 2.56 |
| | 25,197 |
| 165 |
| 2.62 |
| | 423 |
| (6 | ) |
Non-taxable investment securities | 6 |
| — |
| 2.60 |
| | 7 |
| — |
| 2.60 |
| | (1 | ) | — |
| 5 |
| — |
| 2.60 |
| | 6 |
| — |
| 2.60 |
| | (1 | ) | — |
|
Total investment securities | 25,203 |
| 165 |
| 2.62 |
| | 25,739 |
| 154 |
| 2.39 |
| | (536 | ) | 23 |
| 25,625 |
| 164 |
| 2.56 |
| | 25,203 |
| 165 |
| 2.62 |
| | 422 |
| (6 | ) |
Commercial | 39,399 |
| 405 |
| 4.07 |
| | 37,846 |
| 326 |
| 3.40 |
| | 1,553 |
| 67 |
| 41,755 |
| 471 |
| 4.45 |
| | 39,399 |
| 405 |
| 4.07 |
| | 2,356 |
| 38 |
|
Commercial real estate | 12,071 |
| 134 |
| 4.39 |
| | 11,086 |
| 97 |
| 3.47 |
| | 985 |
| 92 |
| 13,379 |
| 166 |
| 4.91 |
| | 12,071 |
| 134 |
| 4.39 |
| | 1,308 |
| 52 |
|
Leases | 3,073 |
| 21 |
| 2.69 |
| | 3,557 |
| 22 |
| 2.50 |
| | (484 | ) | 19 |
| 2,745 |
| 19 |
| 2.89 |
| | 3,073 |
| 21 |
| 2.69 |
| | (328 | ) | 20 |
|
Total commercial loans and leases | 54,543 |
| 560 |
| 4.06 |
| | 52,489 |
| 445 |
| 3.35 |
| | 2,054 |
| 71 |
| 57,879 |
| 656 |
| 4.48 |
| | 54,543 |
| 560 |
| 4.06 |
| | 3,336 |
| 42 |
|
Residential mortgages | 17,488 |
| 156 |
| 3.57 |
| | 15,646 |
| 140 |
| 3.57 |
| | 1,842 |
| — |
| 19,232 |
| 176 |
| 3.65 |
| | 17,488 |
| 156 |
| 3.57 |
| | 1,744 |
| 8 |
|
Home equity loans | 1,252 |
| 18 |
| 5.91 |
| | 1,668 |
| 24 |
| 5.74 |
| | (416 | ) | 17 |
| 971 |
| 14 |
| 6.01 |
| | 1,252 |
| 18 |
| 5.91 |
| | (281 | ) | 10 |
|
Home equity lines of credit | 13,112 |
| 144 |
| 4.40 |
| | 13,765 |
| 126 |
| 3.68 |
| | (653 | ) | 72 |
| 12,332 |
| 158 |
| 5.15 |
| | 13,112 |
| 144 |
| 4.40 |
| | (780 | ) | 75 |
|
Home equity loans serviced by others | 480 |
| 9 |
| 7.23 |
| | 668 |
| 11 |
| 7.12 |
| | (188 | ) | 11 |
| 359 |
| 7 |
| 7.67 |
| | 480 |
| 9 |
| 7.23 |
| | (121 | ) | 44 |
|
Home equity lines of credit serviced by others | 130 |
| 1 |
| 3.62 |
| | 188 |
| 2 |
| 4.24 |
| | (58 | ) | (62 | ) | 92 |
| 1 |
| 5.27 |
| | 130 |
| 1 |
| 3.62 |
| | (38 | ) | 165 |
|
Automobile | 12,657 |
| 113 |
| 3.60 |
| | 13,574 |
| 110 |
| 3.23 |
| | (917 | ) | 37 |
| 11,984 |
| 125 |
| 4.19 |
| | 12,657 |
| 113 |
| 3.60 |
| | (673 | ) | 59 |
|
Education | 8,374 |
| 119 |
| 5.71 |
| | 7,490 |
| 98 |
| 5.26 |
| | 884 |
| 45 |
| 9,235 |
| 137 |
| 5.97 |
| | 8,374 |
| 119 |
| 5.71 |
| | 861 |
| 26 |
|
Credit cards | 1,854 |
| 50 |
| 10.74 |
| | 1,693 |
| 45 |
| 10.71 |
| | 161 |
| 3 |
| 2,041 |
| 52 |
| 10.26 |
| | 1,854 |
| 50 |
| 10.74 |
| | 187 |
| (48 | ) |
Other retail | 2,966 |
| 60 |
| 8.10 |
| | 1,959 |
| 39 |
| 8.01 |
| | 1,007 |
| 9 |
| 3,658 |
| 66 |
| 7.11 |
| | 2,966 |
| 60 |
| 8.10 |
| | 692 |
| (99 | ) |
Total retail loans | 58,313 |
| 670 |
| 4.61 |
| | 56,651 |
| 595 |
| 4.21 |
| | 1,662 |
| 40 |
| 59,904 |
| 736 |
| 4.92 |
| | 58,313 |
| 670 |
| 4.61 |
| | 1,591 |
| 31 |
|
Total loans and leases | 112,856 |
| 1,230 |
| 4.34 |
| | 109,140 |
| 1,040 |
| 3.80 |
| | 3,716 |
| 54 |
| 117,783 |
| 1,392 |
| 4.71 |
| | 112,856 |
| 1,230 |
| 4.34 |
| | 4,927 |
| 37 |
|
Loans held for sale, at fair value | 470 |
| 5 |
| 4.15 |
| | 465 |
| 4 |
| 3.60 |
| | 5 |
| 55 |
| 1,528 |
| 15 |
| 3.93 |
| | 470 |
| 5 |
| 4.15 |
| | 1,058 |
| (22 | ) |
Other loans held for sale | 195 |
| 3 |
| 6.38 |
| | 162 |
| 2 |
| 5.51 |
| | 33 |
| 87 |
| 158 |
| 2 |
| 5.67 |
| | 195 |
| 3 |
| 6.38 |
| | (37 | ) | (71 | ) |
Interest-earning assets | 140,525 |
| 1,411 |
| 4.00 |
| | 137,587 |
| 1,205 |
| 3.49 |
| | 2,938 |
| 51 |
| 146,323 |
| 1,580 |
| 4.30 |
| | 140,525 |
| 1,411 |
| 4.00 |
| | 5,798 |
| 30 |
|
Allowance for loan and lease losses | (1,246 | ) | | | | (1,223 | ) | | | | (23 | ) | | (1,247 | ) | | | | (1,246 | ) | | | | (1 | ) | |
Goodwill | 6,887 |
| | | | 6,882 |
| | | | 5 |
| | 7,040 |
| | | | 6,887 |
| | | | 153 |
| |
Other noninterest-earning assets | 7,087 |
| | | | 6,632 |
| | | | 455 |
| | 9,373 |
| | | | 7,087 |
| | | | 2,286 |
| |
Total assets |
| $153,253 |
| | | |
| $149,878 |
| | | |
| $3,375 |
| |
| $161,489 |
| | | |
| $153,253 |
| | | |
| $8,236 |
| |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | |
Checking with interest |
| $22,185 |
|
| $34 |
| 0.61 | % | |
| $21,751 |
|
| $20 |
| 0.36 | % | |
| $434 |
| 25 bps |
| $23,919 |
|
| $57 |
| 0.96 | % | |
| $22,185 |
|
| $34 |
| 0.61 | % | |
| $1,734 |
| 35 bps |
Money market accounts | 36,396 |
| 79 |
| 0.87 |
| | 36,912 |
| 45 |
| 0.49 |
| | (516 | ) | 38 | 35,228 |
| 114 |
| 1.30 |
| | 36,396 |
| 79 |
| 0.87 |
| | (1,168 | ) | 43 |
Regular savings | 9,889 |
| 1 |
| 0.05 |
| | 9,458 |
| 1 |
| 0.04 |
| | 431 |
| 1 | 13,324 |
| 21 |
| 0.62 |
| | 9,889 |
| 1 |
| 0.05 |
| | 3,435 |
| 57 |
Term deposits | 17,838 |
| 67 |
| 1.50 |
| | 15,148 |
| 36 |
| 0.97 |
| | 2,690 |
| 53 | 22,292 |
| 116 |
| 2.09 |
| | 17,838 |
| 67 |
| 1.50 |
| | 4,454 |
| 59 |
Total interest-bearing deposits | 86,308 |
| 181 |
| 0.84 |
| | 83,269 |
| 102 |
| 0.49 |
| | 3,039 |
| 35 | 94,763 |
| 308 |
| 1.30 |
| | 86,308 |
| 181 |
| 0.84 |
| | 8,455 |
| 46 |
Federal funds purchased and securities sold under agreements to repurchase (1) | 504 |
| 1 |
| 0.73 |
| | 808 |
| — |
| 0.37 |
| | (304 | ) | 36 | 818 |
| 3 |
| 1.76 |
| | 504 |
| 1 |
| 0.73 |
| | 314 |
| 103 |
Other short-term borrowed funds(2) | 1,677 |
| 14 |
| 3.48 |
| | 2,275 |
| 7 |
| 1.23 |
| | (598 | ) | 225 | 45 |
| 1 |
| 2.66 |
| | 191 |
| 1 |
| 1.90 |
| | (146 | ) | 76 |
Long-term borrowed funds(2) | 13,394 |
| 94 |
| 2.77 |
| | 13,647 |
| 70 |
| 2.05 |
| | (253 | ) | 72 | 12,386 |
| 102 |
| 3.30 |
| | 14,880 |
| 107 |
| 2.86 |
| | (2,494 | ) | 44 |
Total borrowed funds | 15,575 |
| 109 |
| 2.78 |
| | 16,730 |
| 77 |
| 1.86 |
| | (1,155 | ) | 92 | 13,249 |
| 106 |
| 3.20 |
| | 15,575 |
| 109 |
| 2.78 |
| | (2,326 | ) | 42 |
Total interest-bearing liabilities | 101,883 |
| 290 |
| 1.14 |
| | 99,999 |
| 179 |
| 0.72 |
| | 1,884 |
| 42 | 108,012 |
| 414 |
| 1.54 |
| | 101,883 |
| 290 |
| 1.14 |
| | 6,129 |
| 40 |
Demand deposits | 28,834 |
| | | | 27,521 |
| | | | 1,313 |
| | 28,389 |
| | | | 28,834 |
| | | | (445 | ) | |
Other liabilities | 2,433 |
| | | | 2,452 |
| | | | (19 | ) | | 3,536 |
| | | | 2,433 |
| | | | 1,103 |
| |
Total liabilities | 133,150 |
| | | | 129,972 |
| | | | 3,178 |
| | 139,937 |
| | | | 133,150 |
| | | | 6,787 |
| |
Stockholders’ equity | 20,103 |
| | | | 19,906 |
| | | | 197 |
| | 21,552 |
| | | | 20,103 |
| | | | 1,449 |
| |
Total liabilities and stockholders’ equity |
| $153,253 |
| | | |
| $149,878 |
| | | |
| $3,375 |
| |
| $161,489 |
| | | |
| $153,253 |
| | | |
| $8,236 |
| |
Interest rate spread | | 2.87 | % | | | 2.77 | % | | | 10 | | 2.77 | % | | | 2.87 | % | | | (10) |
Net interest income | |
| $1,121 |
| | | |
| $1,026 |
| | | | | |
Net interest margin | | 3.18 | % | | | 2.97 | % | | | 21 bps | |
Net interest income and net interest margin(3) | | |
| $1,166 |
| 3.20 | % | | |
| $1,121 |
| 3.20 | % | | | — |
Net interest income and net interest margin, FTE(4) | | |
| $1,172 |
| 3.21 | % | | |
| $1,127 |
| 3.22 | % | | | (1) bps |
Memo: Total deposits (interest-bearing and demand) |
| $115,142 |
|
| $181 |
| 0.63 | % | |
| $110,790 |
|
| $102 |
| 0.37 | % | |
| $4,352 |
| 26 bps |
| $123,152 |
|
| $308 |
| 1.00 | % | |
| $115,142 |
|
| $181 |
| 0.63 | % | |
| $8,010 |
| 37 bps |
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. See “—Analysis
(2) Beginning in the first quarter of Financial Condition — Derivatives” for further information.2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of
days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.
(4)Net interest income of $1.1 billion increased $95 million, or 9%, compared to $1.0 billion in second quarter 2017, reflecting 3% average loan growth and a 21 basis point improvement in net interest margin.
Average interest-earningmargin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. In the fully taxable-equivalent presentation of net interest income and net interest margin, interest income on tax-exempt assets of $140.5 billionis increased $2.9 billion, or 2%, from second quarter 2017, driven by a $2.1 billion increase in averageto make it fully equivalent to interest income earned on taxable assets. The FTE impact is predominantly attributable to commercial loans and leases and a $1.7 billion increase in average retailfor the periods presented.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
loans, partiallyQuarter-To-Date Results:Net interest income of $1.2 billion increased $45 million, or 4%, from second quarter 2018, given 4% growth in interest-earning assets and stable net interest margin.
Net interest margin of 3.20% was stable with second quarter 2018, reflecting higher interest-earning asset yields given higher short-term interest rates and continued mix shift toward more attractive risk-adjusted return portfolios. These results were offset by higher funding costs and the impact of lower long-term rates on securities premium amortization. Net interest margin on an FTE basis of 3.21% was also stable compared to 3.22% in second quarter 2018. Average interest-earning asset yields of 4.30% increased 30 basis points from 4.00% in second quarter 2018, and average interest-bearing liability costs of 1.54% increased 40 basis points from 1.14% in second quarter 2018.
Average interest-earning assets of $146.3 billion in second quarter 2019 increased $5.8 billion, or 4%, from second quarter 2018, driven by a $816 million decrease$4.9 billion, or 4% increase in average investmentsloans and interest-bearing cashleases. Commercial loans and due from banks and depositsleases increased $3.3 billion, or 6%, while retail loans increased $1.6 billion, or 3%. Results also reflected a $1.0 billion increase in banks.loans held for sale, primarily driven by the impact of the FAMC acquisition. Commercial loan growth was driven byresults reflected strength in commercial and industrial loans, driven by geographic, product and client-focused expansion strategies as well as strength in commercial real estate.estate, partially offset by planned reductions in commercial leases. Retail loan growth was driven by strengthmortgage, unsecured and education finance, partially offset by a planned reduction in residential mortgage, other retail, educationauto and credit cards.lower home equity.
AverageSecond quarter 2019 average deposits of $115.1$123.2 billion increased $4.4$8.0 billion, or 7%, from second quarter 2017,2018, reflecting growth in term, deposits,savings and checking with interest, savingsinterest. These results were partially offset by a decline in money market accounts and demand deposits. Total interest-bearing deposit costs of $181 million increased $79 million, or 77%, from $102 million in second quarter 2017, primarily due to the impact of rising rates and a shift in mix.
Average total borrowed funds of $15.6$13.2 billion decreased $1.2$2.3 billion, or 15%, from second quarter 2017, reflecting2018, driven by a $2.5 billion decrease in other short-term borrowed funds,long-term borrowings reflecting improved funding mix from deposit growth, partially offset by an increase in federal funds purchased and repurchase agreements and long-term borrowed funds.agreements. Total borrowed funds costs of $109$106 million increased $32decreased $3 million from second quarter 2017.2018. The total borrowed funds yieldcost of 2.78%3.20% increased 9242 basis points from 1.86%2.78% in second quarter 20172018 due to the risean increase in benchmark interestshort-term rates and a mix shift to long-term borrowed funds.
Net interest margin of 3.18% increased 21 basis points compared to 2.97% in second quarter 2017, driven by higher interest-earning asset yields given higher interest rates and continued mix shift towards higher-yielding assets, partially offset by higher deposit and funding costs. Average interest-earning asset yields of 4.00% increased 51 basis points from 3.49% in second quarter 2017, while average interest-bearing liability costs of 1.14% increased 42 basis points from 0.72% in second quarter 2017.senior debt.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the major components of net interest income and net interest margin:
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | | |
2018 | | 2017 | | Change | 2019 | | 2018 | | Change |
(dollars in millions) | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Income/ Expense | Yields/ Rates | | Average Balances | Yields/ Rates |
Assets | | | | | | | | | |
Assets: | | | | | | | | | |
Interest-bearing cash and due from banks and deposits in banks |
| $1,622 |
|
| $14 |
| 1.70 | % | |
| $2,023 |
|
| $8 |
| 0.76 | % | |
| ($401 | ) | 94 bps |
| $1,362 |
|
| $15 |
| 2.18 | % | |
| $1,622 |
|
| $14 |
| 1.70 | % | |
| ($260 | ) | 48 bps |
Taxable investment securities | 25,315 |
| 333 |
| 2.63 |
| | 25,760 |
| 314 |
| 2.44 |
| | (445 | ) | 19 |
| 25,379 |
| 330 |
| 2.60 |
| | 25,315 |
| 333 |
| 2.63 |
| | 64 |
| (3 | ) |
Non-taxable investment securities | 6 |
| — |
| 2.60 |
| | 8 |
| — |
| 2.60 |
| | (2 | ) | — |
| 5 |
| — |
| 2.60 |
| | 6 |
| — |
| 2.60 |
| | (1 | ) | — |
|
Total investment securities | 25,321 |
| 333 |
| 2.63 |
| | 25,768 |
| 314 |
| 2.44 |
| | (447 | ) | 19 |
| 25,384 |
| 330 |
| 2.60 |
| | 25,321 |
| 333 |
| 2.63 |
| | 63 |
| (3 | ) |
Commercial | 38,683 |
| 762 |
| 3.92 |
| | 37,682 |
| 638 |
| 3.36 |
| | 1,001 |
| 56 |
| 41,659 |
| 931 |
| 4.44 |
| | 38,683 |
| 762 |
| 3.92 |
| | 2,976 |
| 52 |
|
Commercial real estate | 11,812 |
| 253 |
| 4.25 |
| | 10,955 |
| 184 |
| 3.34 |
| | 857 |
| 91 |
| 13,325 |
| 331 |
| 4.94 |
| | 11,812 |
| 253 |
| 4.25 |
| | 1,513 |
| 69 |
|
Leases | 3,093 |
| 41 |
| 2.65 |
| | 3,626 |
| 45 |
| 2.49 |
| | (533 | ) | 16 |
| 2,809 |
| 40 |
| 2.87 |
| | 3,093 |
| 41 |
| 2.65 |
| | (284 | ) | 22 |
|
Total commercial loans and leases | 53,588 |
| 1,056 |
| 3.92 |
| | 52,263 |
| 867 |
| 3.30 |
| | 1,325 |
| 62 |
| 57,793 |
| 1,302 |
| 4.48 |
| | 53,588 |
| 1,056 |
| 3.92 |
| | 4,205 |
| 56 |
|
Residential mortgages | 17,326 |
| 309 |
| 3.56 |
| | 15,466 |
| 276 |
| 3.56 |
| | 1,860 |
| — |
| 19,163 |
| 351 |
| 3.66 |
| | 17,326 |
| 309 |
| 3.56 |
| | 1,837 |
| 10 |
|
Home equity loans | 1,297 |
| 37 |
| 5.83 |
| | 1,730 |
| 49 |
| 5.70 |
| | (433 | ) | 13 |
| 1,005 |
| 30 |
| 6.03 |
| | 1,297 |
| 37 |
| 5.83 |
| | (292 | ) | 20 |
|
Home equity lines of credit | 13,232 |
| 282 |
| 4.30 |
| | 13,860 |
| 244 |
| 3.55 |
| | (628 | ) | 75 |
| 12,441 |
| 317 |
| 5.14 |
| | 13,232 |
| 282 |
| 4.30 |
| | (791 | ) | 84 |
|
Home equity loans serviced by others | 500 |
| 18 |
| 7.28 |
| | 693 |
| 24 |
| 7.07 |
| | (193 | ) | 21 |
| 372 |
| 14 |
| 7.71 |
| | 500 |
| 18 |
| 7.28 |
| | (128 | ) | 43 |
|
Home equity lines of credit serviced by others | 136 |
| 2 |
| 3.81 |
| | 198 |
| 4 |
| 3.98 |
| | (62 | ) | (17 | ) | 95 |
| 2 |
| 5.11 |
| | 136 |
| 2 |
| 3.81 |
| | (41 | ) | 130 |
|
Automobile | 12,835 |
| 225 |
| 3.53 |
| | 13,672 |
| 217 |
| 3.20 |
| | (837 | ) | 33 |
| 12,026 |
| 245 |
| 4.12 |
| | 12,835 |
| 225 |
| 3.53 |
| | (809 | ) | 59 |
|
Education | 8,329 |
| 233 |
| 5.65 |
| | 7,165 |
| 186 |
| 5.25 |
| | 1,164 |
| 40 |
| 9,153 |
| 271 |
| 5.98 |
| | 8,329 |
| 233 |
| 5.65 |
| | 824 |
| 33 |
|
Credit cards | 1,841 |
| 98 |
| 10.72 |
| | 1,679 |
| 91 |
| 10.93 |
| | 162 |
| (21 | ) | 2,020 |
| 105 |
| 10.51 |
| | 1,841 |
| 98 |
| 10.72 |
| | 179 |
| (21 | ) |
Other retail | 2,906 |
| 116 |
| 8.04 |
| | 1,880 |
| 74 |
| 7.98 |
| | 1,026 |
| 6 |
| 3,648 |
| 136 |
| 7.47 |
| | 2,906 |
| 116 |
| 8.04 |
| | 742 |
| (57 | ) |
Total retail loans | 58,402 |
| 1,320 |
| 4.55 |
| | 56,343 |
| 1,165 |
| 4.16 |
| | 2,059 |
| 39 |
| 59,923 |
| 1,471 |
| 4.94 |
| | 58,402 |
| 1,320 |
| 4.55 |
| | 1,521 |
| 39 |
|
Total loans and leases | 111,990 |
| 2,376 |
| 4.25 |
| | 108,606 |
| 2,032 |
| 3.75 |
| | 3,384 |
| 50 |
| 117,716 |
| 2,773 |
| 4.72 |
| | 111,990 |
| 2,376 |
| 4.25 |
| | 5,726 |
| 47 |
|
Loans held for sale, at fair value | 445 |
| 9 |
| 4.01 |
| | 487 |
| 8 |
| 3.45 |
| | (42 | ) | 56 |
| 1,283 |
| 26 |
| 4.09 |
| | 445 |
| 9 |
| 4.01 |
| | 838 |
| 8 |
|
Other loans held for sale | 225 |
| 7 |
| 6.29 |
| | 118 |
| 3 |
| 5.86 |
| | 107 |
| 43 |
| 175 |
| 6 |
| 6.41 |
| | 225 |
| 7 |
| 6.29 |
| | (50 | ) | 12 |
|
Interest-earning assets | 139,603 |
| 2,739 |
| 3.93 |
| | 137,002 |
| 2,365 |
| 3.46 |
| | 2,601 |
| 47 |
| 145,920 |
| 3,150 |
| 4.32 |
| | 139,603 |
| 2,739 |
| 3.93 |
| | 6,317 |
| 39 |
|
Allowance for loan and lease losses | (1,241 | ) | | | | (1,229 | ) | | | | (12 | ) | | (1,245 | ) | | | | (1,241 | ) | | | | (4 | ) | |
Goodwill | 6,887 |
| | | | 6,879 |
| | | | 8 |
| | 7,029 |
| | | | 6,887 |
| | | | 142 |
| |
Other noninterest-earning assets | 7,144 |
| | | | 6,683 |
| | | | 461 |
| | 9,251 |
| | | | 7,144 |
| | | | 2,107 |
| |
Total assets |
| $152,393 |
| | | |
| $149,335 |
|
|
| | |
| $3,058 |
| |
| $160,955 |
| | | |
| $152,393 |
|
|
| | |
| $8,562 |
| |
Liabilities and Stockholders’ Equity | | | | | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | |
Checking with interest |
| $21,927 |
|
| $60 |
| 0.55 | % | |
| $21,228 |
|
| $33 |
| 0.31 | % | |
| $699 |
| 24 bps |
| $23,456 |
|
| $109 |
| 0.94 | % | |
| $21,927 |
|
| $60 |
| 0.55 | % | |
| $1,529 |
| 39 bps |
Money market accounts | 36,738 |
| 144 |
| 0.79 |
| | 37,390 |
| 86 |
| 0.46 |
| | (652 | ) | 33 | 35,218 |
| 224 |
| 1.28 |
| | 36,738 |
| 144 |
| 0.79 |
| | (1,520 | ) | 49 |
Regular savings | 9,759 |
| 2 |
| 0.05 |
| | 9,285 |
| 2 |
| 0.04 |
| | 474 |
| 1 | 12,977 |
| 38 |
| 0.59 |
| | 9,759 |
| 2 |
| 0.05 |
| | 3,218 |
| 54 |
Term deposits | 17,174 |
| 120 |
| 1.41 |
| | 14,663 |
| 67 |
| 0.93 |
| | 2,511 |
| 48 | 21,713 |
| 224 |
| 2.08 |
| | 17,174 |
| 120 |
| 1.41 |
| | 4,539 |
| 67 |
Total interest-bearing deposits | 85,598 |
| 326 |
| 0.77 |
| | 82,566 |
| 188 |
| 0.46 |
| | 3,032 |
| 31 | 93,364 |
| 595 |
| 1.28 |
| | 85,598 |
| 326 |
| 0.77 |
| | 7,766 |
| 51 |
Federal funds purchased and securities sold under agreements to repurchase (1) | 574 |
| 2 |
| 0.70 |
| | 845 |
| 1 |
| 0.30 |
| | (271 | ) | 40 | 729 |
| 5 |
| 1.54 |
| | 574 |
| 2 |
| 0.70 |
| | 155 |
| 84 |
Other short-term borrowed funds(2) | 1,579 |
| 23 |
| 2.99 |
| | 2,617 |
| 15 |
| 1.13 |
| | (1,038 | ) | 186 | 52 |
| 1 |
| 2.71 |
| | 388 |
| 3 |
| 1.73 |
| | (336 | ) | 98 |
Long-term borrowed funds(2) | 13,471 |
| 176 |
| 2.60 |
| | 13,033 |
| 130 |
| 2.00 |
| | 438 |
| 60 | 13,555 |
| 223 |
| 3.28 |
| | 14,662 |
| 196 |
| 2.66 |
| | (1,107 | ) | 62 |
Total borrowed funds | 15,624 |
| 201 |
| 2.57 |
| | 16,495 |
| 146 |
| 1.77 |
| | (871 | ) | 80 | 14,336 |
| 229 |
| 3.19 |
| | 15,624 |
| 201 |
| 2.57 |
| | (1,288 | ) | 62 |
Total interest-bearing liabilities | 101,222 |
| 527 |
| 1.05 |
| | 99,061 |
| 334 |
| 0.68 |
| | 2,161 |
| 37 | 107,700 |
| 824 |
| 1.54 |
| | 101,222 |
| 527 |
| 1.05 |
| | 6,478 |
| 49 |
Demand deposits | 28,690 |
| | | | 27,808 |
| | | | 882 |
|
| 28,426 |
| | | | 28,690 |
| | | | (264 | ) |
|
Other liabilities | 2,440 |
| | | | 2,659 |
| | | | (219 | ) |
| 3,560 |
| | | | 2,440 |
| | | | 1,120 |
|
|
Total liabilities | 132,352 |
| | | | 129,528 |
| | | | 2,824 |
|
| 139,686 |
| | | | 132,352 |
| | | | 7,334 |
|
|
Stockholders’ equity | 20,041 |
| | | | 19,807 |
| | | | 234 |
|
| 21,269 |
| | | | 20,041 |
| | | | 1,228 |
|
|
Total liabilities and stockholders’ equity |
| $152,393 |
| | | |
| $149,335 |
| | | |
| $3,058 |
|
|
| $160,955 |
| | | |
| $152,393 |
| | | |
| $8,562 |
|
|
Interest rate spread | | 2.88 | % | | | 2.78 | % | | | 10 | | 2.78 | % | | | 2.88 | % | | | (10) |
Net interest income | |
| $2,212 |
| | | |
| $2,031 |
| | | |
| |
Net interest margin | | 3.17 | % | | | 2.97 | % | | | 20 bps | |
Net interest income and net interest margin(3) | | |
| $2,326 |
| 3.22 | % | | |
| $2,212 |
| 3.20 | % | | | 2 bps |
Net interest income and net interest margin, FTE(4) | | |
| $2,338 |
| 3.23 | % | | |
| $2,223 |
| 3.21 | % | | | 2 bps |
Memo: Total deposits (interest-bearing and demand) |
| $114,288 |
|
| $326 |
| 0.57 | % | |
| $110,374 |
|
| $188 |
| 0.34 | % | |
| $3,914 |
| 23 bps |
| $121,790 |
|
| $595 |
| 0.98 | % | |
| $114,288 |
|
| $326 |
| 0.57 | % | |
| $7,502 |
| 41 bps |
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. See “—Analysis
(2) Beginning in the first quarter of Financial Condition — Derivatives”2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of
days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.
(4) Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. In the fully taxable-equivalent presentation of net interest income and net interest margin, interest income on tax-exempt assets is increased to make it fully equivalent to interest income earned on taxable assets. The FTE impact is predominantly attributable to commercial loans for further information.the periods presented.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Year-To-Date Results:Net interest income of $2.2$2.3 billion increased $181$114 million, or 9%, compared to $2.0 billion in first half 2017, reflecting 3%5% average loaninterest-earning asset growth and a 20two basis point improvementincrease in net interest margin.
Net interest margin of 3.22% increased two basis points compared to 3.20% in the first half of 2018, driven by higher interest-earning asset yields given higher short-term interest rates and continued mix shift toward more attractive risk-adjusted return portfolios. These results were partially offset by higher funding costs and the impact of lower long-term rates on securities premium amortization. Net interest margin on an FTE basis of 3.23% also increased two basis points compared to 3.21% in the first half of 2018. Average interest-earning asset yields of 4.32% increased 39 basis points from 3.93% in the first half of 2018, while average interest-bearing liability costs of 1.54% increased 49 basis points from 1.05% in the first half of 2018.
Average interest-earning assets of $139.6$145.9 billion increased $2.6$6.3 billion, or 2%5%, from the first half 2017,of 2018, driven by a $1.3$4.2 billion increase in average commercial loans and leases and a $2.1$1.5 billion increase in average retail loans, partially offset by an $848a $197 million decrease in average investments and interest-bearing cash and due from banks
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
and deposits in banks. Commercial loan growth was driven by commercial and commercial real estate. Retail loan growth was driven by residential mortgage, education, credit cards and other retail.
Average deposits of $114.3$121.8 billion increased $3.9$7.5 billion from the first half 2017,of 2018, reflecting growth in term deposits, checking with interest, savings and demand deposits.savings. Total interest-bearing deposit costs of $595 million increased $269 million, or 83%, from $326 million increased $138 million, or 73%, from $188 million in the first half 2017,of 2018, primarily due to rising rates and a shift in mix toward commercial deposits.rates.
Average total borrowed funds of $15.6$14.3 billion decreased $871 million$1.3 billion from the first half 2017,of 2018, reflecting a decrease in other short-term borrowed funds and a decrease in federallong-term borrowed funds, purchased and repurchase agreements, partially offset by an increase in long-term borrowedfederal funds primarily senior debt.purchased and repurchase agreements. Total borrowed funds costs of $201$229 million increased $55$28 million from the first half 2017.of 2018. The total borrowed funds cost of 2.57%3.19% increased 8062 basis points from 1.77%2.57% in the first half 2017of 2018 due to an increase in long-termshort-term rates and a mix shift to long-term senior debt.
Net interest margin of 3.17% increased 20 basis points compared to 2.97% in first half 2017, driven by higher interest-earning asset yields given higher interest rates and continued mix shift toward higher-yielding assets. These results were partially offset by the impact of higher deposit and funding costs. Average interest-earning asset yields of 3.93% increased 47 basis points from 3.46% in first half 2017, while average interest-bearing liability costs of 1.05% increased 37 basis points from 0.68% in first half 2017.
Noninterest Income
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the significant components of our noninterest income:
| | | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
(in millions) | 2018 |
| | 2017 |
| | Change |
| | Percent |
| | 2018 |
| | 2017 |
| | Change |
| | Percent |
| 2019 |
| | 2018 |
| | Change |
| | Percent |
| | 2019 |
| | 2018 |
| | Change |
| | Percent |
|
Service charges and fees |
| $127 |
| |
| $129 |
| |
| ($2 | ) | | (2 | %) | |
| $251 |
| |
| $254 |
| |
| ($3 | ) | | (1 | %) |
| $126 |
| |
| $127 |
| |
| ($1 | ) | | (1 | %) | |
| $249 |
| |
| $251 |
| |
| ($2 | ) | | (1 | %) |
Card fees | 60 |
| | 59 |
| | 1 |
| | 2 |
| | 121 |
| | 119 |
| | 2 |
| | 2 |
| 64 |
| | 60 |
| | 4 |
| | 7 |
| | 123 |
| | 121 |
| | 2 |
| | 2 |
|
Capital markets fees | 48 |
| | 51 |
| | (3 | ) | | (6 | ) | | 87 |
| | 99 |
| | (12 | ) | | (12 | ) | 57 |
| | 48 |
| | 9 |
| | 19 |
| | 111 |
| | 87 |
| | 24 |
| | 28 |
|
Trust and investment services fees | 43 |
| | 39 |
| | 4 |
| | 10 |
| | 83 |
| | 78 |
| | 5 |
| | 6 |
| 53 |
| | 43 |
| | 10 |
| | 23 |
| | 100 |
| | 83 |
| | 17 |
| | 20 |
|
Mortgage banking fees | | 62 |
| | 27 |
| | 35 |
| | 130 |
| | 105 |
| | 52 |
| | 53 |
| | 102 |
|
Letter of credit and loan fees | 32 |
| | 31 |
| | 1 |
| | 3 |
| | 62 |
| | 60 |
| | 2 |
| | 3 |
| 33 |
| | 32 |
| | 1 |
| | 3 |
| | 66 |
| | 62 |
| | 4 |
| | 6 |
|
Foreign exchange and interest rate products | 34 |
| | 26 |
| | 8 |
| | 31 |
| | 61 |
| | 53 |
| | 8 |
| | 15 |
| 35 |
| | 34 |
| | 1 |
| | 3 |
| | 71 |
| | 61 |
| | 10 |
| | 16 |
|
Mortgage banking fees | 27 |
| | 30 |
| | (3 | ) | | (10 | ) | | 52 |
| | 53 |
| | (1 | ) | | (2 | ) | |
Securities gains, net | 2 |
| | 3 |
| | (1 | ) | | (33 | ) | | 10 |
| | 7 |
| | 3 |
| | 43 |
| 4 |
| | 2 |
| | 2 |
| | 100 |
| | 12 |
| | 10 |
| | 2 |
| | 20 |
|
Other income (1) | 15 |
| | 2 |
| | 13 |
| | NM |
| | 32 |
| | 26 |
| | 6 |
| | 23 |
| 28 |
| | 15 |
| | 13 |
| | 87 |
| | 53 |
| | 32 |
| | 21 |
| | 66 |
|
Noninterest income(2) |
| $388 |
| |
| $370 |
| |
| $18 |
| | 5 | % | |
| $759 |
| |
| $749 |
| |
| $10 |
| | 1 | % |
| $462 |
| |
| $388 |
| |
| $74 |
| | 19 | % | |
| $890 |
| |
| $759 |
| |
| $131 |
| | 17 | % |
(1) Includes net securities impairment losses recognized in earnings on debt securities available for sale recognized in earnings,debt securities, bank-owned life insurance income and other income. Amounts for the three and six months ended June 30, 2017 include $11 million of finance lease impairment charges.
(2) 2018 noninterest income amounts reflect the adoption of ASU 2014-09, Revenue From Contracts With Customers (Topic 606).
Quarter-To-Date Results:Noninterest income of $388increased $74 million increased $18 million, or 5%, from second quarter 2017. Excluding2018, driven by increased mortgage banking fees, trust and investment fees, capital market fees, and card fees, including the impact of 2017 finance lease impairments, Underlying noninterest income*Acquisitions.
Year-To-Date Results: Noninterest income increased $7$131 million or 2%, reflecting growth in foreign exchangefrom the first half of 2018, driven by higher mortgage banking fees and interest rate product andhigher trust and investment services fees partially offset by lower mortgage banking fees, driven by a reductionacquisitions. Strength in loan sale gains, as well as a reduction in service charges and fees and capital markets fees.
Noninterest income of $759 million increased $10 million, or 1%, from first half 2017. Excluding the impact of 2017 finance lease impairments, Underlying noninterest income* decreased $1 million, driven by lower capital markets fees primarily reflecting seasonality and an overall market reduction in middle market loan syndication activity. These lower capital markets fees and other income were offset by growth in foreign exchange and interest rate products revenues, reflected the benefit of investments to broaden and trustenhance our capabilities. Other income reflected higher leasing income and investment services fees.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Provision for Credit Losses
The provision for credit losses of $85 million increased $15 million, or 21%, from $70 million in second quarter 2017, reflecting strategic growth in high-quality commercialasset dispositions tied to balance sheet optimization and retail assets. Second quarter 2018 results reflected a $9 million reserve build, compared to a $5 million reserve release in second quarter 2017, largely due to the loan growth experienced in second quarter 2018. Second quarter 2018 net charge-offs of $76 million were stable with second quarter 2017, primarily reflecting lower commercial losses but moderately higher retail losses. On an Underlying basis,* total credit-related costs, which include the impact of second quarter 2017 aircraft lease impairments, decreased $11 million.
The provision for credit losses of $163 million decreased $3 million compared to $166 million in first half 2017, reflecting lower net charge-offs, partially offset by a higher reserve build. First half 2018 results reflected a $17 million reserve build, compared to a $4 million reserve build in first half 2017, largely due to loan growth. Net charge-offs for first half 2018 of $146 million were $16 million lower than first half 2017, due to lower commercial losses, partially offset by slightly higher retail losses. On an Underlying basis,* total credit-related costs decreased $29 million due to the impact of second quarter 2017 aircraft lease impairments.
The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ALLL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.efficiency initiatives.
Noninterest Expense
The following table presents the significant components of our noninterest expense:
| | | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
(in millions) | 2018 |
| | 2017 |
| | Change |
| | Percent |
| | 2018 |
| | 2017 |
| | Change |
| | Percent |
| 2019 |
| | 2018 |
| | Change |
| | Percent |
| | 2019 |
| | 2018 |
| | Change |
| | Percent |
|
Salaries and employee benefits(1) |
| $453 |
| |
| $432 |
| |
| $21 |
| | 5 | % | |
| $923 |
| |
| $878 |
| |
| $45 |
| | 5 | % |
| $507 |
| |
| $453 |
| |
| $54 |
| | 12 | % | |
| $1,016 |
| |
| $923 |
| |
| $93 |
| | 10 | % |
Equipment and software expense(1) | | 126 |
| | 110 |
| | 16 |
| | 15 |
| | 251 |
| | 223 |
| | 28 |
| | 13 |
|
Outside services | 106 |
| | 96 |
| | 10 |
| | 10 |
| | 205 |
| | 187 |
| | 18 |
| | 10 |
| 118 |
| | 106 |
| | 12 |
| | 11 |
| | 228 |
| | 205 |
| | 23 |
| | 11 |
|
Occupancy | 79 |
| | 79 |
| | — |
| | — |
| | 160 |
| | 161 |
| | (1 | ) | | (1 | ) | 82 |
| | 79 |
| | 3 |
| | 4 |
| | 165 |
| | 160 |
| | 5 |
| | 3 |
|
Equipment expense | 64 |
| | 64 |
| | — |
| | — |
| | 131 |
| | 131 |
| | — |
| | — |
| |
Amortization of software | 46 |
| | 45 |
| | 1 |
| | 2 |
| | 92 |
| | 89 |
| | 3 |
| | 3 |
| |
Other operating expense(1)(2) | 127 |
| | 148 |
| | (21 | ) | | (14 | ) | | 247 |
| | 272 |
| | (25 | ) | | (9 | ) | |
Other operating expense | | 118 |
| | 127 |
| | (9 | ) | | (7 | ) | | 228 |
| | 247 |
| | (19 | ) | | (8 | ) |
Noninterest expense |
| $875 |
| |
| $864 |
| |
| $11 |
| | 1 | % | |
| $1,758 |
| |
| $1,718 |
| |
| $40 |
| | 2 | % |
| $951 |
| |
| $875 |
| |
| $76 |
| | 9 | % | |
| $1,888 |
| |
| $1,758 |
| |
| $130 |
| | 7 | % |
(1) SalariesIn the first quarter of 2019, we combined our presentation of equipment expense and employee benefitsamortization of software into equipment and other operating expense amounts reflectsoftware expense. Prior periods have been adjusted to conform with the impact of the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(2) Amounts for the three and six months ended June 30, 2017 include $15 million of operating lease impairment charges.
Noninterest expense of $875 million increased $11 million, or 1%, from second quarter 2017. Excluding the impact of 2017 operating lease impairment charges, Underlying noninterest expense* increased $26 million, or 3%, driven by higher salaries and employee benefits, largely tied to continuing investments to drive growth, as well as higher outside services tied to strategic growth and efficiency initiatives, partially offset by lower other operating expense.
Noninterest expense of $1.8 billion increased $40 million, or 2%, from first half 2017. Excluding the impact of 2017 operating lease impairment charges, Underlying noninterest expense* increased $55 million, or 3%, compared to first half 2017, reflecting higher salaries and employee benefits, driven by higher revenue-based incentives and merit increases, as well as higher outside services expense, given investment in strategic initiatives, partially offset by lower other operating expense.
Income Tax Expense
Income tax expense was $124 million and $144 million in second quarter 2018 and 2017, respectively. Our effective tax rates in second quarter 2018 and 2017 were 22.6% and 31.1%, respectively. The decrease in the effective income tax rate was primarily driven by the impact of tax reform.
Income tax expense was $237 million and $258 million in first half 2018 and 2017, respectively. Our effective tax rates in first half 2018 and 2017 were 22.6% and 28.8%, respectively. The decrease in the effective income tax rate was primarily driven by the impact of tax reform, partially offset by the prior-year settlement of certain state tax matters.current period presentation.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
At June 30,
Quarter-To-Date Results: Noninterest expense increased $76 million from second quarter 2018, our net deferred tax liability was $456driven by an increase in salaries and employee benefits, which included the impact of annual merit increases, revenue based incentives and a severance charge, as well as an increase in equipment and software expense. These results reflected the impact of investments in growth initiatives, partially offset by lower other operating expense, largely tied to a reduction in FDIC insurance and advertising expense. Underlying noninterest expense* increased $69 million, compared with $571or 8%.
Year-To-Date Results: Noninterest expense increased $130 million, at December 31, 2017. Theor 7%, from the first half of 2018 reflecting an increase in salaries and employee benefits given the impact of annual merit increases, revenue-based incentives and investments in growth initiatives. First half 2019 results included an increase in equipment and software expense, which also reflected investments in growth initiatives. These increases were partially offset by a decrease in the net deferred tax liability was primarily attributableother operating expense tied to the tax effect of net unrealized losses on securities and derivatives. For further discussion, see Note 15 “Income Taxes” to our unaudited interim Consolidated Financial Statementsa reduction in Part I, Item 1 — Financial Statements, included in this report.FDIC insurance premiums. Underlying noninterest expense* increased $118 million, or 7%.
Provision for Credit Losses
The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ACL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.
Quarter-To-Date Results: The provision for credit losses increased $12 million from second quarter 2018, due to 4% average loan growth, continued expected seasoning in retail growth portfolios and several idiosyncratic losses in commercial, with key credit metrics continuing to reflect strong credit quality and a $9 million ACL release in second quarter 2019 compared to a $9 million ACL build in second quarter 2018. Second quarter net charge-offs of $106 million were $30 million higher than second quarter 2018, reflecting a small number of idiosyncratic losses in commercial and expected seasoning in retail growth portfolios.
Year-To-Date Results: The provision for credit losses increased $19 million from the first half of 2018, largely related to 5% average loan growth, several idiosyncratic commercial losses and expected seasoning in retail growth portfolios, partially offset by continued improvement in underlying credit quality. In the first half of 2019, results reflected a $13 million ACL release, compared to a $17 million ACL build in the first half of 2018. Net charge-offs for the first half of 2019 of $195 million were $49 million higher than the first half of 2018.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Tax Expense
Quarter-To-Date Results: Income tax expense increased $3 million from second quarter 2018. The effective income tax rate in second quarter 2019 decreased 72 basis points to 21.9% from second quarter 2018, driven by second quarter 2019 net discrete income tax benefits of $5 million.
Year-To-Date Results: Income tax expense increased $17 million from the first half of 2018. The effective income tax rate in the first half of 2019 decreased to 22.1% from 22.6% in the first half of 2018, driven by a reduction in non-deductible FDIC premiums.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Business Operating Segments
The following tables present certain financial data of our business operating segments, Other and consolidated:
| | | As of and for the Three Months Ended June 30, 2018 | As of and for the Three Months Ended June 30, 2019 |
(dollars in millions) | Consumer Banking | | Commercial Banking | | Other(4) |
| | Consolidated |
| Consumer Banking | | Commercial Banking | | Other(4) |
| | Consolidated |
|
Net interest income (1) |
| $759 |
| |
| $376 |
| |
| ($14 | ) | |
| $1,121 |
|
| $799 |
| |
| $371 |
| |
| ($4 | ) | |
| $1,166 |
|
Noninterest income | 228 |
| | 140 |
| | 20 |
| | 388 |
| 277 |
| | 149 |
| | 36 |
| | 462 |
|
Total revenue | 987 |
| | 516 |
| | 6 |
| | 1,509 |
| 1,076 |
| | 520 |
| | 32 |
| | 1,628 |
|
Noninterest expense | 658 |
| | 200 |
| | 17 |
| | 875 |
| 715 |
| | 217 |
| | 19 |
| | 951 |
|
Profit (loss) before provision for credit losses | 329 |
| | 316 |
| | (11 | ) | | 634 |
| |
Profit before provision for credit losses | | 361 |
| | 303 |
| | 13 |
| | 677 |
|
Provision for credit losses | 66 |
| | 9 |
| | 10 |
| | 85 |
| 78 |
| | 25 |
| | (6 | ) | | 97 |
|
Income (loss) before income tax expense (benefit) | 263 |
| | 307 |
| | (21 | ) | | 549 |
| |
Income before income tax expense (benefit) | | 283 |
| | 278 |
| | 19 |
| | 580 |
|
Income tax expense (benefit) | 66 |
| | 70 |
| | (12 | ) | | 124 |
| 70 |
| | 62 |
| | (5 | ) | | 127 |
|
Net income (loss) |
| $197 |
| |
| $237 |
| |
| ($9 | ) | |
| $425 |
| |
Net income | |
| $213 |
| |
| $216 |
| |
| $24 |
| |
| $453 |
|
Loans and leases (period-end) (2)(1) |
| $60,175 |
| |
| $51,503 |
| |
| $2,439 |
| |
| $114,117 |
|
| $62,959 |
| |
| $54,068 |
| |
| $2,016 |
| |
| $119,043 |
|
Average Balances: | | | | | | | | | | | | | | |
Total assets |
| $61,232 |
| |
| $52,170 |
| |
| $39,851 |
| |
| $153,253 |
|
| $65,485 |
| |
| $56,135 |
| |
| $39,869 |
| |
| $161,489 |
|
Total loans and leases (2)(1) | 59,830 |
| | 51,202 |
| | 2,489 |
| | 113,521 |
| 62,678 |
| | 54,653 |
| | 2,138 |
| | 119,469 |
|
Deposits | 77,402 |
| | 30,214 |
| | 7,526 |
| | 115,142 |
| 85,660 |
| | 30,273 |
| | 7,219 |
| | 123,152 |
|
Interest-earning assets | 59,880 |
| | 51,404 |
| | 29,241 |
| | 140,525 |
| 62,731 |
| | 54,950 |
| | 28,642 |
| | 146,323 |
|
Key Performance Metrics: | | | | | | | | | | | | | | |
Net interest margin (3) | 5.08 | % | | 2.93 | % | | NM |
| | 3.18 | % | |
Net interest margin(2)(3) | | 5.11 | % | | 2.71 | % | | NM |
| | 3.20 | % |
Efficiency ratio | 66.68 |
| | 38.80 |
| | NM |
| | 57.95 |
| 66.43 |
| | 41.58 |
| | NM |
| | 58.41 |
|
Loans-to-deposits ratio (average balances)(2) | 77.30 |
| | 169.47 |
| | NM |
| | 98.59 |
| 71.57 |
| | 179.49 |
| | NM |
| | 95.64 |
|
Return on average total tangible assets (3)(2) | 1.29 |
| | 1.82 |
| | NM |
| | 1.16 |
| 1.31 |
| | 1.54 |
| | NM |
| | 1.17 |
|
(1) We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.Includes LHFS.
(2) Includes loans held for sale.
(3) Ratios for the periodthree and six months ended June 30, 2019 and 2018 are presented on an annualized basis.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior period have been adjusted to conform with the current period presentation.
(4)Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses, and expenses includingand income tax expense, not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | | As of and for the Three Months Ended June 30, 2017 | As of and for the Three Months Ended June 30, 2018 |
(dollars in millions) | Consumer Banking | | Commercial Banking | | Other(3) |
| | Consolidated |
| Consumer Banking | | Commercial Banking | | Other(5) |
| | Consolidated |
|
Net interest income |
| $657 |
| |
| $344 |
| |
| $25 |
| |
| $1,026 |
|
| $759 |
| |
| $376 |
| |
| ($14 | ) | |
| $1,121 |
|
Noninterest income | 229 |
| | 130 |
| | 11 |
| | 370 |
| 228 |
| | 140 |
| | 20 |
| | 388 |
|
Total revenue | 886 |
| | 474 |
| | 36 |
| | 1,396 |
| 987 |
| | 516 |
| | 6 |
| | 1,509 |
|
Noninterest expense | 644 |
| | 192 |
| | 28 |
| | 864 |
| 658 |
| | 200 |
| | 17 |
| | 875 |
|
Profit before provision for credit losses | 242 |
| | 282 |
| | 8 |
| | 532 |
| |
Profit (loss) before provision for credit losses | | 329 |
| | 316 |
| | (11 | ) | | 634 |
|
Provision for credit losses | 60 |
| | 1 |
| | 9 |
| | 70 |
| 66 |
| | 9 |
| | 10 |
| | 85 |
|
Income (loss) before income tax expense (benefit) | 182 |
| | 281 |
| | (1 | ) | | 462 |
| 263 |
| | 307 |
| | (21 | ) | | 549 |
|
Income tax expense (benefit) | 64 |
| | 94 |
| | (14 | ) | | 144 |
| 66 |
| | 70 |
| | (12 | ) | | 124 |
|
Net income |
| $118 |
| |
| $187 |
| |
| $13 |
| |
| $318 |
| |
Net income (loss) | |
| $197 |
| |
| $237 |
| |
| ($9 | ) | |
| $425 |
|
Loans and leases (period-end) (1) |
| $58,537 |
| |
| $48,363 |
| |
| $2,853 |
| |
| $109,753 |
|
| $60,175 |
| |
| $51,503 |
| |
| $2,439 |
| |
| $114,117 |
|
Average Balances: | | | | | | | | | | | | | | |
Total assets |
| $59,244 |
| |
| $49,731 |
| |
| $40,903 |
| |
| $149,878 |
|
| $61,232 |
| |
| $52,170 |
| |
| $39,851 |
| |
| $153,253 |
|
Total loans and leases (1) | 57,922 |
| | 48,772 |
| | 3,073 |
| | 109,767 |
| 59,830 |
| | 51,202 |
| | 2,489 |
| | 113,521 |
|
Deposits | 75,107 |
| | 28,744 |
| | 6,939 |
| | 110,790 |
| 77,402 |
| | 30,214 |
| | 7,526 |
| | 115,142 |
|
Interest-earning assets | 57,973 |
| | 48,923 |
| | 30,691 |
| | 137,587 |
| 59,880 |
| | 51,404 |
| | 29,241 |
| | 140,525 |
|
Key Performance Metrics: | | | | | | | | | | | | | | |
Net interest margin (2)(3) | 4.54 | % | | 2.82 | % | | NM |
| | 2.97 | % | 5.08 | % | | 2.93 | % | | NM |
| | 3.20 | % |
Efficiency ratio | 72.64 |
| | 40.48 |
| | NM |
| | 61.94 |
| 66.68 |
| | 38.80 |
| | NM |
| | 57.95 |
|
Loans-to-deposits ratio (average balances)(1)(4) | 77.12 |
| | 169.68 |
| | NM |
| | 99.08 |
| 76.92 |
| | 168.23 |
| | NM |
| | 98.01 |
|
Return on average total tangible assets (2) | 0.80 |
| | 1.51 |
| | NM |
| | 0.89 |
| 1.29 |
| | 1.82 |
| | NM |
| | 1.16 |
|
(1)Includes loans held for sale.LHFS.
(2) Ratios for the periodthree and six months ended June 30, 20172019 and 2018 are presented on an annualized basis.
(3)In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior period have been adjusted to conform with the current period presentation.
(4) We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.
(5) Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses, and expenses includingand income tax expense not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | | As of and for the Six Months Ended June 30, 2018 | As of and for the Six Months Ended June 30, 2019 |
(dollars in millions) | Consumer Banking | | Commercial Banking | | Other(4) |
| | Consolidated |
| Consumer Banking | | Commercial Banking | | Other(4) |
| | Consolidated |
|
Net interest income (1) |
| $1,492 |
| |
| $733 |
| |
| ($13 | ) | |
| $2,212 |
|
| $1,587 |
| |
| $743 |
| |
| ($4 | ) | |
| $2,326 |
|
Noninterest income | 450 |
| | 265 |
| | 44 |
| | 759 |
| 524 |
| | 299 |
| | 67 |
| | 890 |
|
Total revenue | 1,942 |
| | 998 |
| | 31 |
| | 2,971 |
| 2,111 |
| | 1,042 |
| | 63 |
| | 3,216 |
|
Noninterest expense | 1,314 |
| | 408 |
| | 36 |
| | 1,758 |
| 1,415 |
| | 426 |
| | 47 |
| | 1,888 |
|
Profit (loss) before provision for credit losses | 628 |
| | 590 |
| | (5 | ) | | 1,213 |
| |
Profit before provision for credit losses | | 696 |
| | 616 |
| | 16 |
| | 1,328 |
|
Provision for credit losses | 138 |
| | 5 |
| | 20 |
| | 163 |
| 145 |
| | 46 |
| | (9 | ) | | 182 |
|
Income (loss) before income tax expense (benefit) | 490 |
| | 585 |
| | (25 | ) | | 1,050 |
| |
Income before income tax expense (benefit) | | 551 |
| | 570 |
| | 25 |
| | 1,146 |
|
Income tax expense (benefit) | 123 |
| | 133 |
| | (19 | ) | | 237 |
| 136 |
| | 127 |
| | (9 | ) | | 254 |
|
Net income (loss) |
| $367 |
| |
| $452 |
| |
| ($6 | ) | |
| $813 |
| |
Net income | |
| $415 |
| |
| $443 |
| |
| $34 |
| |
| $892 |
|
Loans and leases (period-end) (2)(1) |
| $60,175 |
| |
| $51,503 |
| |
| $2,439 |
| |
| $114,117 |
|
| $62,959 |
| |
| $54,068 |
| |
| $2,016 |
| |
| $119,043 |
|
Average Balances: | | | | | | | | | | | | | | |
Total assets |
| $61,290 |
| |
| $51,286 |
| |
| $39,817 |
| |
| $152,393 |
|
| $65,247 |
| |
| $55,884 |
| |
| $39,824 |
| |
| $160,955 |
|
Total loans and leases (2)(1) | 59,886 |
| | 50,249 |
| | 2,525 |
| | 112,660 |
| 62,422 |
| | 54,545 |
| | 2,207 |
| | 119,174 |
|
Deposits | 76,414 |
| | 30,488 |
| | 7,386 |
| | 114,288 |
| 84,123 |
| | 30,050 |
| | 7,617 |
| | 121,790 |
|
Interest-earning assets | 59,937 |
| | 50,447 |
| | 29,219 |
| | 139,603 |
| 62,475 |
| | 54,838 |
| | 28,607 |
| | 145,920 |
|
Key Performance Metrics: | | | | | | | | | | | | | | |
Net interest margin (3) | 5.02 | % | | 2.93 | % | | NM |
| | 3.17 | % | |
Net interest margin(2)(3) | | 5.12 | % | | 2.73 | % | | NM |
| | 3.22 | % |
Efficiency ratio | 67.68 |
| | 40.86 |
| | NM |
| | 59.17 |
| 67.01 |
| | 40.84 |
| | NM |
| | 58.70 |
|
Loans-to-deposits ratio (average balances)(2) | 78.37 |
| | 164.81 |
| | NM |
| | 98.58 |
| 72.89 |
| | 180.35 |
| | NM |
| | 96.65 |
|
Return on average total tangible assets (3)(2) | 1.21 |
| | 1.78 |
| | NM |
| | 1.12 |
| 1.29 |
| | 1.60 |
| | NM |
| | 1.17 |
|
(1) We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.Includes LHFS.
(2) Includes loans held for sale.
(3) Ratios for the periodthree and six months ended June 30, 2019 and 2018 are presented on an annualized basis.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior period have been adjusted to conform with the current period presentation.
(4) Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses, and expenses includingand income tax expense not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | | As of and for the Six Months Ended June 30, 2017 | As of and for the Six Months Ended June 30, 2018 |
(dollars in millions) | Consumer Banking | | Commercial Banking | | Other(3) |
| | Consolidated | Consumer Banking | | Commercial Banking | | Other(5) |
| | Consolidated |
Net interest income |
| $1,295 |
| |
| $690 |
| |
| $46 |
| |
| $2,031 |
|
| $1,492 |
| |
| $733 |
| |
| ($13 | ) | |
| $2,212 |
|
Noninterest income | 449 |
| | 264 |
| | 36 |
| | 749 |
| 450 |
| | 265 |
| | 44 |
| | 759 |
|
Total revenue | 1,744 |
| | 954 |
| | 82 |
| | 2,780 |
| 1,942 |
| | 998 |
| | 31 |
| | 2,971 |
|
Noninterest expense | 1,291 |
| | 382 |
| | 45 |
| | 1,718 |
| 1,314 |
| | 408 |
| | 36 |
| | 1,758 |
|
Profit before provision for credit losses | 453 |
| | 572 |
| | 37 |
| | 1,062 |
| |
Profit (loss) before provision for credit losses | | 628 |
| | 590 |
| | (5 | ) | | 1,213 |
|
Provision for credit losses | 124 |
| | 20 |
| | 22 |
| | 166 |
| 138 |
| | 5 |
| | 20 |
| | 163 |
|
Income before income tax expense (benefit) | 329 |
| | 552 |
| | 15 |
| | 896 |
| |
Income (loss) before income tax expense (benefit) | | 490 |
| | 585 |
| | (25 | ) | | 1,050 |
|
Income tax expense (benefit) | 116 |
| | 185 |
| | (43 | ) | | 258 |
| 123 |
| | 133 |
| | (19 | ) | | 237 |
|
Net income |
| $213 |
| |
| $367 |
| |
| $58 |
| |
| $638 |
| |
Net income (loss) | |
| $367 |
| |
| $452 |
| |
| ($6 | ) | |
| $813 |
|
Loans and leases (period-end) (1) |
| $58,537 |
| |
| $48,363 |
| |
| $2,853 |
| |
| $109,753 |
|
| $60,175 |
| |
| $51,503 |
| |
| $2,439 |
| |
| $114,117 |
|
Average Balances: | | | | | | | | | | | | | | |
Total assets |
| $58,954 |
| |
| $49,488 |
| |
| $40,893 |
| |
| $149,335 |
|
| $61,290 |
| |
| $51,286 |
| |
| $39,817 |
| |
| $152,393 |
|
Total loans and leases (1) | 57,617 |
| — |
| 48,465 |
| | 3,129 |
| | 109,211 |
| 59,886 |
| | 50,249 |
| | 2,525 |
| | 112,660 |
|
Deposits | 74,623 |
| | 28,858 |
| | 6,893 |
| | 110,374 |
| 76,414 |
| | 30,488 |
| | 7,386 |
| | 114,288 |
|
Interest-earning assets | 57,668 |
| | 48,605 |
| | 30,729 |
| | 137,002 |
| 59,937 |
| | 50,447 |
| | 29,219 |
| | 139,603 |
|
Key Performance Metrics | | | | | | | | | | | | | | |
Net interest margin (2)(3) | 4.53 | % | | 2.86 | % | | NM |
| | 2.97 | % | 5.02 | % | | 2.93 | % | | NM |
| | 3.20 | % |
Efficiency ratio | 74.00 |
| | 40.14 |
| | NM |
| | 61.81 |
| 67.68 |
| | 40.86 |
| | NM |
| | 59.17 |
|
Loans-to-deposits ratio (average balances)(1)(4) | 77.21 |
| | 167.94 |
| | NM |
| | 98.95 |
| 78.01 |
| | 163.52 |
| | NM |
| | 97.99 |
|
Return on average total tangible assets (2) | 0.73 |
| | 1.50 |
| | NM |
| | 0.90 |
| 1.21 |
| | 1.78 |
| | NM |
| | 1.12 |
|
(1)Includes loans held for sale.LHFS.
(2) Ratios for the periodthree and six months ended June 30, 20172019 and 2018 are presented on an annualized basis.
(3)In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior period have been adjusted to conform with the current period presentation.
(4) We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.
(5) Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses, and expenses includingand income tax expense not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”
We operate throughhave two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and their related revenues, provision for credit losses and expenses. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets not directly allocated to a business operating segment, community development, non-core assets (including legacy Royal Bank of Scotland Group plc aircraft loan and leasing), and other unallocated assets, liabilities, capital, revenues, provision for credit losses, and expenses includingand income tax expense. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.” In addition, Other includes goodwill not directly allocated to a business operating segment and any associated goodwill impairment charges. For impairment testing purposes, we allocate all goodwill to our Consumer Banking andand/or Commercial Banking reporting units. For management reporting purposes, we present the goodwill balance (and any related impairment charges)There have been no significant changes in Other.
Our capital levels are evaluated and managed centrally, however, capital is allocated to the business operating segments to support evaluation of business performance. Business operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. Interest income and expense is determined based on the assets and liabilities managed by the business operating segment. Because funding and asset liability management is a central function, funds transfer pricing (“FTP”) methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business operating segment assets, liabilities and capital, respectively, using a matched-funding concept. The residual effect on net interest income of asset/liability management, including the residual net interest income related to the FTP process, is included in Other. We periodically evaluate and refine our methodologies used to measure financial performance ofallocate items to our business operating segments.segments as described in “—Results of Operations — Business Operating Segments” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.
Provision for credit losses is allocated to each business operating segment based on actual net charge-offs that have been recognized by the business operating segment. The difference between the consolidated provision for credit losses and the business operating segments’ net charge-offs is reflected in Other.
Noninterest income and expense directly managed by each business operating segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each business
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
operating segment’s financial results in a manner similar to our unaudited interim Consolidated Financial Statements. Occupancy costs are allocated based on utilization of facilities by each business operating segment. Noninterest expenses incurred by centrally managed operations or business operating segments that directly support another business operating segment’s operations are charged to the applicable business operating segment based on its utilization of those services.
Income taxes are assessed to each business operating segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.
Developing and applying methodologies used to allocate items among the business operating segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines change, or our organizational structure changes.
Consumer Banking
| | | As of and for the Three Months Ended June 30, | | | | | | As of and for the Six Months Ended June 30, | | | | | As of and for the Three Months Ended June 30, | | | | | | As of and for the Six Months Ended June 30, | | | | |
(dollars in millions) | 2018 |
| | 2017 |
| | Change | | Percent |
| | 2018 |
|
| 2017 |
| | Change |
| Percent |
| 2019 |
| | 2018 |
| | Change | | Percent |
| | 2019 |
|
| 2018 |
| | Change |
| Percent |
|
Net interest income (1) |
| $759 |
| |
| $657 |
| |
| $102 |
| | 16 | % | |
| $1,492 |
|
|
| $1,295 |
|
|
| $197 |
|
| 15 | % |
| $799 |
| |
| $759 |
| |
| $40 |
| | 5 | % | |
| $1,587 |
|
|
| $1,492 |
|
|
| $95 |
|
| 6 | % |
Noninterest income | 228 |
| | 229 |
| | (1 | ) | | — |
| | 450 |
|
| 449 |
|
| 1 |
|
| — |
| 277 |
| | 228 |
| | 49 |
| | 21 |
| | 524 |
|
| 450 |
|
| 74 |
|
| 16 |
|
Total revenue | 987 |
| | 886 |
| | 101 |
| | 11 |
| | 1,942 |
|
| 1,744 |
|
| 198 |
|
| 11 |
| 1,076 |
| | 987 |
| | 89 |
| | 9 |
| | 2,111 |
|
| 1,942 |
|
| 169 |
|
| 9 |
|
Noninterest expense | 658 |
| | 644 |
| | 14 |
| | 2 |
| | 1,314 |
|
| 1,291 |
|
| 23 |
|
| 2 |
| 715 |
| | 658 |
| | 57 |
| | 9 |
| | 1,415 |
|
| 1,314 |
|
| 101 |
|
| 8 |
|
Profit before provision for credit losses | 329 |
| | 242 |
| | 87 |
| | 36 |
| | 628 |
|
| 453 |
|
| 175 |
|
| 39 |
| 361 |
| | 329 |
| | 32 |
| | 10 |
| | 696 |
|
| 628 |
|
| 68 |
|
| 11 |
|
Provision for credit losses | 66 |
| | 60 |
| | 6 |
| | 10 |
| | 138 |
|
| 124 |
|
| 14 |
|
| 11 |
| 78 |
| | 66 |
| | 12 |
| | 18 |
| | 145 |
|
| 138 |
|
| 7 |
|
| 5 |
|
Income before income tax expense | 263 |
| | 182 |
| | 81 |
| | 45 |
| | 490 |
|
| 329 |
|
| 161 |
|
| 49 |
| 283 |
| | 263 |
| | 20 |
| | 8 |
| | 551 |
|
| 490 |
|
| 61 |
|
| 12 |
|
Income tax expense | 66 |
| | 64 |
| | 2 |
| | 3 |
| | 123 |
|
| 116 |
|
| 7 |
|
| 6 |
| 70 |
| | 66 |
| | 4 |
| | 6 |
| | 136 |
|
| 123 |
|
| 13 |
|
| 11 |
|
Net income |
| $197 |
| |
| $118 |
| |
| $79 |
| | 67 |
| |
| $367 |
|
|
| $213 |
|
|
| $154 |
|
| 72 |
|
| $213 |
| |
| $197 |
| |
| $16 |
| | 8 |
| |
| $415 |
|
|
| $367 |
|
|
| $48 |
|
| 13 |
|
Loans (period-end) (2)(1) |
| $60,175 |
| |
| $58,537 |
| |
| $1,638 |
| | 3 |
| |
| $60,175 |
|
|
| $58,537 |
|
|
| $1,638 |
|
| 3 |
|
| $62,959 |
| |
| $60,175 |
| |
| $2,784 |
| | 5 |
| |
| $62,959 |
|
|
| $60,175 |
|
|
| $2,784 |
|
| 5 | % |
Average Balances: | | | | | | |
|
| | | | |
| |
|
|
| | | | | | |
|
| | | | |
| |
|
|
|
Total assets |
| $61,232 |
| |
| $59,244 |
| |
| $1,988 |
| | 3 | % | |
| $61,290 |
|
|
| $58,954 |
|
|
| $2,336 |
|
| 4 | % |
| $65,485 |
| |
| $61,232 |
| |
| $4,253 |
| | 7 | % | |
| $65,247 |
|
|
| $61,290 |
|
|
| $3,957 |
|
| 6 | % |
Total loans and leases (2)(1) | 59,830 |
| | 57,922 |
| | 1,908 |
| | 3 |
| | 59,886 |
|
| 57,617 |
|
| 2,269 |
|
| 4 |
| 62,678 |
| | 59,830 |
| | 2,848 |
| | 5 |
| | 62,422 |
|
| 59,886 |
|
| 2,536 |
|
| 4 |
|
Deposits | 77,402 |
| | 75,107 |
| | 2,295 |
| | 3 |
| | 76,414 |
|
| 74,623 |
|
| 1,791 |
|
| 2 |
| 85,660 |
| | 77,402 |
| | 8,258 |
| | 11 |
| | 84,123 |
|
| 76,414 |
|
| 7,709 |
|
| 10 |
|
Interest-earning assets | 59,880 |
| | 57,973 |
| | 1,907 |
| | 3 |
| | 59,937 |
|
| 57,668 |
|
| 2,269 |
|
| 4 |
| 62,731 |
| | 59,880 |
| | 2,851 |
| | 5 |
| | 62,475 |
|
| 59,937 |
|
| 2,538 |
|
| 4 |
|
Key Performance Metrics: | | | | | | | | | |
| |
|
|
|
| | | | | | | | | | |
| |
|
|
|
| |
Net interest margin (3)(2) | 5.08 | % | | 4.54 | % | | 54 | bps | | | | 5.02 | % |
| 4.53 | % |
| 49 | bps |
| | 5.11 | % | | 5.08 | % | | 3 | bps | | | | 5.12 | % |
| 5.02 | % |
| 10 | bps |
| |
Efficiency ratio | 66.68 |
| | 72.64 |
| | (596 | ) bps | | | | 67.68 |
|
| 74.00 |
|
| (632 | ) bps |
| | 66.43 |
| | 66.68 |
| | (25 | ) bps | | | | 67.01 |
|
| 67.68 |
|
| (67 | ) bps |
| |
Loans-to-deposits ratio (average balances)(2)(3) | 77.30 |
| | 77.12 |
| | 18 | bps | | | | 78.37 |
|
| 77.21 |
|
| 116 | bps |
| | 71.57 |
| | 76.92 |
| | (535 | ) bps | | | | 72.89 |
|
| 78.01 |
|
| (512 | ) bps |
| |
Return on average total tangible assets (3)(2) | 1.29 |
| | 0.80 |
| | 49 | bps | | | | 1.21 |
|
| 0.73 |
|
| 48 | bps |
| | 1.31 |
| | 1.29 |
| | 2 | bps | | | | 1.29 |
|
| 1.21 |
|
| 8 | bps |
| |
(1)We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change. Includes LHFS.
(2) Includes loans held for sale.
(3) Ratios for the periodsthree and six months ended June 30, 20182019 and 20172018 are presented on an annualized basis.
(3) We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.
Quarter-To-Date Results:Consumer Banking net interest income of $197 millionincreased $79$40 million, or 67%5%, from $118 million in second quarter 2017, as2018, driven by the benefit of a $101 million increase in total revenue more than offset a $14 million increase in noninterest expense. Net interest income of $759 million increased $102 million, or 16%, from second quarter 2017, driven by the impact of the FTP methodology enhancement as well as the benefit of a $1.9$2.8 billion increase in average loans led by residential mortgage, unsecured personal and education and unsecured retail with higher loan yields that included the benefit of higher rates and continued mix shift towards higher yielding assets, partially offset by an increase in deposit costs.
loans. Noninterest income decreased $1increased $49 million from second quarter 2017,2018, driven by lower service charges and fees andhigher mortgage banking fees partially offset byand higher trust and investment services fees.fees including the impact of Acquisitions. Noninterest expense of $658 million increased $14$57 million, or 2%9%, from second quarter 2017, driven by2018, reflecting higher salaries and benefits and outside services.services including the impact of Acquisitions. Provision for credit losses of $66$78 million increased $6$12 million, or 10%18%, reflecting balance growth andhigher net charge-offs due to seasoning in growth portfolios.
Year-To-Date Results: Consumer Banking net interest income increased$95 million, or 6%, from the first half of 2018, driven by the benefit of a $2.5 billion increase in average loans led by residential mortgage, unsecured retailpersonal and education.education loans. Noninterest income increased $74 million from the first half of 2018, driven by higher mortgage banking fees and higher trust and investment fees including the impact of Acquisitions. Noninterest expense increased $101 million, or 8%, from the first half of 2018, reflecting higher salaries and benefits and outside services including the impact of Acquisitions. Provision for credit losses of $145 million increased$7 million, or 5%, reflecting higher net charge-offs due to seasoning in growth portfolios.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Consumer Banking net income of $367 millionincreased$154 million, or 72%, from $213 million in first half 2017, as the benefit of a $198 millionincrease in total revenue more than offset a $23 million increase in noninterest expense. Net interest income of $1.5 billion increased$197 million, or 15%, from first half 2017 driven by the impact of the FTP methodology enhancement as well as the benefit of a $2.3 billion increase in average loans led by residential mortgage, education and unsecured retail with higher loan yields that included the benefit of higher rates and continued mix shift towards higher yielding assets, partially offset by an increase in deposit costs.
Noninterest income was stable with first half 2017, reflecting higher trust and investment services fees, partially offset by lower service charges and fees and mortgage banking fees. Noninterest expense of $1.3 billion increased $23 million, or 2%, from first half 2017, driven by higher salaries and benefits and outside services. Provision for credit losses of $138 million increased$14 million, or 11%, reflecting balance growth and seasoning in unsecured retail and education.
On August 1, 2018, we completed the acquisition of certain net assets of Franklin American Mortgage Company, a Franklin, Tennessee-based national mortgage servicing and origination firm.
Commercial Banking
| | | As of and for the Three Months Ended June 30, | | | | | | As of and for the Six Months Ended June 30, | | | | | As of and for the Three Months Ended June 30, | | | | | | As of and for the Six Months Ended June 30, | | | | |
(dollars in millions) | 2018 |
| | 2017 |
| | Change | | Percent |
| | 2018 |
| | 2017 |
| | Change | | Percent |
| 2019 |
| | 2018 |
| | Change | | Percent |
| | 2019 |
| | 2018 |
| | Change | | Percent |
|
Net interest income (1) |
| $376 |
| |
| $344 |
| |
| $32 |
| | 9 | % | |
| $733 |
| |
| $690 |
| |
| $43 |
| | 6 | % |
| $371 |
| |
| $376 |
| |
| ($5 | ) | | (1 | %) | |
| $743 |
| |
| $733 |
| |
| $10 |
| | 1 | % |
Noninterest income | 140 |
| | 130 |
| | 10 |
| | 8 |
| | 265 |
| | 264 |
| | 1 |
| | — |
| 149 |
| | 140 |
| | 9 |
| | 6 |
| | 299 |
| | 265 |
| | 34 |
| | 13 |
|
Total revenue | 516 |
| | 474 |
| | 42 |
| | 9 |
| | 998 |
| | 954 |
| | 44 |
| | 5 |
| 520 |
| | 516 |
| | 4 |
| | 1 |
| | 1,042 |
| | 998 |
| | 44 |
| | 4 |
|
Noninterest expense | 200 |
| | 192 |
| | 8 |
| | 4 |
| | 408 |
| | 382 |
| | 26 |
| | 7 |
| 217 |
| | 200 |
| | 17 |
| | 9 |
| | 426 |
| | 408 |
| | 18 |
| | 4 |
|
Profit before provision for credit losses | 316 |
| | 282 |
| | 34 |
| | 12 |
| | 590 |
| | 572 |
| | 18 |
| | 3 |
| 303 |
| | 316 |
| | (13 | ) | | (4 | ) | | 616 |
| | 590 |
| | 26 |
| | 4 |
|
Provision for credit losses | 9 |
| | 1 |
| | 8 |
| | NM |
| | 5 |
| | 20 |
| | (15 | ) | | (75 | ) | 25 |
| | 9 |
| | 16 |
| | 178 |
| | 46 |
| | 5 |
| | 41 |
| | NM |
|
Income before income tax expense | 307 |
| | 281 |
| | 26 |
| | 9 |
| | 585 |
| | 552 |
| | 33 |
| | 6 |
| 278 |
| | 307 |
| | (29 | ) | | (9 | ) | | 570 |
| | 585 |
| | (15 | ) | | (3 | ) |
Income tax expense | 70 |
| | 94 |
| | (24 | ) | | (26 | ) | | 133 |
| | 185 |
| | (52 | ) | | (28 | ) | 62 |
| | 70 |
| | (8 | ) | | (11 | ) | | 127 |
| | 133 |
| | (6 | ) | | (5 | ) |
Net income |
| $237 |
| |
| $187 |
| |
| $50 |
| | 27 |
| |
| $452 |
| |
| $367 |
| |
| $85 |
| | 23 |
|
| $216 |
| |
| $237 |
| |
| ($21 | ) | | (9 | ) | |
| $443 |
| |
| $452 |
| |
| ($9 | ) | | (2 | ) |
Loans and leases (period-end) (2)(1) |
| $51,503 |
| |
| $48,363 |
| |
| $3,140 |
| | 6 |
| |
| $51,503 |
| |
| $48,363 |
| |
| $3,140 |
| | 6 |
|
| $54,068 |
| |
| $51,503 |
| |
| $2,565 |
| | 5 |
| |
| $54,068 |
| |
| $51,503 |
| |
| $2,565 |
| | 5 | % |
Average Balances: | | | | |
|
| |
|
| | | | | | | |
|
| | | | |
|
| |
|
| | | | | | | |
|
|
Total assets |
| $52,170 |
| |
| $49,731 |
| |
| $2,439 |
| | 5 | % | |
| $51,286 |
| |
| $49,488 |
| |
| $1,798 |
| | 4 | % |
| $56,135 |
| |
| $52,170 |
| |
| $3,965 |
| | 8 | % | |
| $55,884 |
| |
| $51,286 |
| |
| $4,598 |
| | 9 | % |
Total loans and leases (2)(1) | 51,202 |
| | 48,772 |
| | 2,430 |
| | 5 |
| | 50,249 |
| | 48,465 |
| | 1,784 |
| | 4 |
| 54,653 |
| | 51,202 |
| | 3,451 |
| | 7 |
| | 54,545 |
| | 50,249 |
| | 4,296 |
| | 9 |
|
Deposits | 30,214 |
| | 28,744 |
| | 1,470 |
| | 5 |
| | 30,488 |
| | 28,858 |
| | 1,630 |
| | 6 |
| 30,273 |
| | 30,214 |
| | 59 |
| | — |
| | 30,050 |
| | 30,488 |
| | (438 | ) | | (1 | ) |
Interest-earning assets | 51,404 |
| | 48,923 |
| | 2,481 |
| | 5 |
| | 50,447 |
| | 48,605 |
| | 1,842 |
| | 4 |
| 54,950 |
| | 51,404 |
| | 3,546 |
| | 7 |
| | 54,838 |
| | 50,447 |
| | 4,391 |
| | 9 |
|
Key Performance Metrics: | | | | |
|
| | | | | | | | | | | | | | |
|
| | | | | | | | | | |
Net interest margin (3)(2) | 2.93 | % | | 2.82 | % | | 11 | bps | | | | 2.93 | % | | 2.86 | % | | 7 | bps | | | 2.71 | % | | 2.93 | % | | (22 | ) bps | | | | 2.73 | % | | 2.93 | % | | (20 | ) bps | | |
Efficiency ratio | 38.80 |
| | 40.48 |
| | (168 | ) bps | | | | 40.86 |
| | 40.14 |
| | 72 | bps | | | 41.58 |
| | 38.80 |
| | 278 | bps | | | | 40.84 |
| | 40.86 |
| | (2 | ) bps | | |
Loans-to-deposits ratio (average balances)(2)(3) | 169.47 |
| | 169.68 |
| | (21 | ) bps | | | | 164.81 |
| | 167.94 |
| | (313 | ) bps | | | 179.49 |
| | 168.23 |
| | 1,126 | bps | | | | 180.35 |
| | 163.52 |
| | 1,683 | bps | | |
Return on average total tangible assets (3)(2) | 1.82 |
| | 1.51 |
| | 31 | bps | | | | 1.78 |
| | 1.50 |
| | 28 | bps | | | 1.54 |
| | 1.82 |
| | (28 | ) bps | | | | 1.60 |
| | 1.78 |
| | (18 | ) bps | | |
(1)We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change. Includes LHFS.
(2) Includes loans held for sale.
(3) Ratios for the periodsthree and six months ended June 30, 20182019 and 20172018 are presented on an annualized basis.
(3) We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.
Quarter-To-Date Results:Commercial Banking net interest income of $237$371 million increased $50decreased $5 million, or 27%1%, from $187$376 million in second quarter 2017, as the benefit of a $42 million increase in total revenue was partially offset2018, driven by an $8 million increase in noninterest expensehigher deposit costs and an $8 million increase in provision for credit losses. Net interestmix. Noninterest income of $376$149 million increased $32$9 million, or 9%6%, from $344$140 million in second quarter 2017,2018, reflecting higher capital market fees, foreign exchange and interest rate product fees and letter of credit and loan fees. Noninterest expense of $217 millionincreased$17 million, or 9%, from $200 million in second quarter 2018, largely driven by the impact of increased headcount due to strategic initiatives and higher indirect expenses. Provision for credit losses increased $16 million from second quarter 2018 due to higher net charge-offs.
Year-To-Date Results:Commercial Banking net interest income of $743 million increased $10 million, or 1%, from $733 million in the first half of 2018, reflecting a $2.4$4.3 billion increase in average loans and leases, partially offset by higher deposit costs and a $1.5 billion increase in average deposits.
mix. Noninterest income of $140$299 million increased $10$34 million, or 8%13%, from $130$265 million in second quarter 2017,the first half of 2018, reflecting higher foreign exchange andcapital market, interest rate products feesproduct, and leasingcapital markets fees. Noninterest expense of $200$426 millionincreased$8 $18 million,, or 4%, from $192$408 million in second quarter 2017, largely driventhe first half of 2018, driven by higher salaries and employee benefits.benefit expense. Provision for credit losses of $46 millionincreased $8$41 million from second quarter 2017 due tothe first half of 2018, driven by higher net charge-offs.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Commercial Banking net income of $452 million increased$85 million, or 23%, from $367 million in first half 2017, as the benefit of a $44 millionincrease in total revenue and a $15 milliondecrease in provision for credit losses was partially offset by a $26 million increase in noninterest expense. Net interest income of $733 million increased$43 million, or 6%, from $690 million in first half 2017, reflecting a $1.8 billionincrease in average loans and leases and a $1.6 billion increase in average deposits.
Noninterest income of $265 million was stable with first half 2017, reflecting higher foreign exchange and interest rate products fees and card fees offset by other income. Noninterest expense of $408 millionincreased $26 million, or 7%, from $382 million in first half 2017, largely driven by higher salaries and employee benefits. Provision for credit losses decreased$15 million from first half 2017, driven by lower net charge-offs.
Other
| | | As of and for the Three Months Ended June 30, | | | | | | As of and for the Six Months Ended June 30, | | | | | As of and for the Three Months Ended June 30, | | | | | | As of and for the Six Months Ended June 30, | | | | |
(in millions) | 2018 |
| | 2017 |
| | Change |
| | Percent |
| | 2018 |
| | 2017 |
| | Change |
| | Percent |
| 2019 |
| | 2018 |
| | Change |
| | Percent |
| | 2019 |
| | 2018 |
| | Change |
| | Percent |
|
Net interest income (1) |
| ($14 | ) | |
| $25 |
| |
| ($39 | ) | | (156 | %) | |
| ($13 | ) | |
| $46 |
| |
| ($59 | ) | | (128 | %) |
| ($4 | ) | |
| ($14 | ) | |
| $10 |
| | 71 | % | |
| ($4 | ) | |
| ($13 | ) | |
| $9 |
| | 69 | % |
Noninterest income | 20 |
| | 11 |
| | 9 |
| | 82 |
| | 44 |
| | 36 |
| | 8 |
| | 22 |
| 36 |
| | 20 |
| | 16 |
| | 80 |
| | 67 |
| | 44 |
| | 23 |
| | 52 |
|
Total revenue | 6 |
| | 36 |
| | (30 | ) | | (83 | ) | | 31 |
| | 82 |
| | (51 | ) | | (62 | ) | 32 |
| | 6 |
| | 26 |
| | NM |
| | 63 |
| | 31 |
| | 32 |
| | 103 |
|
Noninterest expense | 17 |
| | 28 |
| | (11 | ) | | (39 | ) | | 36 |
| | 45 |
| | (9 | ) | | (20 | ) | 19 |
| | 17 |
| | 2 |
| | 12 |
| | 47 |
| | 36 |
| | 11 |
| | 31 |
|
(Loss) profit before provision for credit losses | (11 | ) | | 8 |
| | (19 | ) | | (238 | ) | | (5 | ) | | 37 |
| | (42 | ) | | (114 | ) | |
Profit (loss) before provision for credit losses | | 13 |
| | (11 | ) | | 24 |
| | NM |
| | 16 |
| | (5 | ) | | 21 |
| | NM |
|
Provision for credit losses | 10 |
| | 9 |
| | 1 |
| | 11 |
| | 20 |
| | 22 |
| | (2 | ) | | (9 | ) | (6 | ) | | 10 |
| | (16 | ) | | NM |
| | (9 | ) | | 20 |
| | (29 | ) | | NM |
|
(Loss) income before income tax benefit | (21 | ) | | (1 | ) | | (20 | ) | | NM |
| | (25 | ) | | 15 |
| | (40 | ) | | NM |
| |
Income (loss) before income tax benefit | | 19 |
| | (21 | ) | | 40 |
| | NM |
| | 25 |
| | (25 | ) | | 50 |
| | NM |
|
Income tax benefit | (12 | ) | | (14 | ) | | 2 |
| | 14 |
| | (19 | ) | | (43 | ) | | 24 |
| | 56 |
| (5 | ) | | (12 | ) | | 7 |
| | 58 |
| | (9 | ) | | (19 | ) | | 10 |
| | 53 |
|
Net (loss) income |
| ($9 | ) | |
| $13 |
| |
| ($22 | ) | | (169 | ) | |
| ($6 | ) | |
| $58 |
| |
| ($64 | ) | | (110 | ) | |
Net income (loss) | |
| $24 |
| |
| ($9 | ) | |
| $33 |
| | NM |
| |
| $34 |
| |
| ($6 | ) | |
| $40 |
| | NM |
|
Loans and leases (period-end) (2)(1) |
| $2,439 |
| |
| $2,853 |
| |
| ($414 | ) | | (15 | ) | |
| $2,439 |
| |
| $2,853 |
| |
| ($414 | ) | | (15 | ) |
| $2,016 |
| |
| $2,439 |
| |
| ($423 | ) | | (17 | ) | |
| $2,016 |
| |
| $2,439 |
| |
| ($423 | ) | | (17 | %) |
Average Balances: | | | | | | |
|
| | | | | |
|
| |
|
| | | | | | |
|
| | | | | |
|
| |
|
|
Total assets |
| $39,851 |
| |
| $40,903 |
| |
| ($1,052 | ) | | (3 | %) | |
| $39,817 |
| |
| $40,893 |
| |
| ($1,076 | ) | | (3 | %) |
| $39,869 |
| |
| $39,851 |
| |
| $18 |
| | — | % | |
| $39,824 |
| |
| $39,817 |
| |
| $7 |
| | — | % |
Total loans and leases (2)(1) | 2,489 |
| | 3,073 |
| | (584 | ) | | (19 | ) | | 2,525 |
| | 3,129 |
| | (604 | ) | | (19 | ) | 2,138 |
| | 2,489 |
| | (351 | ) | | (14 | ) | | 2,207 |
| | 2,525 |
| | (318 | ) | | (13 | ) |
Deposits | 7,526 |
| | 6,939 |
| | 587 |
| | 8 |
| | 7,386 |
| | 6,893 |
| | 493 |
| | 7 |
| 7,219 |
| | 7,526 |
| | (307 | ) | | (4 | ) | | 7,617 |
| | 7,386 |
| | 231 |
| | 3 |
|
Interest-earning assets | 29,241 |
| | 30,691 |
| | (1,450 | ) | | (5 | ) | | 29,219 |
| | 30,729 |
| | (1,510 | ) | | (5 | ) | 28,642 |
| | 29,241 |
| | (599 | ) | | (2 | ) | | 28,607 |
| | 29,219 |
| | (612 | ) | | (2 | ) |
(1) We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first Includes LHFS.
Quarter-To-Date Results:Other net interest incomeincreased $10 million from second quarter 2018 we enhanced our assumptions for the liquiditydriven by FTP, partially offset by higher funding and deposit components within our FTP methodology which provides a credit for sourcesswap costs and non core run-off. Noninterest income was up $16 million primarily due to higher leasing income. Results also reflected an ACL release of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.
(2) Includes loans held for sale.
Other net loss of $9$9 million decreased from net income of $13 million in second quarter 2017, primarily driven by lower net interest income. Net interest incomedecreased $39 million due2019, compared to higher funding costs, the declining benefit of swaps and non-core loan portfolio run-off, partially offset by residual FTP and higher investment portfolio income. Noninterest income increased $9 million, driven by a $7 million impact related to finance lease impairments in second quarter 2017. Noninterest expense decreased $11 million, driven by the $15 million impact of operating lease impairments in second quarter 2017. Results also reflected lower net charge-offs and a reservean ACL build of $9 million in second quarter 2018, compared to a reserve release of $52018.
Year-To-Date Results:Other net interest income increased $9 million in second quarter 2017.
Other net loss of $6 milliondecreasedfrom net income of $58 million inthe first half 2017, primarilyof 2018 driven by a $23 million benefit related to the settlement of state tax matters in first half 2017 and lower net interest income. Net interest income decreased $59 million reflecting an FTP, methodology enhancement in first quarter 2018,partially offset by higher funding and swap costs the declining benefit of swaps and non-core loan portfolio run-off. Results also reflected lower net charge-offs and a reservean ACL release of $13 million in the first half of 2019, compared to an ACL build of $17 million in the first half 2018, compared to a reserve build of $4 million in first half 2017.2018.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
Securities
Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns.returns that align with our overall portfolio management strategy. The following table presents our securities AFS and HTM:
| | | June 30, 2018 | | December 31, 2017 | | | June 30, 2019 | | December 31, 2018 | | |
(in millions) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Change in Fair Value | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Change in Fair Value |
Debt Securities Available for Sale, At Fair Value:(1) | | | | | | | | | | | | |
U.S. Treasury and other |
| $12 |
| |
| $12 |
| |
| $12 |
| |
| $12 |
| |
| $— |
| | — | % |
| $90 |
| |
| $90 |
| |
| $24 |
| |
| $24 |
| |
| $66 |
| | 275 | % |
State and political subdivisions | 6 |
| | 6 |
| | 6 |
| | 6 |
| | — |
| | — |
| 5 |
| | 5 |
| | 5 |
| | 5 |
| | — |
| | — |
|
Mortgage-backed securities: | | | | | | | | | | | | |
Mortgage-backed securities, at fair value: | | | | | | | | | | | | |
Federal agencies and U.S. government sponsored entities | 20,559 |
| | 19,871 |
| | 20,065 |
| | 19,828 |
| | 43 |
| | — |
| 20,688 |
| | 20,708 |
| | 20,211 |
| | 19,634 |
| | 1,074 |
| | 5 |
|
Other/non-agency | 269 |
| | 268 |
| | 311 |
| | 311 |
| | (43 | ) | | (14 | ) | 871 |
| | 895 |
| | 236 |
| | 232 |
| | 663 |
| | 286 |
|
Total mortgage-backed securities | 20,828 |
| | 20,139 |
| | 20,376 |
| | 20,139 |
| | — |
| | — |
| 21,559 |
| | 21,603 |
| | 20,447 |
| | 19,866 |
| | 1,737 |
| | 9 |
|
Total debt securities available for sale, at fair value |
| $20,846 |
| |
| $20,157 |
| |
| $20,394 |
| |
| $20,157 |
| |
| $— |
| | — | % |
| $21,654 |
| |
| $21,698 |
| |
| $20,476 |
| |
| $19,895 |
| |
| $1,803 |
| | 9 | % |
Debt Securities Held to Maturity:(1) | | | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | |
Mortgage-backed securities, at cost: | | | | | | | | | | | | |
Federal agencies and U.S. government sponsored entities |
| $3,632 |
| |
| $3,473 |
| |
| $3,853 |
| |
| $3,814 |
| |
| ($341 | ) | | (9 | %) |
| $3,447 |
| |
| $3,441 |
| |
| $3,425 |
| |
| $3,293 |
| |
| $148 |
| | 4 | % |
Other/non-agency | 785 |
| | 787 |
| | 832 |
| | 854 |
| | (67 | ) | | (8 | ) | — |
| | — |
| | 740 |
| | 748 |
| | (748 | ) | | (100 | ) |
Total mortgage-backed securities | 4,417 |
| | 4,260 |
| | 4,685 |
| | 4,668 |
| | (408 | ) | | (9 | ) | 3,447 |
| | 3,441 |
| | 4,165 |
| | 4,041 |
| | (600 | ) | | (15 | ) |
Total debt securities held to maturity |
| $4,417 |
| |
| $4,260 |
| |
| $4,685 |
| |
| $4,668 |
| |
| ($408 | ) | | (9 | ) |
| $3,447 |
| |
| $3,441 |
| |
| $4,165 |
| |
| $4,041 |
| |
| ($600 | ) | | (15 | )% |
Total debt securities available for sale and held to maturity |
| $25,263 |
| |
| $24,417 |
| |
| $25,079 |
| |
| $24,825 |
| |
| ($408 | ) | | (2 | %) |
| $25,101 |
| |
| $25,139 |
| |
| $24,641 |
| |
| $23,936 |
| |
| $1,203 |
| | 5 | % |
Equity Securities:(1) | | | | | | | | | | | | |
Equity securities, at fair value |
| $170 |
| |
| $170 |
| |
| $169 |
| |
| $169 |
| |
| $1 |
| | 1 | % |
| $47 |
| |
| $47 |
| |
| $181 |
| |
| $181 |
| |
| ($134 | ) | | (74 | %) |
Equity securities, at cost | 769 |
| | 769 |
| | 722 |
| | 722 |
| | 47 |
| | 7 |
| 706 |
| | 706 |
| | 834 |
| | 834 |
| | (128 | ) | | (15 | ) |
Total equity securities |
| $939 |
| |
| $939 |
| |
| $891 |
| |
| $891 |
| |
| $48 |
| | 5 | % |
| $753 |
| |
| $753 |
| |
| $1,015 |
| |
| $1,015 |
| |
| ($262 | ) | | (26 | %) |
(1)As of January 1, 2018, we adopted ASU 2016-01, Financial Instruments, Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet.
As of June 30, 2018, the fair value of the AFS and HTM debt securities portfolio decreased $408 million to $24.4 billion, compared with $24.8 billion as of December 31, 2017. The fair value of the AFS debt portfolio of $20.2$21.7 billion at June 30, 2018 remained stable with2019 increased $1.8 billion from $19.9 billion at December 31, 2017 as a decrease in2018 due to lower period-end interest rates that decreased net unrealized losses on mortgage-backed securities of $452by $625 million, due to higher interest rates, was offset by net portfolio additions.additions, and securities transferred from HTM to AFS upon the adoption of ASU 2017–12, Targeted Improvements to Accounting for Hedging Activities. The decline in the fair value of the HTM debt portfolio of $408$600 million was primarily attributable to an increasesecurities transferred from HTM to AFS upon the adoption of ASU 2017–12, partially offset by a transfer of $192 million of securities from AFS to HTM. For further detail see Note 1 "Basis of Presentation" to our unaudited interim Consolidated Financial Statements in net unrealized losses on mortgage-backed securities of $140 million due to higher interest rates and $268 millionPart I, Item 1 — Financial Statements, included in net attrition of the portfolio.this Report.
As of June 30, 2018,2019, the portfolio’s average effective duration was 4.53.3 years compared with 3.94.4 years as of December 31, 2017,2018, as higherlower long-term rates drove a decreasean increase in both actual and projected securities prepayment speeds. We manage theour securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetiteappetite in the context of the broader Interest Rate Riskinterest rate risk in the Banking Bookbanking book framework and limits.
The securities portfolio includes high-quality, highly-liquid investments reflecting our ongoing commitment to maintaining appropriate contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and government-sponsored entity-issuedGSE-issued mortgage-backed securities represent 96% of the fair value of the debt securities portfolio holdings. The portfolio composition is also dominated by holdingsHoldings backed by mortgages todominate our portfolio and facilitate our ability to pledge them to the FHLBs, which has become increasingly important due to the enhanced liquidity requirements of the liquidity coverage ratio and the liquidity stress test.FHLB for collateral purposes. For further discussion of the liquidity
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
coverage ratios, see “Regulation and Supervision — Liquidity Standards” in Part I — Business, included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Loans and Leases
Our loans and leases are disclosed in portfolio segments and classes. Our loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential mortgages, home equity loans, home equity lines of credit, home equity loans serviced by others, home equity lines of credit serviced by others, automobile, education, credit cards and other retail. Our SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others, which we service a portion of internally. The following table shows the composition of loans and leases, including non-core loans, as of:reflected below.
| | (in millions) | June 30, 2018 | | December 31, 2017 | | Change | | Percent | June 30, 2019 | | December 31, 2018 | | Change | | Percent |
Commercial(1) |
| $39,278 |
| |
| $37,562 |
| |
| $1,716 |
| | 5 | % |
| $41,156 |
| |
| $40,857 |
| |
| $299 |
| | 1 | % |
Commercial real estate | 12,528 |
| | 11,308 |
| | 1,220 |
| | 11 |
| 13,123 |
| | 13,023 |
| | 100 |
| | 1 |
|
Leases | 3,082 |
| | 3,161 |
| | (79 | ) | | (2 | ) | 2,684 |
| | 2,903 |
| | (219 | ) | | (8 | ) |
Total commercial loans and leases | 54,888 |
| | 52,031 |
| | 2,857 |
| | 5 |
| 56,963 |
| | 56,783 |
| | 180 |
| | — |
|
Residential mortgages | 17,814 |
| | 17,045 |
| | 769 |
| | 5 |
| 19,192 |
| | 18,978 |
| | 214 |
| | 1 |
|
Home equity loans | 1,211 |
| | 1,392 |
| | (181 | ) | | (13 | ) | 938 |
| | 1,073 |
| | (135 | ) | | (13 | ) |
Home equity lines of credit | 13,014 |
| | 13,483 |
| | (469 | ) | | (3 | ) | 12,266 |
| | 12,710 |
| | (444 | ) | | (3 | ) |
Home equity loans serviced by others | 465 |
| | 542 |
| | (77 | ) | | (14 | ) | 348 |
| | 399 |
| | (51 | ) | | (13 | ) |
Home equity lines of credit serviced by others | 124 |
| | 149 |
| | (25 | ) | | (17 | ) | 88 |
| | 104 |
| | (16 | ) | | (15 | ) |
Automobile | 12,517 |
| | 13,204 |
| | (687 | ) | | (5 | ) | 12,000 |
| | 12,106 |
| | (106 | ) | | (1 | ) |
Education | 8,450 |
| | 8,134 |
| | 316 |
| | 4 |
| 9,305 |
| | 8,900 |
| | 405 |
| | 5 |
|
Credit cards | 1,877 |
| | 1,848 |
| | 29 |
| | 2 |
| 2,046 |
| | 1,991 |
| | 55 |
| | 3 |
|
Other retail | 3,047 |
| | 2,789 |
| | 258 |
| | 9 |
| 3,692 |
| | 3,616 |
| | 76 |
| | 2 |
|
Total retail loans(2) | 58,519 |
| | 58,586 |
| | (67 | ) | | — |
| 59,875 |
| | 59,877 |
| | (2 | ) | | — |
|
Total loans and leases (1) (2) |
| $113,407 |
| |
| $110,617 |
| |
| $2,790 |
| | 3 | % | |
Total loans and leases(3) | |
| $116,838 |
| |
| $116,660 |
| |
| $178 |
| | — | % |
(1) Excluded fromSBA loans we service for others of $18 million are not included above. These loans represent the table above aregovernment guaranteed portion of SBA loans held for sale totaling $710 million and $718 millionsold to outside investors as of June 30, 2018 and December 31, 2017, respectively.
(2) Mortgage2019. There were no SBA loans we serviced for others by our subsidiaries are not included above and amounted to $21.6at December 31, 2018.
(2) Mortgage loans we service for others of $72.5 billion and $20.3$69.6 billion at June 30, 20182019 and December 31, 2017, respectively.2018, respectively, are not included above.
Total(3) LHFS totaling $2.2 billion and $1.3 billion at June 30, 2019 and December 31, 2018, respectively, are not included above.
Strength in commercial loans, driven by geographic, product and client-focused expansion strategies as well as strength in commercial real estate drove an increase in total loans and leases of $113.4 billion as of June 30, 2018 increased $2.8 billion$178 million from $110.6$116.7 billion as of December 31, 2017, reflecting growth in commercial loans and leases. Total commercial loans and leases of $54.9 billion increased $2.9 billion from $52.0 billion as of December 31, 2017, reflecting commercial loan growth of $1.7 billion and commercial real estate loan growth of $1.2 billion. Total retail loans of $58.5 billion decreased by $67 million from $58.6 billion as of December 31, 2017, driven by a $687 million decrease in automobile loans and a $469 million decrease in home equity lines of credit,2018, partially offset by an increase of $769 million, $316 million and $258 millionplanned reductions in commercial leases. Retail loans were relatively stable, as growth in education, residential mortgages, education andmortgage, other retail respectively.and credit card were offset by execution against planned reductions in auto and run-off in the home equity portfolio.
Allowance for Credit Losses and Nonperforming Assets
The allowance for credit losses,ACL, which consists of an ALLL and a reserve for unfunded lending commitments, is created through charges to the provision for credit losses in order to provide appropriate reserves to absorb future estimated credit losses in accordance with GAAP. For further information on our processes to determine our allowance for credit losses,ACL, see “—Critical Accounting Estimates — Allowance for Credit Losses” and Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 20172018 and Note 4 “Allowance"Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk”Risk" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.Report.
The allowance for credit lossesACL totaled $1.3 billionat June 30, 20182019 and December 31, 2017.2018. The ALLL represented 1.10%1.05% of total loans and leases and 148%159% of nonperforming loans and leases as of June 30, 20182019, compared with 1.12%1.06% and 142%156%, respectively, as of December 31, 2017.2018, respectively. As of June 30, 2018,2019, there were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s reserves. As of December 31, 2017, we enhanced the method for assessing various qualitative risks, factors and events that may not be measured in the modeled results. As a result, the qualitative allowance was presented within each loan class.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Overall credit quality has remained strong reflecting growth in higher-quality, lower-risk retail loans and a broadly stable risk profile in the commercial loan and lease portfolios.first half of 2019. Nonperforming loans and leases of $845$770 million as of June 30, 2018,2019 decreased $26$27 million from December 31, 2017,2018, reflecting a $45 million decrease of $41 million in retail nonperforming loans driven by a decrease in real estate secured portfolios, partially offset by a $15 million increase in commercial nonperforming loans and leases.portfolios. Second quarter 20182019 net charge-offs of $106 million increased $30 million, or 39%, from $76 million were stable with thein second quarter 2017, primarily reflecting lower commercial losses but moderately higher retail losses.2018. Second quarter 20182019 annualized net charge-offs of 2736 basis points of average loans and leases was relatively stable compared with 28up nine basis points infrom second quarter 2017. Net2018. First half of 2019 net charge-offs of $195 million increased $49 million, or 34%, from $146 million forin the first half 2018 decreased $16 million, or 10%,of 2018. First half of 2019 annualized net charge-offs of 33 basis points of average loans and leases was up seven basis points from $162 million forthe first half 2017. Annualized net charge-offs as a percentage of total average loans of 0.26% decreased four basis points compared to first half 2017.2018.
Commercial Loan Asset Quality
Our commercial loan and lease portfolio consists of traditional commercial loans, commercial leases and commercial real estate loans and leases.loans. The portfolio is predominantly focused on customers in our footprint and adjacent
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
states in which we have a physical presence where our local delivery model provides for strong client connectivity. Additionally, we also do business in certain specialized industry sectors on a national basis.
For commercial loans and leases, we utilize regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that we believe will be fully repaidFor more information on regulatory classification ratings, see “—Allowance for Credit Losses and Nonperforming Assets — Commercial Loan Asset Quality” in accordance withour Annual Report on Form 10-K for the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness or potential weakness that indicate an increased probability of future loss. “Criticized” loans are grouped into three categories, “special mention,” “substandard” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of our credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection of the debt. Doubtful loans have the same weaknesses as substandard, with the added characteristics that the possibility of loss is high and collection of the full amount of the loan is improbable. These credit quality indicators for commercial loans are continually updated and monitored.year ended December 31, 2018. See Note 4 “Allowance"Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk”Risk" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.Report.
As of June 30, 2018,2019, nonperforming commercial loans and leases of $280$219 million increased $15$18 million from $265$201 million as of December 31, 2017.2018. Total commercial nonperforming loans were 0.5%0.4% of the commercial loan portfolio as of June 30, 20182019 and December 31, 2017.2018. Total commercial loan and lease portfolionet charge-offs of $33 million and $57 million for second quarter and the first half of 2019, respectively, compared to net charge-offs of $12 million and $9 million for second quarter and the first half of 2018, respectively, compared to $14 million and $33 million for second quarter and first half 2017, respectively. The commercial loan and lease portfolio’s annualized net charge-off rate of 23 and 20 basis points for the three and six months ended June 30, 2019, respectively, compared to a net charge-off rate of nine and three basis points for the three and six months ended June 30, 2018, respectively, compared to an annualized net charge-off rate of 10 and 13 basis points for the three and six months ended June 30, 2017, respectively.2018.
The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:
| | | June 30, 2018 | June 30, 2019 |
| | Criticized | | | Criticized | |
(in millions) | Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
| Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
|
Commercial |
| $36,576 |
|
| $1,694 |
|
| $754 |
|
| $254 |
|
| $39,278 |
|
| $39,011 |
|
| $1,174 |
|
| $770 |
|
| $201 |
|
| $41,156 |
|
Commercial real estate | 12,044 |
| 336 |
| 119 |
| 29 |
| 12,528 |
| 12,705 |
| 377 |
| 38 |
| 3 |
| 13,123 |
|
Leases | 2,955 |
| 88 |
| 39 |
| — |
| 3,082 |
| 2,578 |
| 46 |
| 43 |
| 17 |
| 2,684 |
|
Total commercial loans and leases |
| $51,575 |
|
| $2,118 |
|
| $912 |
|
| $283 |
|
| $54,888 |
|
| $54,294 |
|
| $1,597 |
|
| $851 |
|
| $221 |
|
| $56,963 |
|
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | | December 31, 2017 | December 31, 2018 |
| | Criticized | | | Criticized | |
(in millions) | Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
| Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
|
Commercial |
| $35,430 |
|
| $1,143 |
|
| $785 |
|
| $204 |
|
| $37,562 |
|
| $38,600 |
|
| $1,231 |
|
| $828 |
|
| $198 |
|
| $40,857 |
|
Commercial real estate | 10,706 |
| 500 |
| 74 |
| 28 |
| 11,308 |
| 12,523 |
| 412 |
| 82 |
| 6 |
| 13,023 |
|
Leases | 3,069 |
| 73 |
| 19 |
| — |
| 3,161 |
| 2,823 |
| 39 |
| 41 |
| — |
| 2,903 |
|
Total commercial loans and leases |
| $49,205 |
|
| $1,716 |
|
| $878 |
|
| $232 |
|
| $52,031 |
|
| $53,946 |
|
| $1,682 |
|
| $951 |
|
| $204 |
|
| $56,783 |
|
Total commercial criticized loans and leases of $3.3$2.7 billion at June 30, 2018 increased $487 million, or 17%, from2019 were compared to $2.8 billion at December 31, 2017. The increase in2018. Commercial real estate criticized assets is largely focused on general restaurantbalances of $418 million, or 3.2% of the commercial real estate portfolio, decreased from $500 million, or 3.8%, as of December 31, 2018. Commercial real estate accounted for 15.7% of total criticized loans which reflects our prudent approachas of moving loansJune 30, 2019, compared to special mention where they receive heightened monitoring. We believe there are adequate reserves in place and there is not a high loss content in these loans.17.6% as of December 31, 2018.
Retail Loan Asset Quality
For retail loans, we primarily utilize payment and delinquency status to regularly review and monitor credit quality trends. Historical experience indicates that the longer a loan is past due, the greater the likelihood of future credit loss. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-Atlantic and Midwest regions, although we have continued to growlend selectively in areas outside the footprint primarily in the auto finance, education lending and unsecured portfolios.
The credit composition of ourfollowing tables present asset quality metrics for the retail loan portfolio at June 30, 2018 reflected an average FICO score of 763, compared to 762 at December 31, 2017.portfolio:
|
| | | | | |
| June 30, 2019 | | December 31, 2018 |
Average refreshed FICO for total portfolio | 765 |
| | 763 |
|
CLTV ratio for secured real estate(1) | 59 | % | | 58 | % |
Nonperforming retail loans as a percentage of total retail | 0.92 |
| | 1.00 |
|
(1) The real estate secured portfolio CLTV ratio is calculated as the mortgage and second lien loan balance divided by the most recently available value of the property and was 59% for June 30, 2018 and December 31, 2017. Retail net charge-offs of $64 million in second quarter 2018 reflected an increase of $3 million compared to $61 million in second quarter 2017. The annualized net charge-off rate of 0.44% remained stable with second quarter 2017. In first half 2018, retail net charge-offs of $137 million reflected an increase of $8 million compared to first half 2017, reflecting balance growth and seasoning in unsecured retail and education. The annualized net charge-off rate of 0.47% was stable with first half 2017. Nonperforming retail loans as a percentage of total retail loans was 0.97% as of June 30, 2018, compared to 1.03% as of December 31, 2017.
We monitor the potential for increased exposure to credit losses associated with HELOCs that were originated during the period of rapid home price appreciation between 2003 and 2007. Industry-wide, many of the HELOCs originated during this timeframe were structured with an extended interest-only payment period, followed by a requirement to convert to a higher payment amount that would begin fully amortizing both principal and interest, beginning at a certain date in the future. To help manage this potential exposure, in September 2013, we launched a comprehensive program designed to provide heightened customer outreach to inform, educate and assist customers through the reset process as well as to offer alternative financing and forbearance options. Results of this program indicate that our efforts to assist customers at risk of default have successfully reduced delinquency and charge-off rates compared to our original expectations.
The largest retail portfolio subject to payment reset, borrowers ending an interest-only draw period and entering repayment of principal and interest, is the HELOC portfolio. As of June 30, 2018 the HELOC portfolio totaled $13.1 billion, with $335 million scheduled to reach the end of the interest-only draw period and enter repayment of principal and interest for the remainder of 2018, and $2.2 billion scheduled to reach the end of the interest-only draw period and enter repayment of principal and interest between July 1, 2018 and December 31, 2021. The credit composition of the $2.2 billion scheduled to mature between July 1, 2018 and December 31, 2021 is similar to the overall HELOC portfolio, with 52% secured by a first lien, a weighted average FICO score of 761, and a CLTV of 54%, compared to the overall $13.1 billion HELOC portfolio, with 52% secured by a first lien, a weighted average FICO of 767, and a CLTV of 58%. Factors that affect our future expectations for continued relatively low charge-off risk in the face of rising interest rates for the portion of our HELOC portfolio subject to reset in future periods include a relatively high level of first lien collateral positions, improved loan-to-value ratios resulting from continued home price appreciation, relatively stable portfolio credit score profiles and continued robust loss mitigation efforts.
The performances of our historical vintages that have entered repayment remains stable. As of June 30, 2018, for the $1.7 billion of our HELOC portfolio that reached the end of the interest-only draw period and entered repayment of principal and interest during 2014 and 2015, 94% of the balances had been refinanced, paid off orproperty.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
were current on payments, 2% were past due and 4% had been charged off. As |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
(dollars in millions) | 2019 |
| | 2018 |
| | Change |
| | Percent |
| | 2019 |
| | 2018 |
| | Change | | Percent |
|
Net charge-offs |
| $73 |
| |
| $64 |
| |
| $9 |
| | 14 | % | |
| $138 |
| |
| $137 |
| |
| $1 |
| | 1 | % |
Annualized net charge-off rate | 0.49 | % | | 0.44 | % | | 5 | bps | | | 0.47 | % | | 0.47 | % | | — |
| |
Retail net charge-off rate increased to 0.49% for second quarter 2019, an increase of June 30,five basis points from second quarter 2018, driven by continued seasoning in the unsecured portfolios. Retail asset quality was stable with a net charge-off rate of 0.47% for the $738 millionfirst half of our HELOC portfolio that reached the end of the interest-only draw period2019 and entered repayment of principal and interest in 2016, 95% of the balances had been refinanced, paid off or were current on payments, 3% were past due and 2% had been charged off. As of June 30, 2018, for the $730 million of our HELOC portfolio that reached the end of the interest-only draw period and entered repayment of principal and interest in 2017, 95% of the balances had been refinanced, paid off or were current on payments, 4% were past due and 1% had been charged off.2018.
Troubled Debt Restructurings
TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower experiencing financial hardship that we would not otherwise make. TDRs typically result from our loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Our loan modifications are handled on a case by case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our borrower’s financial needs. The types of concessions include interest rate reductions, term extensions, principal forgiveness and other modifications to the structure of the loan that fall outside our lending policy. Depending on the specific facts and circumstances of the customer, restructuring can involve loans moving to nonaccrual, remaining on nonaccrual, or remaining on accrual status.
As of June 30, 2018, $7422019, $686 million of retail loans were classified as TDRs, compared with $761$723 million as of December 31, 2017.2018. As of June 30, 2018, $1862019, $169 million of retail TDRs were in nonaccrual status with 54%49% current with payments, an improvement compared to $211$181 million in nonaccrual status with 51%49% current on payments at December 31, 2017.2018. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated for impairment and loans, once classified as TDRs, remain classified as TDRs until paid off, sold or refinanced at market terms.
For additional information regarding TDRs, see “—Critical Accounting Estimates — Allowance for Credit Losses,” and Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 20172018 and Note 4 “Allowance"Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk”Risk" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.Report.
The following tables present an aging of our retail TDRs:TDRs by loan class, including delinquency status for accruing TDRs and TDRs in nonaccrual:
| | | June 30, 2018 | June 30, 2019 |
(in millions) | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90+ Days Past Due | | Total | |
Recorded Investment: | | | | | | | | | | |
| | | | As a % of Accruing Retail TDRs | | | | |
(dollars in millions) | | Accruing | | 30-89 Days Past Due | | 90+ Days Past Due | | Nonaccruing | | Total |
Residential mortgages |
| $111 |
| |
| $1 |
| |
| $6 |
| |
| $38 |
| |
| $156 |
|
| $103 |
| | 1.0 | % | | 1.5 | % | |
| $44 |
| |
| $147 |
|
Home equity loans | 94 |
| | 1 |
| | 2 |
| | 14 |
| | 111 |
| 75 |
| | 0.5 |
| | — |
| | 21 |
| | 96 |
|
Home equity lines of credit | 170 |
| | 5 |
| | 3 |
| | 24 |
| | 202 |
| 141 |
| | 0.7 |
| | — |
| | 60 |
| | 201 |
|
Home equity loans serviced by others | 41 |
| | 2 |
| | 1 |
| | 2 |
| | 46 |
| 27 |
| | 0.3 |
| | — |
| | 9 |
| | 36 |
|
Home equity lines of credit serviced by others | 8 |
| | — |
| | — |
| | 1 |
| | 9 |
| 3 |
| | — |
| | — |
| | 4 |
| | 7 |
|
Automobile | 21 |
| | 2 |
| | 1 |
| | — |
| | 24 |
| 14 |
| | 0.2 |
| | — |
| | 8 |
| | 22 |
|
Education | 153 |
| | 4 |
| | 2 |
| | 4 |
| | 163 |
| 123 |
| | 0.8 |
| | 0.5 |
| | 21 |
| | 144 |
|
Credit cards | 21 |
| | 1 |
| | 1 |
| | 1 |
| | 24 |
| 25 |
| | 0.5 |
| | — |
| | 2 |
| | 27 |
|
Other retail | 7 |
| | — |
| | — |
| | — |
| | 7 |
| 6 |
| | — |
| | — |
| | — |
| | 6 |
|
Total |
| $626 |
| |
| $16 |
| |
| $16 |
| |
| $84 |
| |
| $742 |
|
| $517 |
| | 4.0 | % | | 2.0 | % | |
| $169 |
| |
| $686 |
|
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | | December 31, 2017 | December 31, 2018 |
(in millions) | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90+ Days Past Due | | Total | |
Recorded Investment: | | | | | | | | | | |
| | | | As a % of Accruing Retail TDRs | | | | |
(dollars in millions) | | Accruing | | 30-89 Days Past Due | | 90+ Days Past Due | | Nonaccruing | | Total |
Residential mortgages |
| $88 |
| |
| $17 |
| |
| $5 |
| |
| $41 |
| |
| $151 |
|
| $111 |
| | 3.0 | % | | 1.6 | % | |
| $44 |
| |
| $155 |
|
Home equity loans | 95 |
| | 7 |
| | 2 |
| | 17 |
| | 121 |
| 85 |
| | 0.7 |
| | — |
| | 25 |
| | 110 |
|
Home equity lines of credit | 158 |
| | 11 |
| | 3 |
| | 25 |
| | 197 |
| 138 |
| | 0.9 |
| | — |
| | 64 |
| | 202 |
|
Home equity loans serviced by others | 45 |
| | 3 |
| | 1 |
| | 2 |
| | 51 |
| 31 |
| | 0.3 |
| | — |
| | 10 |
| | 41 |
|
Home equity lines of credit serviced by others | 8 |
| | — |
| | — |
| | 1 |
| | 9 |
| 3 |
| | — |
| | — |
| | 5 |
| | 8 |
|
Automobile | 19 |
| | 2 |
| | 1 |
| | 1 |
| | 23 |
| 13 |
| | 0.2 |
| | — |
| | 10 |
| | 23 |
|
Education | 163 |
| | 5 |
| | 3 |
| | 4 |
| | 175 |
| 131 |
| | 0.9 |
| | 0.3 |
| | 22 |
| | 153 |
|
Credit cards | 22 |
| | 1 |
| | 1 |
| | 1 |
| | 25 |
| 24 |
| | 0.4 |
| | — |
| | 1 |
| | 25 |
|
Other retail | 9 |
| | — |
| | — |
| | — |
| | 9 |
| 6 |
| | — |
| | — |
| | — |
| | 6 |
|
Total |
| $607 |
| |
| $46 |
| |
| $16 |
| |
| $92 |
| |
| $761 |
|
| $542 |
| | 6.4 | % | | 1.9 | % | |
| $181 |
| |
| $723 |
|
The following tables present the accrual status of our retail TDRs:
|
| | | | | | | | | | | |
| June 30, 2018 |
(in millions) | Accruing | | Nonaccruing | | Total |
Recorded Investment: | | | | | |
Residential mortgages |
| $107 |
| |
| $49 |
| |
| $156 |
|
Home equity loans | 83 |
| | 28 |
| | 111 |
|
Home equity lines of credit | 142 |
| | 60 |
| | 202 |
|
Home equity loans serviced by others | 35 |
| | 11 |
| | 46 |
|
Home equity lines of credit serviced by others | 4 |
| | 5 |
| | 9 |
|
Automobile | 13 |
| | 11 |
| | 24 |
|
Education | 142 |
| | 21 |
| | 163 |
|
Credit cards | 23 |
| | 1 |
| | 24 |
|
Other retail | 7 |
| | — |
| | 7 |
|
Total |
| $556 |
| |
| $186 |
| |
| $742 |
|
|
| | | | | | | | | | | |
| December 31, 2017 |
(in millions) | Accruing | | Nonaccruing | | Total |
Recorded Investment: | | | | | |
Residential mortgages |
| $98 |
| |
| $53 |
| |
| $151 |
|
Home equity loans | 86 |
| | 35 |
| | 121 |
|
Home equity lines of credit | 128 |
| | 69 |
| | 197 |
|
Home equity loans serviced by others | 38 |
| | 13 |
| | 51 |
|
Home equity lines of credit serviced by others | 4 |
| | 5 |
| | 9 |
|
Automobile | 12 |
| | 11 |
| | 23 |
|
Education | 152 |
| | 23 |
| | 175 |
|
Credit cards | 24 |
| | 1 |
| | 25 |
|
Other retail | 8 |
| | 1 |
| | 9 |
|
Total |
| $550 |
| |
| $211 |
| |
| $761 |
|
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Core Assets
The table below presents the composition of our non-core assets:
| | (in millions) | June 30, 2018 | | December 31, 2017 | | Change | | Percent | June 30, 2019 | | December 31, 2018 | | Change | | Percent |
Commercial |
| $63 |
| |
| $56 |
| |
| $7 |
| | 13 | % |
| $8 |
| |
| $72 |
| |
| ($64 | ) | | (89 | %) |
Commercial real estate | 17 |
| | 19 |
| | (2 | ) | | (11 | ) | 12 |
| | 14 |
| | (2 | ) | | (14 | ) |
Leases | 758 |
| | 752 |
| | 6 |
| | 1 |
| 533 |
| | 670 |
| | (137 | ) | | (20 | ) |
Total commercial loans and leases | 838 |
| | 827 |
| | 11 |
| | 1 |
| 553 |
| | 756 |
| | (203 | ) | | (27 | ) |
Residential mortgages | 123 |
| | 136 |
| | (13 | ) | | (10 | ) | 101 |
| | 110 |
| | (9 | ) | | (8 | ) |
Home equity loans | 34 |
| | 40 |
| | (6 | ) | | (15 | ) | 27 |
| | 31 |
| | (4 | ) | | (13 | ) |
Home equity lines of credit | 25 |
| | 30 |
| | (5 | ) | | (17 | ) | 17 |
| | 21 |
| | (4 | ) | | (19 | ) |
Home equity loans serviced by others | 465 |
| | 542 |
| | (77 | ) | | (14 | ) | 348 |
| | 399 |
| | (51 | ) | | (13 | ) |
Home equity lines of credit serviced by others | 124 |
| | 149 |
| | (25 | ) | | (17 | ) | 88 |
| | 104 |
| | (16 | ) | | (15 | ) |
Education | 231 |
| | 254 |
| | (23 | ) | | (9 | ) | 192 |
| | 210 |
| | (18 | ) | | (9 | ) |
Total retail loans | 1,002 |
| | 1,151 |
| | (149 | ) | | (13 | ) | 773 |
| | 875 |
| | (102 | ) | | (12 | ) |
Total non-core loans and leases | 1,840 |
| | 1,978 |
| | (138 | ) | | (7 | ) | 1,326 |
| | 1,631 |
| | (305 | ) | | (19 | ) |
Other assets | 100 |
| | 112 |
| | (12 | ) | | (11 | ) | 79 |
| | 96 |
| | (17 | ) | | (18 | ) |
Total non-core assets |
| $1,940 |
| |
| $2,090 |
| |
| ($150 | ) | | (7 | %) |
| $1,405 |
| |
| $1,727 |
| |
| ($322 | ) | | (19 | %) |
Non-core assets are primarily liquidating loan and lease portfolios inconsistent with our strategic priorities, generally as a result of geographic location, industry, product type or risk level and are included in Other. Non-core assets of $1.9 billion as of June 30, 2018 decreased $150 million, or 7%, from December 31, 2017.
Retail non-core loan balances of $1.0 billion decreased $149 million, or 13%, compared to December 31, 2017. The largest component of our retail non-core portfolio is the home equity serviced by others portfolio (“SBO”), which totaled $589 million as of June 30, 2018, compared to $691 million as of December 31, 2017. The SBO portfolio consists of home equity loans and lines of credit purchased between 2003 and 2007 that were initially serviced by others. We now service about half of this portfolio internally.
The credit profile of the SBO portfolio reflected a weighted-average refreshed FICO score of 711 and CLTV of 80% as of June 30, 2018. The proportion of the portfolio in a second lien position was 97%, with 69% of the portfolio in out-of-footprint geographies. SBO net recoveries of $2 million in second quarter 2018 were flat compared to second quarter 2017.
Commercial non-core loan and lease balances of $838 million increased $11 million, or 1%, from $827 million as of December 31, 2017 due to one short-term restructuring arrangement that is expected to largely pay off in third quarter 2018. The largest component of our commercial non-core portfolio is an aircraft-related lease portfolio tied to legacy Royal Bank of Scotland Group aircraft leasing borrowers, which totaled$758 million and $752 million as of June 30, 2018 and December 31, 2017, respectively.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Deposits
The table below presents the major components of our deposits:
| | (in millions) | June 30, 2018 | | December 31, 2017 | | Change |
| | Percent |
| June 30, 2019 | | December 31, 2018 | | Change |
| | Percent |
|
Demand |
| $29,439 |
| |
| $29,279 |
| |
| $160 |
| | 1 | % |
| $28,192 |
| |
| $29,458 |
| |
| ($1,266 | ) | | (4 | %) |
Checking with interest | 22,775 |
| | 22,229 |
| | 546 |
| | 2 |
| 25,021 |
| | 23,067 |
| | 1,954 |
| | 8 |
|
Regular savings | 9,902 |
| | 9,518 |
| | 384 |
| | 4 |
| 13,495 |
| | 12,007 |
| | 1,488 |
| | 12 |
|
Money market accounts | 36,139 |
| | 37,454 |
| | (1,315 | ) | | (4 | ) | 35,329 |
| | 35,701 |
| | (372 | ) | | (1 | ) |
Term deposits | 18,818 |
| | 16,609 |
| | 2,209 |
| | 13 |
| 21,967 |
| | 19,342 |
| | 2,625 |
| | 14 |
|
Total deposits |
| $117,073 |
| |
| $115,089 |
| |
| $1,984 |
| | 2 | % |
| $124,004 |
| |
| $119,575 |
| |
| $4,429 |
| | 4 | % |
Total deposits as of June 30, 20182019 increased $2.0$4.4 billion, or 2%4%, to $117.1$124.0 billion, from $115.1$119.6 billion as of December 31, 2017, reflecting growth in term2018. Citizens Access®, our digital platform, attracted $5.4 billion of deposits checking with interest, regular savings and demand deposits, partially offset by lower money market accounts. The increase in term deposits is due to increased demand driven by rising interest rates.through second quarter 2019, up from $3.0 billion as of December 31, 2018.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Borrowed Funds
Total borrowed funds as of June 30, 2019 decreased $4.3 billion from December 31, 2018, reflecting a $5.3 billion decrease in long-term FHLB advances given improved funding mix, partially offset by a net $856 million increase in senior debt.
Short-term borrowed funds
A summary of our short-term borrowed funds is presented below: | | (in millions) | June 30, 2018 | | December 31, 2017 | | Change |
| | Percent |
| June 30, 2019 | | December 31, 2018 | | Change |
| | Percent |
|
Federal funds purchased |
| $— |
| |
| $460 |
| |
| ($460 | ) | | (100 | %) |
| $840 |
| |
| $820 |
| |
| $20 |
| | 2 | % |
Securities sold under agreements to repurchase | 326 |
| | 355 |
| | (29 | ) | | (8 | ) | 292 |
| | 336 |
| | (44 | ) | | (13 | ) |
Other short-term borrowed funds (1) | 1,499 |
| | 1,856 |
| | (357 | ) | | (19 | ) | 309 |
| | 161 |
| | 148 |
| | 92 |
|
Total short-term borrowed funds |
| $1,825 |
| |
| $2,671 |
| |
| ($846 | ) | | (32 | %) |
| $1,441 |
| |
| $1,317 |
| |
| $124 |
| | 9 | % |
(1) June 30, 2018 includes $1.5 billion Beginning in the first quarter of debt issued under CBNA’s Global Bank Note Program maturing within one year, with unamortized deferred issuance costs and/or discounts of ($1) million and other basis adjustments of ($10) million. December 31, 2017 includes $750 million of debt issued under CBNA’s Global Bank Note Program maturing within one year, with unamortized deferred issuance costs and/or discounts of ($1) million and other basis adjustments of ($4) million.
Short-term2019, borrowed funds of $1.8 billion as of June 30, 2018, decreased $846 million from December 31, 2017. balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.
The net decreaseincrease in other short-term borrowed funds of $357$148 million resulted from a reduction of $1.1 billionan increase in short-term FHLB advances, partially offset by an increase of $743 million in senior bank debt, issued under CBNA’s Global Note Program, now maturing within one year.advances.
Our advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $10.8$7.4 billion and $9.4$13.0 billion at June 30, 20182019 and December 31, 2017,2018, respectively. Our remaining available FHLB borrowing capacity was $7.0$9.0 billion and $8.0$4.8 billion at June 30, 20182019 and December 31, 2017,2018, respectively. We can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At June 30, 2018,2019, our unused secured borrowing capacity was approximately $39.1$42.8 billion, which included unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Key data related to short-term borrowed funds is presented in the following table:below: | | | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, | | As of and for the Year Ended December 31, | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, | | As of and for the Year Ended December 31, |
(dollars in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | 2017 | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2018 |
Weighted-average interest rate at period-end:(1) | | | | | | | | | | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase | — | % | | — | % | | — | % | | — | % | | 0.74 | % | 1.93 | % | | — | % | | 1.93 | % | | — | % | | 1.72 | % |
Other short-term borrowed funds | 2.41 |
| | 1.31 |
| | 2.41 |
| | 1.31 |
| | 1.72 |
| 2.47 |
| | 3.22 |
| | 2.47 |
| | 3.22 |
| | 2.73 |
|
Maximum amount outstanding at month-end during the period: | | | | | | | | | | |
Maximum amount outstanding at any month-end during the period: | | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase(2) |
| $1,045 |
| |
| $1,075 |
| |
| $1,045 |
| |
| $1,174 |
| |
| $1,174 |
|
| $1,499 |
| |
| $1,045 |
| |
| $1,499 |
| |
| $1,045 |
| |
| $1,282 |
|
Other short-term borrowed funds | 2,247 |
| | 2,507 |
| | 2,247 |
| | 3,508 |
| | 3,508 |
| 508 |
| | 1,110 |
| | 511 |
| | 1,110 |
| | 1,110 |
|
Average amount outstanding during the period: | | | | | | | | | | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase(2) |
| $504 |
| |
| $808 |
| |
| $574 |
| |
| $845 |
| |
| $776 |
|
| $818 |
| |
| $504 |
| |
| $729 |
| |
| $574 |
| |
| $654 |
|
Other short-term borrowed funds | 1,677 |
| | 2,275 |
| | 1,579 |
| | 2,617 |
| | 2,321 |
| 45 |
| | 191 |
| | 52 |
| | 388 |
| | 467 |
|
Weighted-average interest rate during the period:(1) | | | | | | | | | | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase | 0.71 | % | | 0.36 | % | | 0.68 | % | | 0.28 | % | | 0.36 | % | 1.76 | % | | 0.71 | % | | 1.54 | % | | 0.68 | % | | 0.92 | % |
Other short-term borrowed funds | 2.49 |
| | 1.22 |
| | 2.33 |
| | 1.14 |
| | 1.32 |
| 2.66 |
| | 1.90 |
| | 2.71 |
| | 1.73 |
| | 2.10 |
|
(1) Rates exclude certain hedging costs.
(2) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable.
Long-term borrowed funds
A summary of our long-term borrowed funds is presented below: |
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Parent Company: | | | |
2.375% fixed-rate senior unsecured debt, due 2021 |
| $349 |
| |
| $349 |
|
4.150% fixed-rate subordinated debt, due 2022 | 348 |
| | 348 |
|
5.158% fixed-to-floating rate callable subordinated debt, due 2023(1) | — |
| | 333 |
|
3.750% fixed-rate subordinated debt, due 2024 | 250 |
| | 250 |
|
4.023% fixed-rate subordinated debt, due 2024 | 42 |
| | 42 |
|
4.350% fixed-rate subordinated debt, due 2025 | 249 |
| | 249 |
|
4.300% fixed-rate subordinated debt, due 2025 | 749 |
| | 749 |
|
Banking Subsidiaries: | | | |
2.450% senior unsecured notes, due 2019 (2) | 740 |
| | 743 |
|
2.500% senior unsecured notes, due 2019 (2) (3) | — |
| | 741 |
|
2.250% senior unsecured notes, due 2020 (2) | 687 |
| | 692 |
|
Floating-rate senior unsecured notes, due 2020 (2) | 299 |
| | 299 |
|
Floating-rate senior unsecured notes, due 2020 (2) | 250 |
| | 249 |
|
2.200% senior unsecured notes, due 2020 (2) | 499 |
| | 498 |
|
2.250% senior unsecured notes, due 2020 (2) | 732 |
| | 742 |
|
2.550% senior unsecured notes, due 2021 (2) | 951 |
| | 964 |
|
Floating-rate senior unsecured notes, due 2022 (2) | 249 |
| | 249 |
|
2.650% senior unsecured notes, due 2022 (2) | 480 |
| | 491 |
|
3.700% senior unsecured notes, due 2023 (2) | 496 |
| | — |
|
Floating-rate senior unsecured notes, due 2023 (2) | 249 |
| | — |
|
Federal Home Loan advances due through 2038 | 6,010 |
| | 3,761 |
|
Other | 12 |
| | 16 |
|
Total long-term borrowed funds |
| $13,641 |
| |
| $11,765 |
|
(1) Redeemed on June 29, 2018.
(2) Issued under CBNA’s Global Bank Note Program.
(3) Reclassified to short-term borrowed funds.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Long-term borrowed funds
A summary of $13.6 billionour long-term borrowed funds is presented below: |
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Parent Company: | | | |
2.375% fixed-rate senior unsecured debt, due July 2021 |
| $349 |
| |
| $349 |
|
4.150% fixed-rate subordinated debt, due September 2022 | 348 |
| | 348 |
|
3.750% fixed-rate subordinated debt, due July 2024 | 250 |
| | 250 |
|
4.023% fixed-rate subordinated debt, due October 2024 | 42 |
| | 42 |
|
4.350% fixed-rate subordinated debt, due August 2025 | 249 |
| | 249 |
|
4.300% fixed-rate subordinated debt, due December 2025 | 750 |
| | 749 |
|
Banking and Other Subsidiaries: | | | |
2.500% senior unsecured notes, due March 2019 (1) | — |
| | 748 |
|
2.450% senior unsecured notes, due December 2019 (1) | 747 |
| | 744 |
|
2.250% senior unsecured notes, due March 2020 (1) | 698 |
| | 691 |
|
3.060% floating-rate senior unsecured notes, due March 2020 (1) (2) | 300 |
| | 300 |
|
3.091% floating-rate senior unsecured notes, due May 2020 (1) (2) | 250 |
| | 250 |
|
2.200% senior unsecured notes, due May 2020 (1) | 499 |
| | 499 |
|
2.250% senior unsecured notes, due October 2020 (1) | 748 |
| | 738 |
|
2.550% senior unsecured notes, due May 2021 (1) | 986 |
| | 964 |
|
3.250% senior unsecured notes, due February 2022 (1) | 711 |
| | — |
|
3.248% floating-rate senior unsecured notes, due February 2022 (1) (2) | 299 |
| | — |
|
3.331% floating-rate senior unsecured notes, due May 2022 (1) (2) | 250 |
| | 249 |
|
2.650% senior unsecured notes, due May 2022 (1) | 500 |
| | 487 |
|
3.700% senior unsecured notes, due March 2023 (1) | 517 |
| | 502 |
|
3.280% floating-rate senior unsecured notes, due March 2023 (1) (2) | 249 |
| | 249 |
|
3.750% senior unsecured notes, due February 2026 (1) | 521 |
| | — |
|
Federal Home Loan Bank advances, 2.575% weighted average rate, due through 2038 | 2,258 |
| | 7,508 |
|
Other | 17 |
| | 9 |
|
Total long-term borrowed funds (3) |
| $11,538 |
| |
| $15,925 |
|
(1) Issued under CBNA’s Global Bank Note Program.
(2) Rate disclosed reflects the floating rate as of June 30, 2018 increased $1.92019.
(3) Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.
Long-term borrowed funds as of June 30, 2019 decreased $4.4 billion fromDecember 31, 20172018, reflecting an increasea decrease of $2.2$5.3 billion in long-term FHLB borrowings, partially offset by senior unsecured notes issued by CBNA during the redemptionfirst half of $333 million of Parent Company subordinated debt.2019.
The Parent Company’s long-term borrowed funds as of June 30, 20182019 and December 31, 20172018 included principal balances of $2.0 billion for each period, respectively, and $2.3unamortized deferred issuance costs and/or discounts of ($4) million and ($5) million, respectively. The banking and other subsidiaries’ long-term borrowed funds as of June 30, 2019 and December 31, 2018 included principal balances of $9.5 billion and $14.0 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($5) million in each period. The banking subsidiaries’ long-term borrowed funds as of June 30, 2018 and December 31, 2017 include principal balances of $11.8 billion and $9.5 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($18)17) million and ($19)14) million, respectively, and hedging basis adjustments of ($100)$43 million and ($63)66) million, respectively. See Note 8 “Derivatives”9 "Derivatives" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report for further information about our hedging of certain long-term borrowed funds.
On June 29, 2018, the Parent Company redeemed $333 million of its 5.158% fixed-to-floating rate callable subordinated debt due 2023.
CAPITAL AND REGULATORY MATTERS
As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our primary subsidiaries are our two insured depository institutions,banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the OCC, and CBPA, a Pennsylvania-charted savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the FDIC, its primary federal regulator.OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. The current operating environment reflects heightened regulatory expectations around many regulations including consumer compliance, the Bank Secrecy Act, anti-money laundering compliance,
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
and increased internal audit activities. For more information, see “Regulation and Supervision” in Part I, Item 1 — Business included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
On July 3, 2018, we received regulatory approval from the OCC to consolidate our banking subsidiaries via a merger of CBPA into CBNA. We intend to consolidate our banking subsidiaries in January 2019 to streamline governance and enterprise risk management, improve the risk profile and gain operational efficiencies.
Dodd-Frank regulationAct
UnderThe Dodd-Frank Act regulates many aspects of the Dodd-Frankfinancial services industry and addresses among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, derivatives and securities markets, restrictions on an insured bank’s transactions with its affiliates, lending limits and mortgage lending practices.
In light of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) amendments to the Dodd Frank Act and subsequent tailoring Notices of Proposed Rulemaking, the FRB provided us relief in a February 5, 2019 letter from all regulatory requirements, including disclosure requirements, related to supervisory stress testing and company-run stress testing for the 2019 stress test cycle and provided related relief from certain capital planning and regulatory reporting requirements that would otherwise apply in the 2019 stress test cycle. In addition, we mustwere not required to submit oura capital plan to the FRB for 2019 or participate in the 2019 CCAR. We remain subject to the requirement to develop and maintain an annual capital plan that is reviewed and approved by our Board of Directors (or one of its committees) and the results of our annual company-run stress tests to the FRB by April 5th of each year and disclose certain results within 15 days after the FRB discloses the results of its supervisory-run tests. We publish estimated DFAST results under the supervisory severely adverse scenario on our regulatory filings and disclosures page on our Investor Relations website at http://investor.citizensbank.com. On April 5, 2018, we submitted our 2018 Capital Plan, Capital Policy and annual stress test results to the FRB as part of the 2018 CCAR process. On June 28, 2018, the FRB announced that it didhas not objectobjected to our 2018 Capital Plan or to our proposedmaximum planned capital actions for the period beginning July 1, 20182019 and ending June 30, 2019. Our2020. During this four-quarter period ending June 30, 2020, the FRB has not objected to capital distributions up to the amount that would have allowed us to remain above all minimum capital requirements in 2018 Capital Plan includes an increaseCCAR, adjusted for any changes in our quarterly common dividendregulatory capital ratios since the FRB acted on our 2018 capital plan.
Under Section 165 of the Dodd-Frank Act, as amended by EGRRCPA, a bank holding company with total consolidated assets of $100 billion or more, such as us, must currently submit a periodic resolution plan to the FRB and FDIC providing for the company’s strategy for rapid and orderly resolution in the event of its material financial distress or failure. On May 14, 2019, the FRB and the FDIC published a joint Notice of Proposed Rulemaking to modify the Resolution Plan Rule that would, among other things, adjust the scope of application, submission timeframe, and plan content requirements. Until the FRB and FDIC adopt the proposal in the form of a final rule, the current Resolution Plan Rule continues to apply, including the next submission date, which is December 31, 2019 for us. However, on July 26, 2019, the FRB and FDIC jointly announced the extension of the next resolution plan submission date for 15 domestic banks, including us, from $0.22December 31, 2019, to $0.27 per shareJuly 1, 2021, or such other date that may be specified when the FRB and FDIC adopt the final rule.
Under the Federal Deposit Insurance Act, the FDIC has separately implemented a resolution planning rule that currently requires insured depository institutions of $50 billion or more in third quarter 2018, withtotal assets, such as CBNA, to periodically submit a resolution plan. CBNA submitted its most recent resolution plan to the potentialFDIC in July 2018. On April 22, 2019, the FDIC published an Advance Notice of Proposed Rulemaking concerning how to raise quarterly common dividendstailor and improve its rule requiring certain insured depository institutions to $0.32 per share beginning insubmit resolution plans.
On June 27, 2019, andour Board of Directors authorized common share repurchases of up to $1.02$1.275 billion through second quarterover the four-quarter period beginning July 1, 2019. The timing and exact amount of future dividends and share repurchases will depend on various factors, including capital position, financial performance and market conditions.
The Dodd-Frank Act also requires eachFor additional discussion of our bank subsidiaries to conduct stress tests on an annual basis and to disclose the stress test results. CBNA submitted its 2018 annual stress tests to the OCC on April 5, 2018 and published, on our Investor Relations website referenced above, a summary of those results along with the stress test results of the Parent Company on June 21, 2018. Given the amendments to the Dodd-Frank Act enactedand EGRRCPA requirements and their related application, see “Regulation and Supervision” in Part 1, Item 1 - Business and “—Capital and Regulatory Matters” to the audited Consolidated Financial Statements in our Annual Report on May 24, 2018 byForm 10-K for the Economic Growth, Regulatory Relief,year ended December 31, 2018.
Capital Framework
Under the current U.S. Basel III capital framework, we and Consumer Protection Act,our banking subsidiary must meet the federal banking agencies have announced that they would extend the deadlines for DFAST stress testingfollowing specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and reporting requirements for depository institutions with total consolidated assetstier 1 leverage ratio of less than $100 billion, including CBPA, until November 25,4.0%.
In July 2019, at which point a statutory exemption for those depository institutions will be in effect.
Similarly, we are required to submit the results of our mid-cycle company-run DFAST stress tests by October 5th of each year to the FRB and disclose the summary resultsother federal banking regulators jointly announced the finalization of our internally developed stress tests undera proposal to simplify regulatory capital treatment for MSRs, certain deferred tax assets arising from temporary differences (“DTAs”) and investments in the internally developed severely adverse scenario between October 5thcapital of unconsolidated financial institutions, pursuant to EGRRCPA. Effective for us on April 1, 2020, the final rule will result in a change to the individual CET1 deduction threshold for these assets from 10% to 25%, elimination of the aggregate deduction threshold for these assets of 15%, assignment of a 250% risk weight for any MSRs or DTAs not deducted from CET1 capital, and November 4th. We submittedassignment of an exposure category risk weight for investments in the resultscapital of unconsolidated financial institutions not deducted from CET1 capital.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
our 2017 mid-cycle stress test to the FRB on October 3, 2017 and disclosed a summary of the results on October 5, 2017. We publish these company-run estimated impacts of stress on our Investor Relations website referenced above.
Capital Framework
Under the U.S. Basel III capital framework, we and our banking subsidiaries must meet specific minimum requirements for the following ratios: common equity tier 1 capital, tier 1 capital, total capital, and tier 1 leverage.
The U.S. adoption of the Basel III Standardized approach by the Federal bank regulators became effective for CFG, CBNA and CBPA, on January 1, 2015 subject to a phase-in period for certain provisions. In November 2017, the federal banking regulators issued a final rule that extended the 2017 transitions for certain U.S. Basel III capital rules for non-advanced approaches banking organizations, such as us. Effective January 1, 2018, the final rule retains the 2017 U.S. Basel III transitional treatment of certain DTAs, mortgage servicing assets, investments in non-consolidated financial entities and minority interests. As a result, effective January 1, 2018, our mortgage servicing assets retain their 2017 risk weight treatment until the federal banking regulators revise the extended transitional treatment under the November 2017 final rule, which may occur in connection with the finalization of the related September 2017 proposal to simplify the capital treatment of certain DTAs, mortgage servicing assets, investments in non-consolidated financial entities and minority interests.
The current U.S. Basel III rules also impose aA capital conservation buffer (“CCB”) is imposed on top of the following three minimum risk-based capital ratios: CET1 capital, of 4.5%, tier 1 capital of 6.0%, and total capitalcapital. As of 8.0%. The implementation ofJanuary 1, 2019, the CCB began on January 1, 2016 at the 0.625% level and increases by 0.625% on each subsequent January 1, until the buffer reachesreached its fully phased-in level of 2.5% on January 1, 2019. As such,. On April 10, 2018, the FRB issued a proposal designed to create a single, integrated capital requirement by combining the quantitative assessment of firms’ capital plans with the CCB for 2018 increased to 1.875% on January 1, 2018. Banking institutions forrequirement. If adopted, the proposal would change the way in which any risk-basedthe minimum risk capital ratio falls below its effective minimum (required minimum plusratios are calculated by replacing the applicable CCB) will be subject to constraints oncurrent static 2.5% CCB with a stress capital distributions, including dividends, repurchases and certain executive compensation based on the amountbuffer requirement.
For additional discussion of the shortfall.
U.S. Basel III capital framework and its related application, see “Regulation and Supervision” in Part 1, Item 1 - Business included in our Annual Report on Form 10-K for the year ended December 31, 2018. The table below presents our actual regulatory capital ratios under the U.S. Basel III Standardized rules:
| | | Actual | Required Minimum plus Required CCB for Non-Leverage Ratios(5)(6) | FDIA Required Well-Capitalized Minimum for Purposes of Prompt Corrective Action(7) | Actual | Required Minimum plus Required CCB for Non-Leverage Ratios(1)(2) |
(in millions, except ratio data) | Amount | Ratio | Amount | Ratio |
June 30, 2018 | |
Common equity tier 1 capital(1) |
| $14,604 |
| 11.2 | % | 6.4 | % | 6.5 | % | |
June 30, 2019 | | June 30, 2019 |
CET1 capital | |
| $14,629 |
| 10.5 | % | 7.0 | % |
Tier 1 capital(2) | 15,147 |
| 11.6 |
| 7.9 |
| 8.0 |
| 15,762 |
| 11.3 |
| 8.5 |
|
Total capital(3) | 18,056 |
| 13.8 |
| 9.9 |
| 10.0 |
| 18,582 |
| 13.4 |
| 10.5 |
|
Tier 1 leverage(4) | 15,147 |
| 10.2 |
| 4.0 |
| 5.0 |
| 15,762 |
| 10.1 |
| 4.0 |
|
Risk-weighted assets | 130,621 |
| | 138,879 |
| |
Quarterly adjusted average assets | 148,341 |
| | 155,956 |
| |
December 31, 2017 | |
Common equity tier 1 capital(1) |
| $14,309 |
| 11.2 | % | 5.8 | % | 6.5 | % | |
December 31, 2018 | | December 31, 2018 |
CET1 capital | |
| $14,485 |
| 10.6 | % | 6.4 | % |
Tier 1 capital(2) | 14,556 |
| 11.4 |
| 7.3 |
| 8.0 |
| 15,325 |
| 11.3 |
| 7.9 |
|
Total capital(3) | 17,781 |
| 13.9 |
| 9.3 |
| 10.0 |
| 18,157 |
| 13.3 |
| 9.9 |
|
Tier 1 leverage(4) | 14,556 |
| 10.0 |
| 4.0 |
| 5.0 |
| 15,325 |
| 10.0 |
| 4.0 |
|
Risk-weighted assets | 127,692 |
| | 136,202 |
| |
Quarterly adjusted average assets | 145,601 |
| | 153,026 |
| |
(1) “Common equity tier 1 capital ratio” is CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(2) “Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(3) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(4) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.
(5) Required “Minimum Capital ratio” for 20182019 and 20172018 are: Common equity tier 1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%.
(6)(2) “Minimum Capital ratio” includes capital conservation buffer of 2.500% for Transitional Basel III of2019 and 1.875% for 2018 and 1.250% for 2017;2018; N/A to Tier 1 leverage.
(7) Presented for informational purposes. Prompt corrective action provisions apply only to insured depository institutions, CBNA and CBPA.
At June 30, 2018,2019, our CET1 capital, tier 1 capital and total capital ratios were 11.2%10.5%, 11.6%11.3% and 13.8%13.4%, respectively, as compared with with 11.2%10.6%, 11.4%11.3%, and13.9%13.3%, respectively, as of December 31, 2017.2018. The CET1 capital ratio remained stabledecreased as $2.7 billion of risk-weighted asset (“RWA”) growth, the impact of the capital actions described in “—Capital Transactions” below, and an increase in goodwill and intangibles related to Acquisitions, were partially offset by net income for the six months ended June 30, 2018 was offset by risk-weighted asset growth and our 2017 Capital Plan actions over the period, which included common dividends of $215 million, preferred dividends of $7 million and the repurchase of $325 million of our outstanding common stock.2019. The tier 1 capital ratio
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
increased due toas the issuance of preferred stock. The totalchanges in the CET1 capital ratio decreased aswere more than offset by the issuance of preferred stock was more than offset byas described further in “—Capital Transactions” below. The total capital ratio increased due to the redemption of subordinated debt.changes in CET1 and tier 1 capital ratios. At June 30, 2018,2019, our CET1 capital, tier 1 capital and total capital ratios were 418353 basis points, 310285 basis points and 332288 basis points, respectively, above their regulatory minimums plus the fully phased-in capital conservation buffer. All ratios remained well above the U.S. Basel III minima.
Regulatory Capital Ratios and Capital Composition
CET1 capital under U.S. Basel III Standardized rules totaled $14.6 billion at June 30, 2018,2019, and increased $295$144 million from $14.3$14.5 billion at December 31, 2017,2018, as net income for the six months ended June 30, 20182019 was partially offset by the impact of common share repurchases, dividends and dividend payments over the period.an increase in goodwill and intangibles related to Acquisitions. Tier 1 capital at June 30, 20182019 totaled $15.1$15.8 billion, reflecting a $591$437 million increase from $14.6$15.3 billion at December 31, 2017,2018, driven by the changes in CET1 capital noted above and the issuance of preferred stock. At June 30, 2018,2019, we had $543 million$1.1 billion of fixed-to-floating non-cumulative perpetual preferred stock issued and outstanding, an increase of $296$293 million from $247$840 million at December 31, 2017, as we issued2018, given the first quarter 2019 issuance of 300,000 shares of Series BD Preferred Stock that qualified as additional tier 1 capital. Total capital of $18.1$18.6 billion at June 30, 2018,2019, increased $275$425 million from December 31, 2017,2018, driven by the changes in CET1 capital noted above and the issuance of preferred stock, partially offset by the redemption of subordinated debt.tier 1 capital.
Risk-weighted assets (“RWA”)RWA totaled $130.6$138.9 billion at June 30, 2018,2019, based on U.S. Basel III Standardized rules, up $2.9$2.7 billion from December 31, 2017. This2018. The increase was driven by loans held for sale, the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842), higher derivative valuations, and growth in commercialmulti-family and education loans and commitments, as well as growth in the residential mortgage, education and unsecured retail portfolios. Thesecommercial commitments. The increases were partially offset by a decrease in commercial loans and run-off in the auto and home equity portfolios.portfolio.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
As of June 30, 2018,2019, the tier 1 leverage ratio was 10.2%10.1%, reflecting an increase of 2110 basis points from 10.0% at December 31, 2017 due to2018. The increase was driven by the increasechange in tier 1 capital level noted above, partially offset by a $2.7$2.9 billion increase in quarterly adjusted average assets.
The following table presents our capital composition under the U.S. Basel III capital framework:
| | (in millions) | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
Total common stockholders’ equity |
| $19,924 |
| |
| $20,023 |
|
| $20,884 |
| |
| $19,977 |
|
Exclusions:(1) | | | | | | |
Net unrealized losses recorded in accumulated other comprehensive income, net of tax: | | | | | | |
Debt and equity securities | 575 |
| | 236 |
| 25 |
| | 490 |
|
Derivatives | 200 |
| | 143 |
| 6 |
| | 143 |
|
Unamortized net periodic benefit costs | 435 |
| | 441 |
| 457 |
| | 463 |
|
Deductions: | | | | | | |
Goodwill | (6,887 | ) | | (6,887 | ) | (7,040 | ) | | (6,923 | ) |
Deferred tax liability associated with goodwill | 359 |
| | 355 |
| 371 |
| | 366 |
|
Other intangible assets | (2 | ) | | (2 | ) | (74 | ) | | (31 | ) |
Total common equity tier 1 | 14,604 |
| | 14,309 |
| 14,629 |
| | 14,485 |
|
Qualifying preferred stock | 543 |
| | 247 |
| 1,133 |
| | 840 |
|
Total tier 1 capital | 15,147 |
| | 14,556 |
| 15,762 |
| | 15,325 |
|
Qualifying subordinated debt(2) | 1,568 |
| | 1,901 |
| 1,500 |
| | 1,499 |
|
Allowance for loan and lease losses | 1,253 |
| | 1,236 |
| 1,227 |
| | 1,242 |
|
Allowance for credit losses for off-balance sheet exposure | 88 |
| | 88 |
| 93 |
| | 91 |
|
Total capital |
| $18,056 |
| |
| $17,781 |
|
| $18,582 |
| |
| $18,157 |
|
(1) As a U.S. Basel III Standardized approach institution, we selected the one-time election to opt-out of the requirements to include all the components of AOCI.
(2) As of June 30, 20182019 and December 31, 2017,2018, the amount of non-qualifying subordinated debt excluded from regulatory capital was $70$139 million.
Capital Adequacy Process
Our assessment of capital adequacy begins with our risk appetite and risk management framework. This framework provides for the identification, measurement and management of material risks. Capital requirements are determined for actual and forecasted risk portfolios using applicable regulatory capital methodologies. The assessment also considers the possible impacts of approved and proposedThere have been no significant changes to regulatory capital requirements. Key analytical frameworks including stress testing, which enable the assessment ofour capital adequacy versus unexpected loss under a variety of stress scenarios, supplement our base case forecast. A robust governance
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
risk appetite and risk management framework supports our capital planning process. This process includes capital management policiesas described in “—Capital and procedures that document capital adequacy metrics and limits, as well as our comprehensive capital contingency plan and the active engagement of both the legal entity boards and senior management in oversight and decision making.
Forward-looking assessments of capital adequacy feed development of a single capital plan covering us and our banking subsidiaries that is submittedRegulatory Matters” to the FRB and toaudited Consolidated Financial Statements in our Annual Report on Form 10-K for the bank regulators. We prepare this plan in full compliance with the FRB’s Capital Plan Rule and we participate annually in the FRB’s horizontal capital review (“HCR”), which is the FRB’s assessment of specific capital planning areas as part of their normal supervisory process. In addition to the stress test requirements under CCAR, we also perform semi-annual company-run stress tests required by the Dodd-Frank Act.
All distributions proposed under our Capital Plan are subject to consideration and approval by our Board of Directors prior to execution. The timing and exact amount of future dividends and share repurchases will depend on various factors, including our capital position, financial performance and market conditions.year ended December 31, 2018.
Capital Transactions
The following capital actions were completed by the Company during the six months ended June 30, 2018:2019:
Declared and paid quarterly common stock dividendsIssued $300 million, or 300,000 shares, of $0.226.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock (the “Series D Preferred Stock”), par value of $25.00 per share for first and second quarter 2018, aggregating to common stock dividend paymentswith a liquidation preference of $215$1,000 per share, with net proceeds of $292 million;
| |
• | Declared quarterly common stock dividends of $0.32 per share for first and second quarters of 2019, aggregating to $297 million; |
Declared and paid a semi-annual dividend of $27.50 per share on the 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock, aggregating to $7 millionmillion;
Declared a semi-annual dividend of $30.00 per share on April 6, 2018;
Issued 300,000 shares, ofthe 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, (the “Series B Preferred Stock”), par valueaggregating to $9 million;
Declared quarterly dividends of $25.00$15.94 per share with a liquidation preferencefor the first and second quarters of $1,0002019 on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $9 million;
Declared quarterly dividends of $11.82 per share with net proceedsfor the first quarter of $2962019 and $15.88 per share for the second quarter of 2019 on the 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, aggregating to $8 million; and
Repurchased $325$320 million of our outstanding common stock; and
stock.Redeemed $333 million of our 5.158% fixed-to-floating rate callable subordinated debt due June 29, 2023.
Banking Subsidiaries’ Capital
The following table presents our banking subsidiaries’ capital ratios under U.S. Basel III Standardized rules:
|
| | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(dollars in millions, except ratio data) | Amount |
| Ratio |
| | Amount |
| Ratio |
|
Citizens Bank, National Association | | | | | |
Common equity tier 1 capital(1) |
| $11,899 |
| 11.0 | % | |
| $11,917 |
| 11.4 | % |
Tier 1 capital (2) | 11,899 |
| 11.0 |
| | 11,917 |
| 11.4 |
|
Total capital(3) | 14,142 |
| 13.1 |
| | 14,127 |
| 13.5 |
|
Tier 1 leverage(4) | 11,899 |
| 10.1 |
| | 11,917 |
| 10.3 |
|
Risk-weighted assets | 107,829 |
| | | 104,767 |
| |
Quarterly adjusted average assets | 117,457 |
| | | 115,291 |
| |
| | | | | |
Citizens Bank of Pennsylvania | | | | | |
Common equity tier 1 capital(1) |
| $2,990 |
| 12.8 | % | |
| $3,045 |
| 12.9 | % |
Tier 1 capital (2) | 2,990 |
| 12.8 |
| | 3,045 |
| 12.9 |
|
Total capital(3) | 3,213 |
| 13.7 |
| | 3,284 |
| 13.9 |
|
Tier 1 leverage(4) | 2,990 |
| 8.5 |
| | 3,045 |
| 8.7 |
|
Risk-weighted assets | 23,388 |
| | | 23,659 |
| |
Quarterly adjusted average assets | 35,044 |
| | | 34,821 |
| |
(1) “Common equity tier 1 capital ratio” is CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(2) “Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(3) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(4) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
CBNABanking Subsidiary Capital
The following table presents our banking subsidiary’s capital ratios under U.S. Basel III Standardized rules:
|
| | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(dollars in millions, except ratio data) | Amount |
| Ratio |
| | Amount |
| Ratio |
|
Citizens Bank, National Association | | | | | |
CET1 capital |
| $15,166 |
| 10.9 | % | |
| $11,994 |
| 10.6 | % |
Tier 1 capital | 15,166 |
| 10.9 |
| | 11,994 |
| 10.6 |
|
Total capital | 17,611 |
| 12.7 |
| | 14,252 |
| 12.5 |
|
Tier 1 leverage | 15,166 |
| 9.7 |
| | 11,994 |
| 9.9 |
|
Risk-weighted assets | 138,569 |
| | | 113,610 |
| |
Quarterly adjusted average assets | 155,590 |
| | | 121,686 |
| |
CBNA’s CET1 capital totaled $11.9$15.2 billion at June 30, 2018, down $18 million2019, up $3.2 billion from $11.9$12.0 billion at December 31, 2017, reflecting2018. The increase was primarily driven by the net impact of dividend payments,the merger of Citizens Bank of Pennsylvania (“CBPA”) into CBNA effective January 2, 2019, and net income for the six months ended June 30, 2019. The increase was partially offset by net income. At June 30, 2018, CBNA held minimal additional tier 1 capital.dividend payments to the Parent Company and an increase in goodwill and intangibles related to Acquisitions. Total capital was $14.1$17.6 billion at June 30, 2018,2019, an increase of $15 million$3.4 billion from $14.1$14.3 billionatDecember 31, 2017, primarily2018, driven by the increase in the allowance for credit losses, partially offset by the decreasechange in CET1 capital noted above.and an increase in ACL, primarily attributable to the merger.
CBNA hadCBNA’s RWA of $107.8totaled $138.6 billion at June 30, 2018,2019, an increase of $3.1$25.0 billion from December 31, 2017,2018, driven by approximately $22 billion resulting from the merger of CBPA into CBNA. In addition, the increase in RWA was driven by loans held for sale, the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842), higher derivative valuations and growth in commercialmultifamily loans, education loans and commitments, as well as growth in the residential mortgage, education and unsecured retail portfolios. Thesecommercial commitments. The increases were partially offset by a decrease in commercial loans and run-off in the auto and home equity portfoliosportfolio.
As of June 30, 2018, the CBNA2019, CBNA’s tier 1 leverage ratio decreased 2111 basis points to 10.1%9.7% from 10.3% as of9.9% at December 31, 2017,2018, primarily driven by a $2.2$33.9 billion increase in quarterly adjusted average assets that drove a 19240 basis point decline in the ratio, as well as a two basis point decrease from lower CET1 capital described above.
CBPA CET1 capital totaled $3.0 billion at June 30, 2018, a decrease of $55 million from December 31, 2017, as dividend payments exceeded net income. At June 30, 2018, there was no additional tier 1 capital. Total capital was $3.2 billion at June 30, 2018, a decrease of $71 million from December 31, 2017, driven by the decrease in CET1 capital noted above, and a decrease in the allowance for credit losses.
CBPA had RWA of $23.4 billion at June 30, 2018, a decrease of $271 million from December 31, 2017, driven by decreases in the auto, education and home equity portfolios. These decreases were partially offset by increasesa $3.2 billion increase in commercial loans and mortgage backed securities.
As of June 30, 2018, the CBPA tier 1 leverage ratio decreased 21 basis points to 8.5% from 8.7% as of December 31, 2017, driven by a 15 basis point decrease from lower CET1 capital described above, and a $223 million increase in quarterly adjusted average assets that drove a six229 basis point decreaseincrease in the ratio. These movements were primarily attributable to the merger of CBPA into CBNA.
LIQUIDITY
Liquidity is defined as our ability to meet our cash-flow and collateral obligations in a timely manner, at a reasonable cost. An institution must maintain operating liquidity to meet its expected daily and forecasted cash-flow requirements, as well as contingent liquidity to meet unexpected (stress scenario) funding requirements. As noted earlier, reflecting the importance of meeting all unexpected and stress-scenario funding requirements, we identify and manage contingent liquidity (consisting of cash balances at the FRB, unencumbered high-quality and liquid securities, and unused FHLB borrowing capacity). Separately, we also identify and manage asset liquidity as a subset of contingent liquidity (consisting of cash balances at the FRB and unencumbered high-quality securities). We consider the effective and prudent management of liquidity to be fundamental to our health and strength.
We manage liquidity at the consolidated enterprise level and at each material legal entity, including at the Parent Company and CBNA and CBPA.level.
Parent Company Liquidity
Our Parent Company’s primary sources of cash are (i) dividends and interest received from our banking subsidiariesCBNA as a result of investing in bank equity and subordinated debt;debt and (ii) externally issued preferred stock and senior and subordinated debt. Uses of cash include the following: (i) routine cash flow requirements as a bank holding company, including periodic share repurchases and payments of dividends, interest and expenses; (ii) needs of subsidiaries, including banking subsidiaries,CBNA, for additional equity and, as required, their needsits need for debt financing; and (iii) support for extraordinary funding requirements when necessary. To the extent that the Parent Company has relied on wholesale borrowings, uses also include payments of related principal and interest.
On May 24, 2018,January 29, 2019, the Parent Company issued $300 million, or 300,00012,000,000 depositary shares, each representing a 1/40th interest in a share of 6.000%its 6.350% fixed-to-floating rate non-cumulative perpetual Series BD Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share.share (equivalent to $25
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
per depositary share). For further discussion,information, see Note 10 “Stockholders’ Equity”11 "Stockholders’ Equity" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.Report.
On June 29, 2018,July 25, 2019, the Parent Company redeemed $333issued $500 million of its 5.158% fixed-to-floating rate callable subordinated debt due June 29, 2023.in seven-year 2.850% fixed-rate senior notes.
During the three months ended June 30, 20182019 and 2017,2018, the Parent Company declared and paid dividends on common stock of $148 million and $107 million, and $71 million, respectively. During the three months ended June 30, 2019, the Parent Company declared dividends on preferred stock of $18 million. No dividends were declared on preferred stock during the three months ended June 30, 2018. During the six months ended June 30, 20182019 and 2017,2018, the Parent Company declared and paid dividends on common stock of $215$297 million and $143$215 million, respectively, and declared and paid semi-annualdividends on preferred dividendsstock of $33 million and $7 million, for both periods.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
respectively.
During three months ended June 30, 20182019 and 2017,2018, the Parent Company repurchased $150$120 million and $130$150 million of its outstanding common stock, respectively. During the six months ended June 30, 20182019 and 2017,2018, the Parent Company repurchased $325$320 million and $260$325 million of its outstanding common stock, respectively.
Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $809 million$1.2 billion as of June 30, 20182019 compared with $443$911 million as of December 31, 2017.2018. The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At June 30, 2018,2019, the Parent Company’s double-leverage ratio was 99.5%97.9%.
Banking Subsidiaries’CBNA Liquidity
In the ordinary course of business, the liquidity of CBNA and CBPA is managed by matching sources and uses of cash. The primary sources of bank liquidity include (i) deposits from our consumer and commercial customers; (ii) payments of principal and interest on loans and debt securities; and (iii) wholesale borrowings, as needed, and as described under “—Liquidity Risk Management and Governance.” The primary uses of bank liquidity include (i) withdrawals and maturities of deposits; (ii) payment of interest on deposits; (iii) funding of loans and related commitments; and (iv) funding of securities purchases. To the extent that the banks haveCBNA has relied on wholesale borrowings, uses also include payments of related principal and interest. For further information on CBNA’s outstanding debt, see Note 8 "Borrowed Funds" to our Consolidated Financial Statements in Part I, Item 1—Financial Statements and Supplementary Data, of this Report.
Our banking subsidiaries’As CBNA’s major businesses involve taking deposits and making loans. Hence,loans, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and for loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary.
On March 29, 2018,February 14, 2019, CBNA issued $750 million$1.5 billion in five-year senior notes, consisting of $700 million in three-year fixed-rate notes, $300 million in three-year floating-rate notes, and $500 million in seven-year fixed-rate notes and $250 million in floating-rate notes.
Liquidity Risk
We define liquidity risk as the risk that an entity will be unable to meet its payment obligations in a timely manner, at a reasonable cost. Liquidity risk can arise due to contingent liquidity risk and/or funding liquidity risk.
Contingent liquidity risk is the risk that market conditions may reduce an entity’s ability to liquidate, pledge and/or finance certain assets and thereby substantially reduce the liquidity value of such assets. Drivers of contingent liquidity risk include general market disruptions as well as specific issues regarding the credit quality and/or valuation of a security or loan, issuer or borrower and/or asset class.
Funding liquidity risk is the risk that market conditions and/or entity-specific events may reduce an entity’s ability to raise funds from depositors and/or wholesale market counterparties. Drivers of funding liquidity risk may be idiosyncratic or systemic, reflecting impediments to operations and/or damaged market confidence.
Factors Affecting Liquidity
Given the composition of their assets and borrowing sources, contingent liquidity risk at both CBNA and CBPA would be materially affected by such events as deterioration of financing markets for high-quality securities (e.g., mortgage-backed securities and other instruments issued by the GNMA, FNMA and the FHLMC), by any inability of the FHLBs to provide collateralized advances and/or by a refusal of the FRB to act as lender of last resort in systemic stress.
Similarly, given the structure of theirits balance sheets,sheet, the funding liquidity risk of CBNA and CBPA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both (e.g., the financial crisis of 2008-2010). However, during the financial crisis, our banking subsidiaries reduced their dependence on unsecured wholesale funding to virtually zero.both. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our contingent liquidity risk and our funding liquidity risk to be relatively modest.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
An additional variable affecting our access and the access of our banking subsidiaries, to unsecured wholesale market funds and to large denomination (i.e., uninsured) customer deposits is the credit ratings assigned by such agencies as Moody’s, Standard & Poor’s and Fitch. The following table presents our credit ratings:
|
| | | | | | |
| | June 30, 20182019 |
| | Moody’s | | Standard and Poor’s | | Fitch |
|
| Citizens Financial Group, Inc.: | | | | | |
| Long-term issuer | NR | | BBB+ | | BBB+ |
| Short-term issuer | NR | | A-2 | | F2 |
| Subordinated debt | NR | | BBB | | BBB |
| Preferred Stock | NR | | BB+ | | BB- |
| Citizens Bank, National Association: | | | | | |
| Long-term issuer | Baa1 | | A- | | BBB+ |
| Short-term issuer | NR | | A-2 | | F2 |
| Long-term deposits | A1 | | NR | | A- |
| Short-term deposits | P-1 | | NR | | F2 |
| Citizens Bank of Pennsylvania: | | | | | |
| Long-term issuer | Baa1 | | A- | | BBB+ |
| Short-term issuer | NR | | A-2 | | F2 |
| Long-term deposits | A1 | | NR | | A- |
| Short-term deposits | P-1 | | NR | | F2 |
| NR = Not rated | | | | | |
On July 31, 2019, Fitch announced an upgrade to CFG’s short-term issuer default rating from F2 to F1, an upgrade to CBNA’s short-term issuer default rating from F2 to F1, and an upgrade to CBNA’s short-term deposit rating from F2 to F1.
Changes in our public credit ratings could affect both the cost and availability of our wholesale funding. As a result, and in order to maintain a conservative funding profile, our banking subsidiaries continuesubsidiary continues to minimize reliance on unsecured wholesale funding. At June 30, 2018,2019, our wholesale funding consisted primarily of secured borrowings from the FHLBs collateralized by high-quality residential mortgages, and term debt issued by the Parent Company and CBNA.
Existing and evolving regulatory liquidity requirements, such as the LCR, and NSFR, represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB, the OCC, and the FDIC regularly evaluate our liquidity as part of the overall supervisory process. In addition we are subject to existing and evolving regulatory liquidity requirements, some of which are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. For further discussion, see “Regulation and Supervision — Financial Regulatory Reform” and “—Liquidity Requirements” in Part I, Item 1 — Business, of our Annual Report on Form 10-K for the year ended December 31, 2018.
The LCR was developed to ensure banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. In September 2014, the U.S. federal banking regulators published the final rule to implement the LCR. This rule also introduced a modified version of the LCR in the U.S., which generally applies to bank holding companies not active internationally (institutions with less than $10 billion of on-balance sheet foreign exposure), with total assets of greater than $50 billion but less than $250 billion. Under this definition weWe are designated as a modified LCR financial institution under the final rule published by U.S. federal banking regulators and were compliant beginning in January 2017. Achieving sustainable LCR compliance may require changes in the size and/or composition of our investment portfolio, the configuration of our discretionary wholesale funding portfolio, and our average cash position. We remain fully compliant with the LCR as of June 30, 2018.2019.
The U.S. federal bank regulatory agencies have issued a notice of proposed rulemaking to implement the NSFR, along with a modified version with similar parameters as the LCR, that would designate us as a modified NSFR financial institution. The NSFR is one of the two Basel III-based liquidity measures, distinctly separate from the LCR, and is designed to promote medium- and long-term stable funding of the assets and off-balance sheet activities of banks and bank holding companies over a one-year time horizon. Generally consistent with the Basel Committee’s framework, under the proposed rule banking organizations would be required to hold an amount of available stable funding (“ASF”) over a one-year time horizon that equals or exceeds the institution’s amount of required stable funding (“RSF”), with the ASF representing the numerator and the RSF representing the denominator of the NSFR. The banking organizations subject to the modified NSFR would multiply the RSF amount by 70%, such that the RSF amount required for these companies would be required to maintain ASF of at least 70% of its RSF. Generally, these modified NSFR companies are defined as institutions with total assets of greater than $50 billion but less than $250 billion, and less than $10 billion of on-balance sheet foreign exposure. The proposed rule includes detailed descriptions of the items that would comprise ASF and RSF and standardized factors that would apply to ASF and RSF items, and would require any institution whose applicable modified NSFR falls under 100% to notify the appropriate federal regulator and develop a remediation plan.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
We are currently evaluating the impact of the U.S. federal bank regulatory agencies’ NSFR framework. If ultimately adopted as currently proposed, the implementation of the NSFR could impact our liquidity and funding requirements and practices in the future.
We continue to review and monitor these liquidity requirements to develop appropriate implementation plans and liquidity strategies. We expect to be fully compliant with the final rules on or prior to their applicable effective date.
Liquidity Risk Management and Governance
Liquidity risk is measured and managed by the Funding and Liquidity Unitunit within our Treasury unit in accordance with policy guidelines promulgated by our Board and the Asset and Liability Management Committee. In managing liquidity risk, the Funding and Liquidity Unitunit delivers regular and comprehensive reporting, including current levels versus threshold limits for a broad set of liquidity metrics and early warning indicators, explanatory commentary relating to emerging risk trends and, as appropriate, recommended remedial strategies.
The mission of ourOur Funding and Liquidity Unitunit’s primary goal is to deliver and otherwise maintain prudent levels of operating liquidity (to support expected and projected funding requirements), and contingent liquidity (to support unexpected funding requirements resulting from idiosyncratic, systemic, and combination stress events, and regulatory liquidity requirements). Additionally, we will deliver this liquidity from stable funding sources, in a timely manner from stable and at a reasonable cost, without significant adverse consequences.cost-efficient funding sources.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
We seek to accomplish this missiongoal by funding loans with stable deposits; by prudently controlling dependence on wholesale funding, particularly short-term unsecured funding; and by maintaining ample available liquidity, including a contingent liquidity buffer of unencumbered high-quality loans and securities. As of June 30, 2018:2019:
Core deposits continued to be our primary source of funding and our consolidated period end loan-to-deposit ratio was 97.5%;
Our cash position (which is defined as cash balance held at the FRB) totaled $2.9 billion;
Contingent liquidity was $29.0 billion, consisting of unencumbered high-quality liquid assets of $19.1 billion, unused FHLB capacity of $7.0 billion, and our cash position (defined above) of $2.9 billion. Asset liquidity (a component of contingent liquidity) was $22.0 billion consisting of our cash position of $2.9 billion and unencumbered high-quality and liquid securities of $19.1 billion; and
Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $13.0 billion. Use of this borrowing capacity would be considered only during exigent circumstances.
| |
• | Core deposits continued to be our primary source of funding and our consolidated period end loan-to-deposit ratio, which excludes loans held for sale, was 94.2%; |
| |
• | Our cash position (which is defined as cash balance held at the FRB) totaled $2.0 billion; |
| |
• | Contingent liquidity was $31.3 billion, consisting of unencumbered high-quality liquid securities of $20.3 billion, unused FHLB capacity of $9.0 billion, and our cash position of $2.0 billion. Asset liquidity (a component of contingent liquidity) was $22.3 billion consisting of our cash position of $2.0 billion and unencumbered high-quality liquid securities of $20.3 billion; |
| |
• | Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $13.5 billion. Use of this borrowing capacity would be considered only during exigent circumstances; and |
| |
• | For a summary of our sources and uses of cash by type of activity for the six months ended June 30, 2019 and 2018, see the Consolidated Statements of Cash Flows in Part I, Item 1 — Financial Statements, included in this Report. |
The Funding and Liquidity Unitunit monitors a variety of liquidity and funding metrics and early warning indicators and metrics, including specific risk thresholds limits. These monitoring tools are broadly classified as follows:
Current liquidity sources and capacities, including cash at the FRBs, free and liquid securities and available and secured FHLB borrowing capacity;
Liquidity stress sources, including idiosyncratic, systemic and combined stresses, in addition to evolving regulatory requirements such as the LCR and the NSFR;LCR; and
Current and prospective exposures, including secured and unsecured wholesale funding and spot and cumulative cash-flow gaps across a variety of horizons.
Further, certain of these metrics are monitored individually for our banking subsidiariesCBNA and for our consolidated enterprise on a daily basis, including cash position, unencumbered securities, asset liquidity, and available FHLB borrowing capacity. In order to identify emerging trends and risks and inform funding decisions, specific metrics are also forecasted over a one-year horizon.
Cash flows from operating activities contributed $1.4 billion in first half 2018, primarily driven by net income of $813 million. Net cash used by investing activities was $3.4 billion, primarily reflecting a net increase in loans and leases of $3.0 billion and purchases of debt securities available for sale of $2.3 billion, partially offset by proceeds from maturities, paydowns and sales of debt securities available for sale of $1.9 billion. Cash provided by financing activities was $2.8 billion, driven by proceeds from issuance of long-term borrowed funds of $11.5 billion, a net increase in deposits of $2.0 billion and net proceeds from issuance of preferred stock of $296 million, partially offset by repayments of long-term FHLB advances of $7.6 billion and a net decrease in other short-term borrowed funds of $2.4 billion. The $11.5 billionproceeds from issuances of long-term borrowed funds included $750 million
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
from issuances of medium-term debt and $10.8 billion in FHLB advances.These activities resulted in a cumulative increase in cash and cash equivalents of $833 million, which when added to the cash and cash equivalents balance of $3.0 billion at the beginning of the year, resulted in an ending balance of cash and cash equivalents of $3.9 billion as of June 30, 2018.
Cash flows from operating activities contributed $537 million in first half 2017, driven by net income of $638 million, a net decrease in loans held for sale activity of $95 million. Net cash used by investing activities was $1.9 billion, primarily reflecting purchases in the securities available for sale portfolio of $2.3 billion and a net increase in loans and leases of $1.8 billion, partially offset by proceeds from maturities, paydowns and sales of securities available for sale of $2.1 billion. Cash provided by financing activities was $1.8 billion, driven by proceeds from issuance of long-term borrowed funds of $10.1 billion and a net increase in deposits of $3.8 billion, partially offset by a net decrease in other short-term borrowed funds of $1.2 billion, and repayments of long-term FHLB advances of $9.8 billion. The $10.1 billion proceeds included $2.5 billion from issuances of medium-term debt and $7.6 billion in FHLB advances. These activities represented a cumulative increase in cash and cash equivalents of $463 million, which, when added to the cash and cash equivalents balance of $3.7 billion at the beginning of the year, resulted in an ending balance of cash and cash equivalents of $4.2 billion as of June 30, 2017.
OFF-BALANCE SHEET ARRANGEMENTS
The following table presents our outstanding off-balance sheet arrangements. See Note 11 “Commitments12 "Commitments and Contingencies”Contingencies" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.Report.
|
| | | | | | | | | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 | | Change |
| | Percent |
|
Undrawn commitments to extend credit |
| $65,389 |
| |
| $62,959 |
| |
| $2,430 |
| | 4 | % |
Financial standby letters of credit | 1,974 |
| | 2,036 |
| | (62 | ) | | (3 | ) |
Performance letters of credit | 120 |
| | 47 |
| | 73 |
| | 155 |
|
Commercial letters of credit | 56 |
| | 53 |
| | 3 |
| | 6 |
|
Marketing rights | 39 |
| | 41 |
| | (2 | ) | | (5 | ) |
Risk participation agreements | 14 |
| | 16 |
| | (2 | ) | | (13 | ) |
Residential mortgage loans sold with recourse | 6 |
| | 7 |
| | (1 | ) | | (14 | ) |
Total |
| $67,598 |
| |
| $65,159 |
| |
| $2,439 |
| | 4 | % |
|
| | | | | | | | | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 | | Change |
| | Percent |
|
Commitments to extend credit |
| $70,217 |
| |
| $69,553 |
| |
| $664 |
| | 1 | % |
Letters of credit | 2,252 |
| | 2,125 |
| | 127 |
| | 6 |
|
Marketing rights | 35 |
| | 37 |
| | (2 | ) | | (5 | ) |
Risk participation agreements | 41 |
| | 19 |
| | 22 |
| | 116 |
|
Loans sold with recourse | 23 |
| | 5 |
| | 18 |
| | NM |
|
Total |
| $72,568 |
| |
| $71,739 |
| |
| $829 |
| | 1 | % |
CRITICAL ACCOUNTING ESTIMATES
Our unaudited interim Consolidated Financial Statements, which are included in this report,Report, are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish accounting policies and make estimates that affect amounts reported in our audited Consolidated Financial Statements.
An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on our unaudited interim Consolidated Financial Statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. Our most significant accounting policies and estimates are relatedrelate to the ALLL,determination of the ACL
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
and the fair value and income taxes.of MSRs. For additional information regarding these accounting policies and estimates and their related application, see “—Critical Accounting Estimates” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. No material changes were made to these significantcritical accounting policies or estimates during the six months ended June 30, 2018.2019.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK GOVERNANCE
We are committed to maintaining a strong, integrated, and proactive approach to the management of all risks to which we are exposed in pursuit of our business objectives. A key aspect of our Board’s responsibility as the main decision making body is setting our risk appetite to ensure that the levels of risk that we are willing to accept in the attainment of our strategic business and financial objectives are clearly understood.
To enable our Board to carry out its objectives, it has delegated authority for risk management activities, as well as governance and oversight of those activities, to a number of Board and executive management level risk committees. The Executive Risk Committee (“ERC”), chaired by the Chief Risk Officer, is responsible for oversight of risk across the enterprise and actively considers our inherent material risks, analyzes our overall risk profile and seeks confirmation that the risks are being appropriately identified, assessed and mitigated. Reporting to the ERC are the following additional committees covering specific areas of risk: Compliance and Operational Risk Committee, Model Risk Committee, Credit Policy Committee, Asset/Asset Liability Committee, Business Initiatives Review Committee, and the Conduct and Ethics Oversight Committee.
There have been no significant changes in our risk governance practices, risk framework, risk appetite, or credit risk as described in “—Risk Governance” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
MARKET RISK
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Modest market risk arises from trading activities that serve customer needs, including hedging of interest rate and foreign exchange risk. As described below, more material market risk arises from our non-trading banking activities, such as loan origination and deposit-gathering. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. We actively manage both trading and non-trading market risks.
Non-Trading Risk
We are exposed to market risk as a result of non-trading banking activities. This market risk is substantially composed of interest rate risk, as we have no direct currency or commodity risk and de minimis equity risk. We also have market risk related to capital markets loan originations, as well as the valuation of our mortgage servicing rights.
Interest Rate Risk
Interest rate risk emerges from the balance sheet after the aggregation of our assets, liabilities and equity. We refer to this non-trading risk embedded in the balance sheet as “structural interest rate risk” or “interest rate risk in the banking book.”
A major source of structural interest rate risk is a difference in the repricing of assets, on the one hand, and liabilities and equity, on the other. First, there are differences in the timing and drivers of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a commercial loan may reprice monthly withMSRs. There have been no significant changes in LIBOR while the rate paid on debt or certificates of deposit may be fixed for a longer period. There are differences in the drivers of rate changes as well. Loans may be tied to a specific index rate such as LIBOR or Prime, while deposits may be only loosely correlated with LIBOR and depend on competitive demand. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.
Another important source of structural interest rate risk relates to the potential exercise of explicit or embedded options. For example, most consumer loans can be prepaid without penalty; and most consumer deposits can be withdrawn without penalty. The exercise of such options by customers can exacerbate the timing differences discussed above.
A primary source of our structural interest rate risk relates to faster repricing of floating rate loans relative to the retail deposit funding. This source of asset sensitivity is more biased to the short end of the yield curve. For the past eight years with the Federal Funds rate near zero, this risk had been asymmetrical with significantly more upside benefit than potential exposure. As interest rates have begun to rise, the risk position has become more symmetrical as rates can decline further before becoming floored at zero.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The secondary source of our interest rate risk is driven by longer term rates comprising the rollover or reinvestment risk on fixed rate loans as well as the prepayment risk on mortgage related loans and securities funded by non-rate sensitive deposits and equity.
The primary goalsources of interest rate risk, management is to control exposure to interest rate risk within policy limits approved by the Board. These limits and guidelines reflect our tolerance for interest ratepractices, risk over both short-term and long-term horizons. To ensure that exposure to interest rate risk is managed within this risk appetite, we must both measure the exposure and,framework, metrics or assumptions as necessary, hedge it. The Treasury Asset and Liability Management team is responsible for measuring, monitoring and reporting on the structural interest rate risk position. These exposures are reported on a monthly basisdescribed in “—Market Risk — Non-Trading Risk” to the Asset and Liability Committee (“ALCO”) and at Board meetings.
We measure structural interest rate risk through a variety of metrics intended to quantify both short-term and long-term exposures. The primary method that we use to quantify interest rate risk is simulation analysisaudited Consolidated Financial Statements in which we model net interest income from assets, liabilities and hedge derivative positions under various interest rate scenarios over a three-year horizon. Exposure to interest rate risk is reflected inour Annual Report on Form 10-K for the variation of forecasted net interest income across scenarios.
Key assumptions in this simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances and the behavior of loan and deposit clients in different rate environments. The most material of these behavioral assumptions relate to the repricing characteristics and balance fluctuations of deposits with indeterminate (i.e., non-contractual) maturities as well as the pace of mortgage prepayments. Assessments are periodically made by running sensitivity analysis of the impact of key assumptions. The results of these analyses are reported to ALCO.
As the future path of interest rates cannot be known in advance, we use simulation analysis to project net interest income under various interest rate scenarios including a “most likely” (implied forward) scenario as well as a variety of deliberately extreme and perhaps unlikely scenarios. These scenarios may assume gradual ramping of the overall level of interest rates, immediate shocks to the level of rates and various yield curve twists in which movements in short- or long-term rates predominate. Generally, projected net interest income in any interest rate scenario is compared to net interest income in a base case where market forward rates are realized.year ended December 31, 2018.
The table below reports net interest income exposures against a variety of interest rate scenarios. Our policies involve measuring exposures as a percentage change in net interest income over the next year due to either instantaneous or gradual parallel changes in rates relative to the market implied forward yield curve. With rates rising from historically low levels due to Federal Open Market Committee rate increases, exposure to falling rates has increased. As the following table illustrates, our balance sheet is asset-sensitive:asset sensitive; net interest income would benefit from an increase in interest rates. Exposurerates, while exposure to a decline in interest rates is within limit. While an instantaneous and severe shift in interest rates was used in this analysis, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact as demonstrated in the following table.impact.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The table below presents the sensitivity of net interest income to various parallel yield curve shifts from the market implied forward yield curve:
| | | Estimated % Change in Net Interest Income over 12 Months | Estimated % Change in Net Interest Income over 12 Months |
Basis points | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
Instantaneous Change in Interest Rates | | | | | | |
+200 | 8.7 | % | | 9.6 | % | 8.5 | % | | 9.5 | % |
+100 | 4.4 |
| | 4.9 |
| 4.2 |
| | 4.8 |
|
-100 | (5.1 | ) | | (5.9 | ) | (5.4 | ) | | (4.5 | ) |
Gradual Change in Interest Rates | | | | | | |
+200 | 4.6 |
| | 5.1 |
| 2.9 |
| | 4.9 |
|
+100 | 2.4 |
| | 2.7 |
| 1.2 |
| | 2.5 |
|
-100 | (2.1 | ) | | (1.8 | ) | (2.3 | ) | | (1.1 | ) |
Given broad expectations the FRB would cut interest rates, we reduced asset sensitivity to mitigate the potential impact of declining rates. Asset sensitivity against a 200 basis point gradual increase in rates was 4.6%2.9% at June 30, 2018,2019, a decrease from 5.1%4.9% at December 31, 2017. As2018. Additionally, we have reduced our short-term interest rate exposure (six months and under) to approximately 25%, with the Fed has begunremainder in the intermediate to normalize rates given improved economic growth and data, this upward trend in rates has benefited our net interest income and net interest margin as a resultlong tenors of the asset sensitivity. Thecurve. The risk position can be affected by changes in interest rates which impact the repricing sensitivity
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
or beta of the deposit base as well as the cash flows on prepayable assets. The risk position is managed within our risk limits, and long term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding.
We use a valuation measure of exposure to structural interest rate risk, Economic Value of Equity (“EVE”), as a supplement to net interest income simulations. EVE complements net interest income simulation analysis as it estimates risk exposure over a long-term horizon. EVE measures the extent to which the economic value of assets, liabilities and off-balance sheet instruments may change in response to fluctuationfluctuations in interest rates. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. The change in value is expressed as a percentage of regulatory capital.
We use interest rate swap contracts to manage the interest rate exposure to variability in the interest cash flows on our floating-rate assets and floating-rate wholesale funding, and to hedge market risk on fixed-rate capital markets debt issuances. The table below summarizes the related hedging activities.
|
| | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(dollars in millions) | Notional Value | Avg Maturity (Yrs) | Float Index | Rate Range Fixed Leg | | Notional Value | Avg Maturity (Yrs) | Float Index | Rate Range Fixed Leg |
Receive-fixed: | | | | | | | | | |
Cash flow - floating-rate commercial loans(1) |
| $7,600 |
| 2.5 | 1mL | 0.92% - 1.87% | |
| $7,600 |
| 3.0 | 1mL | 0.92% - 1.87% |
Cash flow - floating-rate commercial loans(1) | 775 |
| 11.4 | 3mL | 2.95% - 3.18% | | — |
| — |
| — |
| — |
Fair value - senior debt issuance(2) | 3,450 |
| 2.9 | 3mL | 1.17% - 2.80% | | 5,200 |
| 2.4 | 3mL | 1.06% - 1.92% |
Total receive-fixed | 11,825 |
| | | | | 12,800 |
| | | |
Pay-fixed: | | | | | | | | | |
Cash flow - floating-rate wholesale funding(3) | 500 |
| 0.5 | 1mL | 1.32% | | 500 |
| 1.0 | 1mL | 1.32% |
Cash flow - floating-rate wholesale funding(3) | 365 |
| 2.1 | 3mL | 2.79% - 2.91% | | — |
| — |
| — |
| — |
Total pay-fixed | 865 |
| | | | | 500 |
| | | |
Total |
| $12,690 |
| | | | |
| $13,300 |
| | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| | | Weighted Average | | | Weighted Average |
(dollars in millions) | Notional Amount | Fair Value | Maturity (Years) | Receive Rate | Pay Rate | | Notional Amount | Fair Value | Maturity (Years) | Receive Rate | Pay Rate |
Cash flow - receive fixed/pay variable - conventional ALM |
| $14,850 |
|
| ($3 | ) | 1.9 | 1.8 | % | 2.4 | % | |
| $8,100 |
|
| $3 |
| 2.2 |
| 1.7 | % | 2.5 | % |
Fair value - receive fixed/pay variable - conventional debt | 4,650 |
| (1 | ) | 2.5 | 2.0 |
| 2.5 |
| | 3,450 |
| 2 |
| 2.4 |
| 1.8 |
| 2.7 |
|
Cash flow - pay fixed/receive variable - conventional ALM | 4,750 |
| 1 |
| 4.40 |
| 2.4 |
| 1.7 |
| | 500 |
| — |
| — |
| 2.4 |
| 1.3 |
|
Fair value - pay fixed/receive variable - conventional ALM | 846 |
| — |
| 4.60 |
| 2.5 |
| 2.3 |
| | — |
| — |
| — |
| — |
| — |
|
Total portfolio swaps |
| $25,096 |
|
| ($3 | ) | 2.6 | 2.0 | % | 2.3 | % | |
| $12,050 |
|
| $5 |
| 2.2 |
| 1.8 | % | 2.5 | % |
Floors - conventional ALM(1) |
| $7,000 |
|
| $— |
| — |
| — |
| — |
| |
| $7,000 |
|
| $— |
| 0.5 |
| | |
(1) We use receive-fixed swaps to minimize Conventional ALM floors, which matured in July 2019, do not have a receive rate or pay rate, but rather a strike price on the exposure to variability in the interest cash flows on our floating-rate assets.option.
(2) We use receive-fixed swaps to hedge market risk on fixed rate capital markets debt issuances.
(3) We use pay-fixed swaps to hedge floating-rate wholesale funding.
During second quarter 2018, we purchased $775 million of receive-fixed swaps, with an average maturity of 11.4 years and fixed leg rates ranging from 2.95% to 3.18% and $365 million of pay-fixed swaps with an average maturity of 2.1 years and fixed leg rates ranging from 2.79% to 2.91%.
Capital Markets
A key component of our capital markets activities is the underwriting and distribution of corporate credit facilities to partially finance mergers and acquisitions transactions for our clients. We have a rigorous risk management process around these activities, including a limit structure capping our underwriting risk, our potential loss, and sub limits for specific asset classes. Further, the ability to approve underwriting exposure is delegated only to senior level individuals in the credit risk management and capital markets organizations with each transaction adjudicated in a formal committee meeting.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Mortgage Servicing Rights
We have market risk associated with the value of the mortgage servicing right assets,MSRs, which are impacted by various types of inherent risks, including risks related to duration, basis, convexity, volatility and yield curve. We have elected to account for the levelMSRs acquired from FAMC or originated after December 31, 2018 at fair value while maintaining a lower of cost or market approach on our non-FAMC MSRs originated before December 31, 2018.
As part of our overall risk management strategy relative to the fair market value of the MSRs acquired from FAMC or originated after December 31, 2018, we enter into various free-standing derivatives, such as interest rates.rate swaps, interest rate swaptions, interest rate futures, and forward contracts to purchase mortgage-backed securities to economically hedge the changes in fair value. As of June 30, 20182019, the fair value of these MSRs was $531 million and the total notional amount of related derivative contracts was $11.5 billion. Gains and losses on MSRs and the related derivatives used for hedging are included in mortgage banking fees on the Consolidated Statements of Operations.
As of June 30, 2019 and December 31, 2017,2018, our mortgage servicing rightsnon-FAMC MSRs originated on or before December 31, 2018 had a book value of $217$189 million and $198$221 million, respectively, and were carried at the lower of cost or fair value.market. As of June 30, 20182019 and December 31, 2017, the2018, these MSRs had a fair value of our mortgage servicing rights was $254$193 million and $218$243 million, respectively, which exceeded the carrying value at those dates. Depending on the interest rate environment, economic hedges may be used to stabilizeprotect the market value of these MSRs.
As with our traded market risk based activities, earnings at-risk excludes the mortgage servicing right asset.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
impact of MSRs. MSRs are captured under our single price risk management framework that is used for calculating a management value at risk that is consistent with the definition used by banking regulators, as defined below.
Trading Risk
We are exposed to market risk primarily through client facilitation activities including derivatives and foreign exchange products as well as underwriting and market making activities. Exposure is created as a result of changes in interest rates and related basis spreads and volatility, foreign exchange rates, and credit spreads on a select range of interest rates, foreign exchange, commodities, corporate bonds and secondary loan instruments. These trading activities are conducted through our two banking subsidiaries, CBNA and CBPA.
Client facilitation activities consist primarily of interest rate derivatives and foreign exchange contracts where we enter into offsetting trades with a separate counterparty or exchange to manageCCMI.There have been no significant changes in our market risk exposure. In addition to the aforementioned activities, we operate a secondary loan trading desk with the objective to meet secondary liquidity needs of our issuing clients’ transactions and investor clients. We do not engage in any trading activities with the intent to benefit from short-term price differences.
We record interest rate derivatives and foreign exchange contracts as derivative assets and liabilities on our Consolidated Balance Sheets. Trading assets and liabilities are carried at fair value with income earned related to these activities included in net interest income. Changes in fair value of trading assets and liabilities are reflected in other income, a component of noninterest income on the unaudited interim Consolidated Statements of Operations.
Market Risk Governance
The market risk limit setting process is established in line with the formal enterprise risk appetite process and policy. This appetite reflects the strategic and enterprise level articulation of opportunities for creating franchise value set to the boundaries of how much market risk to take. Dealing authorities represent the key control tool in the management of market risk that allows the cascading of the risk appetite throughout the enterprise. A dealing authority sets the operational scope and tolerances within which a business and/or trading desk is permitted to operate and this is reviewed at least annually. Dealing authorities are structured to accommodate the client facing trades and hedges needed to manage the risk profile. Primary responsibility for keeping within established tolerances resides with the business. Key risk indicators, including VaR, open foreign currency positions, and single name risk, are monitored on a daily basis and reported against tolerances consistent with our risk appetite and business strategy to relevant business line management and risk counterparts.
Market Risk Measurement
We use VaR as a statistical measure for estimating potential exposure of our traded market risk in normal market conditions. Our VaR framework for risk management and regulatory reporting is the same. Risk management VaR is based on a one day holding period to a 99% confidence level, whereas regulatory VaR is based on a ten day holding period to the same confidence level. Additional to VaR, non-statistical measurements for measuring risk are employed, such as sensitivity analysis, market value and stress testing.
Our market risk platform and associated market risk and valuation models for our foreign exchange, interest rate products, and traded loans capture correlation effects and allow for aggregation of market risk across risk types, business lines and legal entities. We measure, monitor and report market risk for both management and regulatory capital purposes.
VaR Overview
Thegovernance, market risk measurement, or market risk practices including VaR, stressed VaR, sensitivity analysis, stress testing, or VaR model is basedreview and validation as described in “—Market Risk — Trading Risk” to the audited Consolidated Financial Statements in our Annual Report on historical simulation. The VaR measure estimates the extent of any fair value losses on trading positions that may occur due to broad market movements (General VaR) such as changes in the level of interest rates, foreign exchange rates, equity prices and commodity prices. It is calculated on the basis that current positions remain broadly unaltered over the course of a given holding period. It is assumed that markets are sufficiently liquid to allow the business to close its positions, if required, within this holding period. VaR’s benefit is that it captures the historic correlations of a portfolio. Based on the composition of our “covered positions,” we also use a standardized add-on approachForm 10-K for the loan trading desk’s Specific Risk capital which estimates the extent of any losses that may occur from factors other than broad market movements. The General VaR approach is expressed in terms of a confidence level over the past 500 trading days. The internal VaR measure (used as the basis of the main VaR trading limits) is a 99% confidence level with a one day holding period, meaning that a loss greater than the VaR is expected to occur, on average, on only one day in 100 trading days (i.e., 1% of the time). Theoretically, there should be a loss event greater than VaR two to three times per year. The regulatory measure of VaR is done at a 99% confidence level with a ten-day holding period. The historical market data applied to calculate the VaR is updated on a two business day lag. Refer to “Market Risk Regulatory Capital” below for detailsyear ended December 31, 2018.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
of our ten-day VaR metrics for second quarters 2018 and 2017, respectively, including high, low, average and period end VaR for interest rate and foreign exchange rate risks, as well as total VaR.
Market Risk Regulatory Capital
The U.S. banking regulators’ “Market Risk Rule” covers the calculation of market risk capital and substantially modified the determination of market risk-weighted assets and implemented a more risk sensitive methodology for the risk inherent in certain trading positions categorized as “covered positions.” For the purposes of the Market Risk Rule, all of our client facing trades and associated hedges need to maintain a low risk profile to qualify, and do qualify, as “covered positions.” For the three months ended June 30, 20182019 and 2017,2018, we were not subject to the reporting threshold under the Market Risk Rule. As a result, the $767$634 million and $596$767 million of calculated market risk-weighted assets as of June 30, 20182019 and 2017,2018, respectively, were not included in our risk-weighted assets. As such, our covered trading activities were risk-weighted under U.S. Basel III Standardized credit risk rules. While not subject to the determination requirements of market risk-weighted assets, we nevertheless comply with the Market Risk Rule’s other requirements. The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR. The following table presents the results of our modeled and non-modeled measures for regulatory capital calculations:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | For the Three Months Ended June 30, 2019 | | For the Three Months Ended June 30, 2018 |
Market Risk Category | | Period End | | Average | | High | | Low | | Period End | | Average | | High | | Low |
Interest Rate | |
| $1 |
| |
| $— |
| |
| $1 |
| |
| $— |
| |
| $2 |
| |
| $2 |
| |
| $2 |
| |
| $1 |
|
Foreign Exchange Currency Rate | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Credit Spread | | 5 |
| | 4 |
| | 5 |
| | 3 |
| | 3 |
| | 2 |
| | 3 |
| | 2 |
|
Commodity | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
General VaR | | 5 |
| | 4 |
| | 5 |
| | 3 |
| | 4 |
| | 3 |
| | 4 |
| | 3 |
|
Specific Risk VaR | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total VaR | |
| $5 |
| |
| $4 |
| |
| $5 |
| |
| $3 |
| |
| $4 |
| |
| $3 |
| |
| $4 |
| |
| $3 |
|
Stressed General VaR | |
| $13 |
| |
| $9 |
| |
| $13 |
| |
| $7 |
| |
| $15 |
| |
| $13 |
| |
| $15 |
| |
| $10 |
|
Stressed Specific Risk VaR | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Stressed VaR | |
| $13 |
| |
| $9 |
| |
| $13 |
| |
| $7 |
| |
| $15 |
| |
| $13 |
| |
| $15 |
| |
| $10 |
|
Market Risk Regulatory Capital | |
| $37 |
| | | | | | | |
| $47 |
| | | | | | |
Specific Risk Not Modeled Add-on | | 14 |
| | | | | | | | 14 |
| | | | | | |
de Minimis Exposure Add-on | | — |
| | | | | | | | — |
| | | | | | |
Total Market Risk Regulatory Capital | |
| $51 |
| | | | | | | |
| $61 |
| | | | | | |
Market Risk-Weighted Assets | |
| $634 |
| | | | | | | |
| $767 |
| | | | | | |
Market Risk-Weighted Assets (included in our FR Y-9C regulatory filing) | |
| $— |
| | | | | | | |
| $— |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | For the Three Months Ended June 30, 2018 | | For the Three Months Ended June 30, 2017 |
Market Risk Category | | Period End | | Average | | High | | Low | | Period End | | Average | | High | | Low |
Interest Rate | |
| $2 |
| |
| $2 |
| |
| $2 |
| |
| $1 |
| |
| $1 |
| |
| $1 |
| |
| $2 |
| |
| $— |
|
Foreign Exchange Currency Rate | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Credit Spread | | 3 |
| | 2 |
| | 3 |
| | 2 |
| | 3 |
| | 2 |
| | 3 |
| | 2 |
|
General VaR | | 4 |
| | 3 |
| | 4 |
| | 3 |
| | 3 |
| | 3 |
| | 4 |
| | 2 |
|
Specific Risk VaR | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total VaR | |
| $4 |
| |
| $3 |
| |
| $4 |
| |
| $3 |
| |
| $3 |
| |
| $3 |
| |
| $4 |
| |
| $2 |
|
Stressed General VaR | |
| $15 |
| |
| $13 |
| |
| $15 |
| |
| $10 |
| |
| $11 |
| |
| $9 |
| |
| $11 |
| |
| $8 |
|
Stressed Specific Risk VaR | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Stressed VaR | |
| $15 |
| |
| $13 |
| |
| $15 |
| |
| $10 |
| |
| $11 |
| |
| $9 |
| |
| $11 |
| |
| $8 |
|
Market Risk Regulatory Capital | |
| $47 |
| | | | | | | |
| $35 |
| | | | | | |
Specific Risk Not Modeled Add-on | | 14 |
| | | | | | | | 11 |
| | | | | | |
de Minimis Exposure Add-on | | — |
| | | | | | | | 2 |
| | | | | | |
Total Market Risk Regulatory Capital | |
| $61 |
| | | | | | | |
| $48 |
| | | | | | |
Market Risk-Weighted Assets | |
| $767 |
| | | | | | | |
| $596 |
| | | | | | |
Market Risk-Weighted Assets (included in our FR Y-9C regulatory filing) (1) | |
| $— |
| | | | | | | |
| $— |
| | | | | | |
(1) For the three months ended June 30, 2018 and 2017, we did not meet the reporting threshold prescribed by Market Risk Capital Guidelines.
Stressed VaR
SVaR is an extension of VaR, but uses a longer historical look-back horizon that is fixed from January 3, 2005. This is done not only to identify headline risks from more volatile periods, but also to provide a counter-balance to VaR which may be low during periods of low volatility. The holding period for profit and loss determination is ten days. In addition to risk management purposes, SVaR is also a component of market risk regulatory capital. We calculate SVaR daily under its own dynamic window regime. In a dynamic window regime, values of the ten-day, 99% VaR are calculated over all possible 260-day periods that can be obtained from the complete historical data set. Refer to “Market Risk Regulatory Capital” above for details of SVaR metrics, including high, low, average and period end SVaR for the combined portfolio.
Sensitivity Analysis
Sensitivity analysis is the measure of exposure to a single risk factor, such as a one basis point change in rates or credit spread. We conduct and monitor sensitivity on interest rates, basis spreads, foreign exchange exposures, option prices, and credit spreads. Whereas VaR is based on previous moves in market risk factors over recent periods, it may not be an accurate predictor of future market moves. Sensitivity analysis complements VaR, as it provides an indication of risk relative to each factor irrespective of historical market moves, and is an effective tool in evaluating the appropriateness of hedging strategies and concentrations.
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Stress Testing
Conducting a stress test of a portfolio consists of running risk models with the inclusion of key variables that simulate various historical or hypothetical scenarios. For historical stress tests, profit and loss results are simulated for selected time periods corresponding to the most volatile underlying returns while hypothetical stress tests aim to consider concentration risk, illiquidity under stressed market conditions and risk arising from our trading activities that may not be fully captured by our other models. Hypothetical scenarios also assume that market moves happen simultaneously and no repositioning or hedging activity takes place to mitigate losses as events unfold. We generate stress tests of our trading positions on a daily basis. For example, we currently include a stress test that simulates a “Lehman-type” crisis scenario by taking the worst 20-trading day peak to trough moves for the various risk factors that go into VaR from that period, and assumes they occurred simultaneously.
VaR Model Review and Validation
Market risk measurement models used are independently reviewed and subject to ongoing performance analysis by the model owner. The independent review and validation focuses on the model methodology, market data, and performance. Independent review of market risk measurement models is the responsibility of Citizens’ Model Risk Management and Validation team. Aspects covered include challenging the assumptions used, the quantitative techniques employed and the theoretical justification underpinning them, and an assessment of the soundness of the required data over time. Where possible, the quantitative impact of the major underlying modeling assumptions will be estimated (e.g., through developing alternative models). Results of such reviews are shared with the U.S. banking regulators. The market risk models may be periodically enhanced due to changes in market price levels and price action regime behavior. The Market Risk Management and Validation team will conduct internal validation before a new or changed model element is implemented and before a change is made to a market data mapping.
VaR Backtesting
Backtesting is one form of validation of the VaR model and is run daily. The Market Risk Rule requires a comparison of our internal VaR measure to the actual net trading revenue (excluding fees, commissions, reserves, intra-day trading and net interest income) for each day over the preceding year (the most recent 250 business days). Any observed loss in excess of the VaR number is taken as an exception. The level of exceptions determines the multiplication factor used to derive the VaR and SVaR-based capital requirement for regulatory reporting purposes, when applicable. We perform sub-portfolio backtesting as required under the Market Risk Rule, and as approved by our banking regulators, for interest rate, credit spread, and foreign exchange positions. The following graph shows our daily net trading revenue and total internal, modeled VaR for the twelve months ended June 30, 2018.2019.
Daily VaR Backtesting
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
KEY PERFORMANCE METRICS, NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Introduction — Key Performance Metrics Used by Management and Non-GAAP Financial Measures,” included in this report.Report. The following table presents computations of key performance metrics used throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:
| | | | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, | | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, |
(in millions, except share, per-share and ratio data) | Ref. | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| |
(in millions, except share, per share and ratio data) | | Ref. | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Total revenue (GAAP) | A |
| $1,509 |
| |
| $1,396 |
| |
| $2,971 |
| |
| $2,780 |
| A |
| $1,628 |
| |
| $1,509 |
| |
| $3,216 |
| |
| $2,971 |
|
Noninterest expense (GAAP) | B | 875 |
| | 864 |
| | 1,758 |
| | 1,718 |
| B | 951 |
| | 875 |
| | 1,888 |
| | 1,758 |
|
Net income (GAAP) | C | 425 |
| | 318 |
| | 813 |
| | 638 |
| C | 453 |
| | 425 |
| | 892 |
| | 813 |
|
Net income available to common stockholders (GAAP) | D | 425 |
| | 318 |
| | 806 |
| | 631 |
| D | 435 |
| | 425 |
| | 859 |
| | 806 |
|
Return on average common equity: | | | | | | | | | | | | | | | | |
Average common equity (GAAP) | E |
| $19,732 |
| |
| $19,659 |
| |
| $19,732 |
| |
| $19,560 |
| E |
| $20,420 |
| |
| $19,732 |
| |
| $20,182 |
| |
| $19,732 |
|
Return on average common equity | D/E | 8.65 | % | | 6.48 | % | | 8.24 | % | | 6.50 | % | D/E | 8.54 | % | | 8.65 | % | | 8.58 | % | | 8.24 | % |
Return on average tangible common equity: | | | | | | | | | | | | | | | | |
Average common equity (GAAP) | E |
| $19,732 |
| |
| $19,659 |
| |
| $19,732 |
| |
| $19,560 |
| E |
| $20,420 |
| |
| $19,732 |
| |
| $20,182 |
| |
| $19,732 |
|
Less: Average goodwill (GAAP) | | 6,887 |
| | 6,882 |
| | 6,887 |
| | 6,879 |
| | 7,040 |
| | 6,887 |
| | 7,029 |
| | 6,887 |
|
Less: Average other intangibles (GAAP) | | 2 |
| | 2 |
| | 2 |
| | 1 |
| | 80 |
| | 2 |
| | 69 |
| | 2 |
|
Add: Average deferred tax liabilities related to goodwill (GAAP) | | 357 |
| | 534 |
| | 356 |
| | 533 |
| | 370 |
| | 357 |
| | 369 |
| | 356 |
|
Average tangible common equity | F |
| $13,200 |
| |
| $13,309 |
| |
| $13,199 |
| |
| $13,213 |
| F |
| $13,670 |
| |
| $13,200 |
| |
| $13,453 |
| |
| $13,199 |
|
Return on average tangible common equity | D/F | 12.93 | % | | 9.57 | % | | 12.32 | % | | 9.62 | % | D/F | 12.75 | % | | 12.93 | % | | 12.87 | % | | 12.32 | % |
Return on average total assets: | | | | | | | | | | | | | | | | |
Average total assets (GAAP) | G |
| $153,253 |
| |
| $149,878 |
| |
| $152,393 |
| |
| $149,335 |
| G |
| $161,489 |
| |
| $153,253 |
| |
| $160,955 |
| |
| $152,393 |
|
Return on average total assets | C/G | 1.11 | % | | 0.85 | % | | 1.08 | % | | 0.86 | % | C/G | 1.13 | % | | 1.11 | % | | 1.12 | % | | 1.08 | % |
Return on average total tangible assets: | | | | | | | | | | | | | | | | |
Average total assets (GAAP) | G |
| $153,253 |
| |
| $149,878 |
| |
| $152,393 |
| |
| $149,335 |
| G |
| $161,489 |
| |
| $153,253 |
| |
| $160,955 |
| |
| $152,393 |
|
Less: Average goodwill (GAAP) | | 6,887 |
| | 6,882 |
| | 6,887 |
| | 6,879 |
| | 7,040 |
| | 6,887 |
| | 7,029 |
| | 6,887 |
|
Less: Average other intangibles (GAAP) | | 2 |
| | 2 |
| | 2 |
| | 1 |
| | 80 |
| | 2 |
| | 69 |
| | 2 |
|
Add: Average deferred tax liabilities related to goodwill (GAAP) | | 357 |
| | 534 |
| | 356 |
| | 533 |
| | 370 |
| | 357 |
| | 369 |
| | 356 |
|
Average tangible assets | H |
| $146,721 |
| |
| $143,528 |
| |
| $145,860 |
| |
| $142,988 |
| H |
| $154,739 |
| |
| $146,721 |
| |
| $154,226 |
| |
| $145,860 |
|
Return on average total tangible assets | C/H | 1.16 | % | | 0.89 | % | | 1.12 | % | | 0.90 | % | C/H | 1.17 | % | | 1.16 | % | | 1.17 | % | | 1.12 | % |
Efficiency ratio: | | | | | | | | | | | | | | | | |
Efficiency ratio | B/A | 57.95 | % | | 61.94 | % | | 59.17 | % | | 61.81 | % | B/A | 58.41 | % | | 57.95 | % | | 58.70 | % | | 59.17 | % |
Operating leverage: | | | | | | | | | | | | | | | | |
Increase in total revenue | | 8.15 | % | | 9.23 | % | | 6.86 | % | | 10.67 | % | | 7.81 | % | | 8.15 | % | | 8.25 | % | | 6.86 | % |
Increase in noninterest expense | | 1.19 |
| | 4.47 |
| | 2.30 |
| | 4.88 |
| | 8.66 |
| | 1.19 |
| | 7.39 |
| | 2.30 |
|
Operating leverage | | 6.96 | % | | 4.76 | % | | 4.56 | % | | 5.79 | % | | (0.85 | )% | | 6.96 | % | | 0.86 | % | | 4.56 | % |
Effective income tax rate: | | | | | | | | | | | | | | | | |
Income before income tax expense | I |
| $549 |
| |
| $462 |
| |
| $1,050 |
| |
| $896 |
| I |
| $580 |
| |
| $549 |
| |
| $1,146 |
| |
| $1,050 |
|
Income tax expense | J | 124 |
| | 144 |
| | 237 |
| | 258 |
| J | 127 |
| | 124 |
| | 254 |
| | 237 |
|
Effective income tax rate | J/I | 22.58 | % | | 31.13 | % | | 22.55 | % | | 28.82 | % | J/I | 21.86 | % | | 22.58 | % | | 22.14 | % | | 22.55 | % |
Net income per average common share - basic and diluted: | | | | | | | | | | | | | | | | |
Average common shares outstanding - basic (GAAP) | K | 484,744,354 |
| | 506,371,846 |
| | 486,114,872 |
| | 507,903,141 |
| K | 458,154,335 |
| | 484,744,354 |
| | 459,426,685 |
| | 486,114,872 |
|
Average common shares outstanding - diluted (GAAP) | L | 486,141,695 |
| | 507,414,122 |
| | 487,683,216 |
| | 509,362,055 |
| L | 459,304,224 |
| | 486,141,695 |
| | 460,857,535 |
| | 487,683,216 |
|
Net income per average common share - basic (GAAP) | D/K |
| $0.88 |
| |
| $0.63 |
| |
| $1.66 |
| |
| $1.24 |
| D/K |
| $0.95 |
| |
| $0.88 |
| |
| $1.87 |
| |
| $1.66 |
|
Net income per average common share - diluted (GAAP) | D/L | 0.88 |
| | 0.63 |
| | 1.65 |
| | 1.24 |
| D/L | 0.95 |
| | 0.88 |
| | 1.86 |
| | 1.65 |
|
Dividend payout ratio: | | | | | | | | | | | | | | | | |
Cash dividends declared and paid per common share | M |
| $0.22 |
| |
| $0.14 |
| |
| $0.44 |
| |
| $0.28 |
| M |
| $0.32 |
| |
| $0.22 |
| |
| $0.64 |
| |
| $0.44 |
|
Dividend payout ratio | M/(D/K) | 25.06 | % | | 22.32 | % | | 26.52 | % | | 22.55 | % | M/(D/K) | 34 | % | | 25 | % | | 34 | % | | 27 | % |
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | | | As of and for the Three Months Ended June 30, | | As of and for the Three Months Ended June 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
(in millions, except ratio data) | Ref. | Consumer Banking | Commercial Banking | Other | Consolidated | | Consumer Banking | Commercial Banking | Other | Consolidated | Ref. | Consumer Banking | Commercial Banking | Other | Consolidated | | Consumer Banking | Commercial Banking | Other | Consolidated |
Net income available to common stockholders: | | | | | |
Net income (loss) available to common stockholders: | | | | | |
Net income (loss) (GAAP) | N |
| $197 |
|
| $237 |
|
| ($9 | ) |
| $425 |
| |
| $118 |
|
| $187 |
|
| $13 |
|
| $318 |
| N |
| $213 |
|
| $216 |
|
| $24 |
|
| $453 |
| |
| $197 |
|
| $237 |
|
| ($9 | ) |
| $425 |
|
Less: Preferred stock dividends | | — |
| — |
| — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
| 18 |
| 18 |
| | — |
| — |
| — |
| — |
|
Net income (loss) available to common stockholders | O |
| $197 |
|
| $237 |
|
| ($9 | ) |
| $425 |
| |
| $118 |
|
| $187 |
|
| $13 |
|
| $318 |
| O |
| $213 |
|
| $216 |
|
| $6 |
|
| $435 |
| |
| $197 |
|
| $237 |
|
| ($9 | ) |
| $425 |
|
Efficiency ratio: | Efficiency ratio: | | | | | | | |
Total revenue (GAAP) | P |
| $987 |
|
| $516 |
|
| $6 |
|
| $1,509 |
| |
| $886 |
|
| $474 |
|
| $36 |
|
| $1,396 |
| P |
| $1,076 |
|
| $520 |
|
| $32 |
|
| $1,628 |
| |
| $987 |
|
| $516 |
|
| $6 |
|
| $1,509 |
|
Noninterest expense (GAAP) | Q | 658 |
| 200 |
| 17 |
| 875 |
| | 644 |
| 192 |
| 28 |
| 864 |
| Q | 715 |
| 217 |
| 19 |
| 951 |
| | 658 |
| 200 |
| 17 |
| 875 |
|
Efficiency ratio | Q/P | 66.68 | % | 38.80 | % | NM |
| 57.95 | % | | 72.64 | % | 40.48 | % | NM |
| 61.94 | % | Q/P | 66.43 | % | 41.58 | % | NM |
| 58.41 | % | | 66.68 | % | 38.80 | % | NM |
| 57.95 | % |
Return on average total tangible assets: | | | | | | | | |
Average total assets (GAAP) | |
| $61,232 |
|
| $52,170 |
|
| $39,851 |
|
| $153,253 |
| |
| $59,244 |
|
| $49,731 |
|
| $40,903 |
|
| $149,878 |
| |
| $65,485 |
|
| $56,135 |
|
| $39,869 |
|
| $161,489 |
| |
| $61,232 |
|
| $52,170 |
|
| $39,851 |
|
| $153,253 |
|
Less: Average goodwill (GAAP) | | — |
| — |
| 6,887 |
| 6,887 |
| | — |
| — |
| 6,882 |
| 6,882 |
| | 119 |
| 45 |
| 6,876 |
| 7,040 |
| | — |
| 11 |
| 6,876 |
| 6,887 |
|
Less: Average other intangibles (GAAP) | | — |
| — |
| 2 |
| 2 |
| | — |
| — |
| 2 |
| 2 |
| | 73 |
| 7 |
| — |
| 80 |
| | — |
| 2 |
| — |
| 2 |
|
Add: Average deferred tax liabilities related to goodwill (GAAP) | | — |
| — |
| 357 |
| 357 |
| | — |
| — |
| 534 |
| 534 |
| | — |
| — |
| 370 |
| 370 |
| | — |
| — |
| 357 |
| 357 |
|
Average total tangible assets | R |
| $61,232 |
|
| $52,170 |
|
| $33,319 |
|
| $146,721 |
| |
| $59,244 |
|
| $49,731 |
|
| $34,553 |
|
| $143,528 |
| R |
| $65,293 |
|
| $56,083 |
|
| $33,363 |
|
| $154,739 |
| |
| $61,232 |
|
| $52,157 |
|
| $33,332 |
|
| $146,721 |
|
Return on average total tangible assets | N/R | 1.29 | % | 1.82 | % | NM |
| 1.16 | % | | 0.80 | % | 1.51 | % | NM |
| 0.89 | % | N/R | 1.31 | % | 1.54 | % | NM |
| 1.17 | % | | 1.29 | % | 1.82 | % | NM |
| 1.16 | % |
| | | | As of and for the Six Months Ended June 30, | | As of and for the Six Months Ended June 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
(in millions, except ratio data) | Ref. | Consumer Banking | Commercial Banking | Other | Consolidated | | Consumer Banking | Commercial Banking | Other | Consolidated | Ref. | Consumer Banking | Commercial Banking | Other | Consolidated | | Consumer Banking | Commercial Banking | Other | Consolidated |
Net income available to common stockholders: | | | | | |
Net income (loss) available to common stockholders: | | | | | |
Net income (loss) (GAAP) | N |
| $367 |
|
| $452 |
|
| ($6 | ) |
| $813 |
| |
| $213 |
|
| $367 |
|
| $58 |
|
| $638 |
| N |
| $415 |
|
| $443 |
|
| $34 |
|
| $892 |
| |
| $367 |
|
| $452 |
|
| ($6 | ) |
| $813 |
|
Less: Preferred stock dividends | | — |
| — |
| 7 |
| 7 |
| | — |
| — |
| 7 |
| 7 |
| | — |
| — |
| 33 |
| 33 |
| | — |
| — |
| 7 |
| 7 |
|
Net income (loss) available to common stockholders | O |
| $367 |
|
| $452 |
|
| ($13 | ) |
| $806 |
| |
| $213 |
|
| $367 |
|
| $51 |
|
| $631 |
| O |
| $415 |
|
| $443 |
|
| $1 |
|
| $859 |
| |
| $367 |
|
| $452 |
|
| ($13 | ) |
| $806 |
|
Efficiency ratio: | Efficiency ratio: | |
| | | |
| |
| |
| |
| Efficiency ratio: | |
| | | |
| |
| |
| |
|
Total revenue (GAAP) | P |
| $1,942 |
|
| $998 |
|
| $31 |
|
| $2,971 |
| |
| $1,744 |
|
| $954 |
|
| $82 |
|
| $2,780 |
| P |
| $2,111 |
|
| $1,042 |
|
| $63 |
|
| $3,216 |
| |
| $1,942 |
|
| $998 |
|
| $31 |
|
| $2,971 |
|
Noninterest expense (GAAP) | Q | 1,314 |
| 408 |
| 36 |
| 1,758 |
| | 1,291 |
| 382 |
| 45 |
| 1,718 |
| Q | 1,415 |
| 426 |
| 47 |
| 1,888 |
| | 1,314 |
| 408 |
| 36 |
| 1,758 |
|
Efficiency ratio | Q/P | 67.68 | % | 40.86 | % | NM |
| 59.17 | % | | 74.00 | % | 40.14 | % | NM |
| 61.81 | % | Q/P | 67.01 | % | 40.84 | % | NM |
| 58.70 | % | | 67.68 | % | 40.86 | % | NM |
| 59.17 | % |
Return on average total tangible assets: | | | | | | | | | | |
Average total assets (GAAP) | |
| $61,290 |
|
| $51,286 |
|
| $39,817 |
|
| $152,393 |
| |
| $58,954 |
|
| $49,488 |
|
| $40,893 |
|
| $149,335 |
| |
| $65,247 |
|
| $55,884 |
|
| $39,824 |
|
| $160,955 |
| |
| $61,290 |
|
| $51,286 |
|
| $39,817 |
|
| $152,393 |
|
Less: Average goodwill (GAAP) | | — |
| — |
| 6,887 |
| 6,887 |
| | — |
| — |
| 6,879 |
| 6,879 |
| | 119 |
| 34 |
| 6,876 |
| 7,029 |
| | — |
| 11 |
| 6,876 |
| 6,887 |
|
Less: Average other intangibles (GAAP) | | — |
| — |
| 2 |
| 2 |
| | — |
| — |
| 1 |
| 1 |
| | 64 |
| 5 |
| — |
| 69 |
| | — |
| 2 |
| — |
| 2 |
|
Add: Average deferred tax liabilities related to goodwill (GAAP) | | — |
| — |
| 356 |
| 356 |
| | — |
| — |
| 533 |
| 533 |
| | — |
| — |
| 369 |
| 369 |
| | — |
| — |
| 356 |
| 356 |
|
Average total tangible assets | R |
| $61,290 |
|
| $51,286 |
|
| $33,284 |
|
| $145,860 |
| |
| $58,954 |
|
| $49,488 |
|
| $34,546 |
|
| $142,988 |
| R |
| $65,064 |
|
| $55,845 |
|
| $33,317 |
|
| $154,226 |
| |
| $61,290 |
|
| $51,273 |
|
| $33,297 |
|
| $145,860 |
|
Return on average total tangible assets | N/R | 1.21 | % | 1.78 | % | NM |
| 1.12 | % | | 0.73 | % | 1.50 | % | NM |
| 0.90 | % | N/R | 1.29 | % | 1.60 | % | NM |
| 1.17 | % | | 1.21 | % | 1.78 | % | NM |
| 1.12 | % |
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents computations of non-GAAP financial measures representing our “Underlying”Underlying results used throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations”:
| | | | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, | | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, |
(in millions, except share, per-share and ratio data) | Ref. | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| |
Noninterest income, Underlying: | | | | | | | | | |
Noninterest income (GAAP) | |
| $388 |
| |
| $370 |
| |
| $759 |
| |
| $749 |
| |
Less: Lease impairment credit-related costs | | — |
| | (11 | ) | | — |
| | (11 | ) | |
Noninterest income, Underlying (non-GAAP) | |
| $388 |
| |
| $381 |
| |
| $759 |
| |
| $760 |
| |
(in millions, except share, per share and ratio data) | | Ref. | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Total revenue, Underlying: | | | | | | | | | | | | | | | | |
Total revenue (GAAP) | A |
| $1,509 |
| |
| $1,396 |
| |
| $2,971 |
| |
| $2,780 |
| A |
| $1,628 |
| |
| $1,509 |
| |
| $3,216 |
| |
| $2,971 |
|
Less: Lease impairment credit-related costs | | — |
| | (11 | ) | | — |
| | (11 | ) | |
Less: Notable items | | | — |
| | — |
| | — |
| | — |
|
Total revenue, Underlying (non-GAAP) | S |
| $1,509 |
| |
| $1,407 |
| |
| $2,971 |
| |
| $2,791 |
| S |
| $1,628 |
| |
| $1,509 |
| |
| $3,216 |
| |
| $2,971 |
|
Noninterest expense, Underlying: | | | | | | | | | | | | | | | | |
Noninterest expense (GAAP) | B |
| $875 |
| |
| $864 |
| |
| $1,758 |
| |
| $1,718 |
| B |
| $951 |
| |
| $875 |
| |
| $1,888 |
| |
| $1,758 |
|
Less: Lease impairment credit-related costs | | — |
| | 15 |
| | — |
| | 15 |
| |
Less: Notable items | | | 7 |
| | — |
| | 12 |
| | — |
|
Noninterest expense, Underlying (non-GAAP) | T |
| $875 |
| |
| $849 |
| |
| $1,758 |
| |
| $1,703 |
| T |
| $944 |
| |
| $875 |
| |
| $1,876 |
| |
| $1,758 |
|
Pre-provision profit: | | | | | | | | | | | | | | | | |
Total revenue (GAAP) | A | 1,509 |
| | 1,396 |
| | 2,971 |
| | 2,780 |
| A |
| $1,628 |
| |
| $1,509 |
| |
| $3,216 |
| |
| $2,971 |
|
Less: Noninterest expense (GAAP) | B | 875 |
| | 864 |
| | 1,758 |
| | 1,718 |
| B | 951 |
| | 875 |
| | 1,888 |
| | 1,758 |
|
Pre-provision profit (GAAP) | |
| $634 |
| |
| $532 |
| |
| $1,213 |
| |
| $1,062 |
| |
| $677 |
| |
| $634 |
| |
| $1,328 |
| |
| $1,213 |
|
Pre-provision profit, Underlying | | | | | | | | | | | | | | | | |
Total revenue, Underlying (non-GAAP) | S |
| $1,509 |
| |
| $1,407 |
| |
| $2,971 |
| |
| $2,791 |
| S |
| $1,628 |
| |
| $1,509 |
| |
| $3,216 |
| |
| $2,971 |
|
Less: Noninterest expense, Underlying (non-GAAP) | T | 875 |
| | 849 |
| | 1,758 |
| | 1,703 |
| T | 944 |
| | 875 |
| | 1,876 |
| | 1,758 |
|
Pre-provision profit, Underlying (non-GAAP) | |
| $634 |
| |
| $558 |
| |
| $1,213 |
| |
| $1,088 |
| |
| $684 |
| |
| $634 |
| |
| $1,340 |
| |
| $1,213 |
|
Total credit-related costs, Underlying: | | | | | | | | | |
Provision for credit losses (GAAP) | |
| $85 |
| |
| $70 |
| |
| $163 |
| |
| $166 |
| |
Add: Lease impairment credit-related costs | | — |
| | 26 |
| | — |
| | 26 |
| |
Total credit-related costs, Underlying (non-GAAP) | |
| $85 |
| |
| $96 |
| |
| $163 |
| |
| $192 |
| |
Income before income tax expense, Underlying: | | | | | | | | | | | | | | | | |
Income before tax expense (GAAP) | I |
| $549 |
| |
| $462 |
| |
| $1,050 |
| |
| $896 |
| I |
| $580 |
| |
| $549 |
| |
| $1,146 |
| |
| $1,050 |
|
Less: Notable items | | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (12 | ) | | — |
|
Income before income tax expense, Underlying (non-GAAP) | U |
| $549 |
| |
| $462 |
| |
| $1,050 |
| |
| $896 |
| U |
| $587 |
| |
| $549 |
| |
| $1,158 |
| |
| $1,050 |
|
Income tax expense and effective income tax rate, Underlying: | | | | | | | | | | | | | | | | |
Income tax expense (GAAP) | J |
| $124 |
| |
| $144 |
| |
| $237 |
| |
| $258 |
| J |
| $127 |
| |
| $124 |
| |
| $254 |
| |
| $237 |
|
Less: Settlement of certain state tax matters | | — |
| | — |
| | — |
| | (23 | ) | |
Less: Notable items | | | (2 | ) | | — |
| | (3 | ) | | — |
|
Income tax expense, Underlying (non-GAAP) | V |
| $124 |
| |
| $144 |
| |
| $237 |
| |
| $281 |
| V |
| $129 |
| |
| $124 |
| |
| $257 |
| |
| $237 |
|
Effective income tax rate (GAAP) | J/I | 22.58 | % | | 31.13 | % | | 22.55 | % | | 28.82 | % | J/I | 21.86 | % | | 22.58 | % | | 22.14 | % | | 22.55 | % |
Effective income tax rate, Underlying (non-GAAP) | V/U | 22.58 |
| | 31.13 |
| | 22.55 |
| | 31.34 |
| V/U | 21.89 |
| | 22.58 |
| | 22.16 |
| | 22.55 |
|
Net income, Underlying: | | | | | | | | | | | | | | | | |
Net income (GAAP) | C |
| $425 |
| |
| $318 |
| |
| $813 |
| |
| $638 |
| C |
| $453 |
| |
| $425 |
| |
| $892 |
| |
| $813 |
|
Less: Settlement of certain state tax matters | | — |
| | — |
| | — |
| | (23 | ) | |
Add: Notable items, net of tax expense | | | 5 |
| | — |
| | 9 |
| | — |
|
Net income, Underlying (non-GAAP) | W |
| $425 |
| |
| $318 |
| |
| $813 |
| |
| $615 |
| W |
| $458 |
| |
| $425 |
| |
| $901 |
| |
| $813 |
|
Net income available to common stockholders, Underlying: | | | | | | | | | |
Net income available to common stockholders (GAAP) | D |
| $425 |
| |
| $318 |
| |
| $806 |
| |
| $631 |
| |
Less: Settlement of certain state tax matters | | — |
| | — |
| | — |
| | (23 | ) | |
Net income available to common stockholders, Underlying (non-GAAP) | X |
| $425 |
| |
| $318 |
| |
| $806 |
| |
| $608 |
| |
| | | | | | | | | | | | | | | | |
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
| | | | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, | | As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, |
(in millions, except share, per-share and ratio data) | Ref. | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| |
(in millions, except share, per share and ratio data) | | Ref. | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Net income available to common stockholders, Underlying: | | | | | | | | | |
Net income available to common stockholders (GAAP) | | D |
| $435 |
| |
| $425 |
| |
| $859 |
| |
| $806 |
|
Add: Notable items, net of tax expense | | | 5 |
| | — |
| | 9 |
| | — |
|
Net income available to common stockholders, Underlying (non-GAAP) | | X |
| $440 |
| |
| $425 |
| |
| $868 |
| |
| $806 |
|
Return on average common equity and return on average common equity, Underlying: | | | | | | | | | | | | | | | | |
Average common equity (GAAP) | E |
| $19,732 |
| |
| $19,659 |
| |
| $19,732 |
| |
| $19,560 |
| E |
| $20,420 |
| |
| $19,732 |
| |
| $20,182 |
| |
| $19,732 |
|
Return on average common equity | D/E | 8.65 | % | | 6.48 | % | | 8.24 | % | | 6.50 | % | D/E | 8.54 | % | | 8.65 | % | | 8.58 | % | | 8.24 | % |
Return on average common equity, Underlying (non-GAAP) | X/E | 8.65 |
| | 6.48 |
| | 8.24 |
| | 6.27 |
| X/E | 8.63 |
| | 8.65 |
| | 8.67 |
| | 8.24 |
|
Return on average tangible common equity and return on average common equity, Underlying: | | | | | | | | | |
Return on average tangible common equity and return on average tangible common equity, Underlying: | | | | | | | | | |
Average common equity (GAAP) | E |
| $19,732 |
| |
| $19,659 |
| |
| $19,732 |
| |
| $19,560 |
| E |
| $20,420 |
| |
| $19,732 |
| |
| $20,182 |
| |
| $19,732 |
|
Less: Average goodwill (GAAP) | | 6,887 |
| | 6,882 |
| | 6,887 |
| | 6,879 |
| | 7,040 |
| | 6,887 |
| | 7,029 |
| | 6,887 |
|
Less: Average other intangibles (GAAP) | | 2 |
| | 2 |
| | 2 |
| | 1 |
| | 80 |
| | 2 |
| | 69 |
| | 2 |
|
Add: Average deferred tax liabilities related to goodwill (GAAP) | | 357 |
| | 534 |
| | 356 |
| | 533 |
| | 370 |
| | 357 |
| | 369 |
| | 356 |
|
Average tangible common equity | F |
| $13,200 |
| |
| $13,309 |
| |
| $13,199 |
| |
| $13,213 |
| F |
| $13,670 |
| |
| $13,200 |
| |
| $13,453 |
| |
| $13,199 |
|
Return on average tangible common equity | D/F | 12.93 | % | | 9.57 | % | | 12.32 | % | | 9.62 | % | D/F | 12.75 | % | | 12.93 | % | | 12.87 | % | | 12.32 | % |
Return on average tangible common equity, Underlying (non-GAAP) | X/F | 12.93 |
| | 9.57 |
| | 12.32 |
| | 9.28 |
| X/F | 12.89 |
| | 12.93 |
| | 13.00 |
| | 12.32 |
|
Return on average total assets and return on average total assets, Underlying: | | | | | | | | | | | | | | | | |
Average total assets (GAAP) | G |
| $153,253 |
| |
| $149,878 |
| |
| $152,393 |
| |
| $149,335 |
| G |
| $161,489 |
| |
| $153,253 |
| |
| $160,955 |
| |
| $152,393 |
|
Return on average total assets | C/G | 1.11 | % | | 0.85 | % | | 1.08 | % | | 0.86 | % | C/G | 1.13 | % | | 1.11 | % | | 1.12 | % | | 1.08 | % |
Return on average total assets, Underlying (non-GAAP) | W/G | 1.11 |
| | 0.85 |
| | 1.08 |
| | 0.83 |
| W/G | 1.14 |
| | 1.11 |
| | 1.13 |
| | 1.08 |
|
Return on average total tangible assets and return on average total tangible assets, Underlying: | | | | | | | | | | | | | | | | |
Average total assets (GAAP) | G |
| $153,253 |
| |
| $149,878 |
| |
| $152,393 |
| |
| $149,335 |
| G |
| $161,489 |
| |
| $153,253 |
| |
| $160,955 |
| |
| $152,393 |
|
Less: Average goodwill (GAAP) | | 6,887 |
| | 6,882 |
| | 6,887 |
| | 6,879 |
| | 7,040 |
| | 6,887 |
| | 7,029 |
| | 6,887 |
|
Less: Average other intangibles (GAAP) | | 2 |
| | 2 |
| | 2 |
| | 1 |
| | 80 |
| | 2 |
| | 69 |
| | 2 |
|
Add: Average deferred tax liabilities related to goodwill (GAAP) | | 357 |
| | 534 |
| | 356 |
| | 533 |
| | 370 |
| | 357 |
| | 369 |
| | 356 |
|
Average tangible assets | H |
| $146,721 |
| |
| $143,528 |
| |
| $145,860 |
| |
| $142,988 |
| H |
| $154,739 |
| |
| $146,721 |
| |
| $154,226 |
| |
| $145,860 |
|
Return on average total tangible assets | C/H | 1.16 | % | | 0.89 | % | | 1.12 | % | | 0.90 | % | C/H | 1.17 | % | | 1.16 | % | | 1.17 | % | | 1.12 | % |
Return on average total tangible assets, Underlying (non-GAAP) | W/H | 1.16 |
| | 0.89 |
| | 1.12 |
| | 0.87 |
| W/H | 1.19 |
| | 1.16 |
| | 1.18 |
| | 1.12 |
|
Efficiency ratio and efficiency ratio, Underlying: | | | | | | | | | | | | | | | | |
Efficiency ratio | B/A | 57.95 | % | | 61.94 | % | | 59.17 | % | | 61.81 | % | B/A | 58.41 | % | | 57.95 | % | | 58.70 | % | | 59.17 | % |
Efficiency ratio, Underlying (non-GAAP) | T/S | 57.95 |
| | 60.36 |
| | 59.17 |
| | 61.02 |
| T/S | 58.02 |
| | 57.95 |
| | 58.34 |
| | 59.17 |
|
Operating leverage and operating leverage, Underlying: | | | | | | | | | | | | | | | | |
Increase in total revenue | | 8.15 | % | | 9.23 | % | | 6.86 | % | | 10.67 | % | | 7.81 | % | | 8.15 | % | | 8.25 | % | | 6.86 | % |
Increase in noninterest expense | | 1.19 |
| | 4.47 |
| | 2.30 |
| | 4.88 |
| | 8.66 |
| | 1.19 |
| | 7.39 |
| | 2.30 |
|
Operating leverage | | 6.96 | % | | 4.76 | % | | 4.56 | % | | 5.79 | % | | (0.85 | )% | | 6.96 | % | | 0.86 | % | | 4.56 | % |
Increase in total revenue, Underlying (non-GAAP) | | 7.29 | % | | 10.09 | % | | 6.43 | % | | 11.11 | % | | 7.81 | % | | 7.29 | % | | 8.25 | % | | 6.43 | % |
Increase in noninterest expense, Underlying (non-GAAP) | | 3.01 |
| | 2.66 |
| | 3.22 |
| | 3.97 |
| | 7.93 |
| | 3.01 |
| | 6.73 |
| | 3.22 |
|
Operating leverage, Underlying (non-GAAP) | | 4.28 | % | | 7.43 | % | | 3.21 | % | | 7.14 | % | | (0.12 | )% | | 4.28 | % | | 1.52 | % | | 3.21 | % |
Net income per average common share - basic and diluted and net income per average common share - basic and diluted, Underlying: | | | | | | | | | | | | | | | | |
Average common shares outstanding - basic (GAAP) | K | 484,744,354 |
| | 506,371,846 |
| | 486,114,872 |
| | 507,903,141 |
| K | 458,154,335 |
| | 484,744,354 |
| | 459,426,685 |
| | 486,114,872 |
|
Average common shares outstanding - diluted (GAAP) | L | 486,141,695 |
| | 507,414,122 |
| | 487,683,216 |
| | 509,362,055 |
| L | 459,304,224 |
| | 486,141,695 |
| | 460,857,535 |
| | 487,683,216 |
|
Net income per average common share - basic (GAAP) | D/K | 0.88 |
| | 0.63 |
| |
| $1.66 |
| |
| $1.24 |
| D/K |
| $0.95 |
| |
| $0.88 |
| |
| $1.87 |
| |
| $1.66 |
|
Net income per average common share - diluted (GAAP) | D/L | 0.88 |
| | 0.63 |
| | 1.65 |
| | 1.24 |
| D/L | 0.95 |
| | 0.88 |
| | 1.86 |
| | 1.65 |
|
Net income per average common share - basic, Underlying (non-GAAP) | X/K | 0.88 |
| | 0.63 |
| | 1.66 |
| | 1.20 |
| X/K | 0.96 |
| | 0.88 |
| | 1.89 |
| | 1.66 |
|
Net income per average common share - diluted, Underlying (non-GAAP) | X/L | 0.88 |
| | 0.63 |
| | 1.65 |
| | 1.19 |
| X/L | 0.96 |
| | 0.88 |
| | 1.88 |
| | 1.65 |
|
CITIZENS FINANCIAL GROUP, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 1. FINANCIAL STATEMENTS
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | (in millions, except share data) | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
ASSETS: | | | | | | |
Cash and due from banks |
| $997 |
| |
| $987 |
|
| $996 |
| |
| $1,081 |
|
Interest-bearing cash and due from banks | 2,868 |
| | 2,045 |
| 2,039 |
| | 2,993 |
|
Interest-bearing deposits in banks | 114 |
| | 192 |
| 186 |
| | 148 |
|
Debt securities available for sale, at fair value (including $393 and $91 pledged to creditors, respectively)(1) | 20,157 |
| | 20,157 |
| |
Debt securities held to maturity (fair value of $4,260 and $4,668, respectively) | 4,417 |
| | 4,685 |
| |
Debt securities available for sale, at fair value (including $434 and $363 pledged to creditors, respectively)(1) | | 21,698 |
| | 19,895 |
|
Debt securities held to maturity (fair value of $3,441 and $4,041, respectively) | | 3,447 |
| | 4,165 |
|
Equity securities, at fair value | 170 |
| | 169 |
| 47 |
| | 181 |
|
Equity securities, at cost | 769 |
| | 722 |
| 706 |
| | 834 |
|
Loans held for sale, at fair value | 521 |
| | 497 |
| 1,750 |
| | 1,219 |
|
Other loans held for sale | 189 |
| | 221 |
| 455 |
| | 101 |
|
Loans and leases | 113,407 |
| | 110,617 |
| 116,838 |
| | 116,660 |
|
Less: Allowance for loan and lease losses | (1,253 | ) | | (1,236 | ) | (1,227 | ) | | (1,242 | ) |
Net loans and leases | 112,154 |
| | 109,381 |
| 115,611 |
| | 115,418 |
|
Derivative assets | 224 |
| | 617 |
| 833 |
| | 317 |
|
Premises and equipment, net | 720 |
| | 685 |
| 740 |
| | 791 |
|
Bank-owned life insurance | 1,677 |
| | 1,656 |
| 1,711 |
| | 1,698 |
|
Goodwill | 6,887 |
| | 6,887 |
| 7,040 |
| | 6,923 |
|
Due from broker | — |
| | 6 |
| 249 |
| | — |
|
Other assets | 3,567 |
| | 3,429 |
| 5,241 |
| | 4,754 |
|
TOTAL ASSETS |
| $155,431 |
| |
| $152,336 |
|
| $162,749 |
| |
| $160,518 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: | | | | | | |
LIABILITIES: | | | | | | |
Deposits: | | | | | | |
Noninterest-bearing |
| $29,439 |
| |
| $29,279 |
|
| $28,192 |
| |
| $29,458 |
|
Interest-bearing | 87,634 |
| | 85,810 |
| 95,812 |
| | 90,117 |
|
Total deposits | 117,073 |
| | 115,089 |
| 124,004 |
| | 119,575 |
|
Federal funds purchased and securities sold under agreements to repurchase | 326 |
| | 815 |
| 1,132 |
| | 1,156 |
|
Other short-term borrowed funds | 1,499 |
| | 1,856 |
| 309 |
| | 161 |
|
Derivative liabilities | 425 |
| | 310 |
| 106 |
| | 292 |
|
Deferred taxes, net | 456 |
| | 571 |
| 767 |
| | 573 |
|
Long-term borrowed funds
| 13,641 |
| | 11,765 |
| 11,538 |
| | 15,925 |
|
Due to broker | | 257 |
| | — |
|
Other liabilities | 1,544 |
| | 1,660 |
| 2,619 |
| | 2,019 |
|
TOTAL LIABILITIES | 134,964 |
| | 132,066 |
| 140,732 |
| | 139,701 |
|
Contingencies (refer to Note 11) |
|
| |
|
| |
Contingencies (refer to Note 12) | |
|
| |
|
|
STOCKHOLDERS’ EQUITY: | | | | | | |
Preferred stock, $25.00 par value, 100,000,000 shares authorized | 543 |
| | 247 |
| 1,133 |
| | 840 |
|
Common stock: | | | | | | |
$0.01 par value, 1,000,000,000 shares authorized; 566,579,431 shares issued and 484,055,194 shares outstanding at June 30, 2018 and 565,850,984 shares issued and 490,812,912 shares outstanding at December 31, 2017 | 6 |
| | 6 |
| |
$0.01 par value, 1,000,000,000 shares authorized; 568,003,349 shares issued and 457,903,826 shares outstanding at June 30, 2019 and 566,819,863 shares issued and 466,007,984 shares outstanding at December 31, 2018 | | 6 |
| | 6 |
|
Additional paid-in capital | 18,806 |
| | 18,781 |
| 18,860 |
| | 18,815 |
|
Retained earnings | 4,755 |
| | 4,164 |
| 5,959 |
| | 5,385 |
|
Treasury stock, at cost, 82,524,237 and 75,038,072 shares at June 30, 2018 and December 31, 2017, respectively | (2,433 | ) | | (2,108 | ) | |
Treasury stock, at cost, 110,099,523 and 100,811,879 shares at June 30, 2019 and December 31, 2018, respectively | | (3,453 | ) | | (3,133 | ) |
Accumulated other comprehensive loss | (1,210 | ) | | (820 | ) | (488 | ) | | (1,096 | ) |
TOTAL STOCKHOLDERS’ EQUITY |
| $20,467 |
| |
| $20,270 |
|
| $22,017 |
| |
| $20,817 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $155,431 |
| |
| $152,336 |
|
| $162,749 |
| |
| $160,518 |
|
(1) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.
The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except share and per-share data) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
| |
(in millions, except share and per share data) | | 2019 |
| 2018 |
| | 2019 |
| | 2018 |
|
INTEREST INCOME: | | | | | | | | |
Interest and fees on loans and leases |
| $1,230 |
|
| $1,040 |
| |
| $2,376 |
|
| $2,032 |
|
| $1,392 |
|
| $1,230 |
| |
| $2,773 |
| |
| $2,376 |
|
Interest and fees on loans held for sale, at fair value | 5 |
| 4 |
| | 9 |
| 8 |
| 15 |
| 5 |
| | 26 |
| | 9 |
|
Interest and fees on other loans held for sale | 3 |
| 2 |
| | 7 |
| 3 |
| 2 |
| 3 |
| | 6 |
| | 7 |
|
Investment securities | 165 |
| 154 |
| | 333 |
| 314 |
| 164 |
| 165 |
| | 330 |
| | 333 |
|
Interest-bearing deposits in banks | 8 |
| 5 |
| | 14 |
| 8 |
| 7 |
| 8 |
| | 15 |
| | 14 |
|
Total interest income | 1,411 |
| 1,205 |
| | 2,739 |
| 2,365 |
| 1,580 |
| 1,411 |
| | 3,150 |
| | 2,739 |
|
INTEREST EXPENSE: | | | | | | | | |
Deposits | 181 |
| 102 |
| | 326 |
| 188 |
| 308 |
| 181 |
| | 595 |
| | 326 |
|
Federal funds purchased and securities sold under agreements to repurchase | 1 |
| — |
| | 2 |
| 1 |
| 3 |
| 1 |
| | 5 |
| | 2 |
|
Other short-term borrowed funds | 14 |
| 7 |
| | 23 |
| 15 |
| 1 |
| 1 |
| | 1 |
| | 3 |
|
Long-term borrowed funds | 94 |
| 70 |
| | 176 |
| 130 |
| 102 |
| 107 |
| | 223 |
| | 196 |
|
Total interest expense | 290 |
| 179 |
| | 527 |
| 334 |
| 414 |
| 290 |
| | 824 |
| | 527 |
|
Net interest income | 1,121 |
| 1,026 |
| | 2,212 |
| 2,031 |
| 1,166 |
| 1,121 |
| | 2,326 |
| | 2,212 |
|
Provision for credit losses | 85 |
| 70 |
| | 163 |
| 166 |
| 97 |
| 85 |
| | 182 |
| | 163 |
|
Net interest income after provision for credit losses | 1,036 |
| 956 |
| | 2,049 |
| 1,865 |
| 1,069 |
| 1,036 |
| | 2,144 |
| | 2,049 |
|
NONINTEREST INCOME: | | | | | | | | |
Service charges and fees | 127 |
| 129 |
| | 251 |
| 254 |
| 126 |
| 127 |
| | 249 |
| | 251 |
|
Card fees | 60 |
| 59 |
| | 121 |
| 119 |
| 64 |
| 60 |
| | 123 |
| | 121 |
|
Capital markets fees | 48 |
| 51 |
| | 87 |
| 99 |
| 57 |
| 48 |
| | 111 |
| | 87 |
|
Trust and investment services fees | 43 |
| 39 |
| | 83 |
| 78 |
| 53 |
| 43 |
| | 100 |
| | 83 |
|
Mortgage banking fees | | 62 |
| 27 |
| | 105 |
| | 52 |
|
Letter of credit and loan fees | 32 |
| 31 |
| | 62 |
| 60 |
| 33 |
| 32 |
| | 66 |
| | 62 |
|
Foreign exchange and interest rate products | 34 |
| 26 |
| | 61 |
| 53 |
| 35 |
| 34 |
| | 71 |
| | 61 |
|
Mortgage banking fees | 27 |
| 30 |
| | 52 |
| 53 |
| |
Securities gains, net | 2 |
| 3 |
| | 10 |
| 7 |
| 4 |
| 2 |
| | 12 |
| | 10 |
|
Net impairment losses recognized in earnings on debt securities | (1 | ) | (4 | ) | | (2 | ) | (5 | ) | — |
| (1 | ) | | (1 | ) | | (2 | ) |
Other income | 16 |
| 6 |
| | 34 |
| 31 |
| 28 |
| 16 |
| | 54 |
| | 34 |
|
Total noninterest income | 388 |
| 370 |
| | 759 |
| 749 |
| 462 |
| 388 |
| | 890 |
| | 759 |
|
NONINTEREST EXPENSE: | | | | | | | | |
Salaries and employee benefits | 453 |
| 432 |
| | 923 |
| 878 |
| 507 |
| 453 |
| | 1,016 |
| | 923 |
|
Equipment and software expense | | 126 |
| 110 |
| | 251 |
| | 223 |
|
Outside services | 106 |
| 96 |
| | 205 |
| 187 |
| 118 |
| 106 |
| | 228 |
| | 205 |
|
Occupancy | 79 |
| 79 |
| | 160 |
| 161 |
| 82 |
| 79 |
| | 165 |
| | 160 |
|
Equipment expense | 64 |
| 64 |
| | 131 |
| 131 |
| |
Amortization of software | 46 |
| 45 |
| | 92 |
| 89 |
| |
Other operating expense | 127 |
| 148 |
| | 247 |
| 272 |
| 118 |
| 127 |
| | 228 |
| | 247 |
|
Total noninterest expense | 875 |
| 864 |
| | 1,758 |
| 1,718 |
| 951 |
| 875 |
| | 1,888 |
| | 1,758 |
|
Income before income tax expense | 549 |
| 462 |
| | 1,050 |
| 896 |
| 580 |
| 549 |
| | 1,146 |
| | 1,050 |
|
Income tax expense | 124 |
| 144 |
| | 237 |
| 258 |
| 127 |
| 124 |
| | 254 |
| | 237 |
|
NET INCOME |
| $425 |
|
| $318 |
| |
| $813 |
|
| $638 |
|
| $453 |
|
| $425 |
| |
| $892 |
| |
| $813 |
|
Net income available to common stockholders |
| $425 |
|
| $318 |
| |
| $806 |
|
| $631 |
|
| $435 |
|
| $425 |
| |
| $859 |
| |
| $806 |
|
Weighted-average common shares outstanding: | | | | | | | | |
Basic | 484,744,354 |
| 506,371,846 |
| | 486,114,872 |
| 507,903,141 |
| 458,154,335 |
| 484,744,354 |
| | 459,426,685 |
| | 486,114,872 |
|
Diluted | 486,141,695 |
| 507,414,122 |
| | 487,683,216 |
| 509,362,055 |
| 459,304,224 |
| 486,141,695 |
| | 460,857,535 |
| | 487,683,216 |
|
Per common share information: | | | | | | | | |
Basic earnings |
| $0.88 |
|
| $0.63 |
| |
| $1.66 |
|
| $1.24 |
|
| $0.95 |
|
| $0.88 |
| |
| $1.87 |
| |
| $1.66 |
|
Diluted earnings | 0.88 |
| 0.63 |
| | 1.65 |
| 1.24 |
| 0.95 |
| 0.88 |
| | 1.86 |
| | 1.65 |
|
Dividends declared and paid | 0.22 |
| 0.14 |
| | 0.44 |
| 0.28 |
| |
The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
Net income |
| $425 |
|
| $318 |
| |
| $813 |
|
| $638 |
|
Other comprehensive (loss) income: | | | | | |
Net unrealized derivative instrument (losses) gains arising during the periods, net of income taxes of ($4), $16, ($22) and $14, respectively | (13 | ) | 26 |
| | (65 | ) | 23 |
|
Reclassification adjustment for net derivative losses (gains) included in net income, net of income taxes of $3, ($2), $3 and ($6), respectively | 6 |
| (5 | ) | | 8 |
| (11 | ) |
Net unrealized debt securities (losses) gains arising during the periods, net of income taxes of ($19), $33, ($105) and $36, respectively | (60 | ) | 56 |
| | (332 | ) | 61 |
|
Other-than-temporary impairment not recognized in earnings on debt securities, net of income taxes of $1, $6, $0 and ($1), respectively | — |
| 10 |
| | (1 | ) | (2 | ) |
Reclassification of net debt securities (gains) losses to net income, net of income taxes of $0, $0, ($2) and ($1), respectively | (1 | ) | 1 |
| | (6 | ) | (1 | ) |
Amortization of actuarial loss, net of income taxes of $1, $2, $2 and $4, respectively | 3 |
| 2 |
| | 6 |
| 5 |
|
Total other comprehensive (loss) income, net of income taxes | (65 | ) | 90 |
| | (390 | ) | 75 |
|
Total comprehensive income |
| $360 |
|
| $408 |
| |
| $423 |
|
| $713 |
|
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| 2018 |
| | 2019 |
| | 2018 |
|
Net income |
| $453 |
|
| $425 |
| |
| $892 |
| |
| $813 |
|
Other comprehensive income (loss): | | | | | | |
Net unrealized derivative instrument gains (losses) arising during the periods, net of income taxes of $23, ($4), $36 and ($22), respectively | 68 |
| (13 | ) | | 107 |
| | (65 | ) |
Reclassification adjustment for net derivative losses included in net income, net of income taxes of $4, $3, $9 and $3, respectively | 15 |
| 6 |
| | 30 |
| | 8 |
|
Net unrealized debt securities gains (losses) arising during the periods, net of income taxes of $72, ($19), $152 and ($105), respectively | 221 |
| (60 | ) | | 467 |
| | (332 | ) |
Other-than-temporary impairment not recognized in earnings on debt securities, net of income taxes of $0, $1, $0 and $0, respectively | 1 |
| — |
| | 1 |
| | (1 | ) |
Reclassification of net debt securities gains to net income, net of income taxes of ($1), $0, ($3) and ($2), respectively | (3 | ) | (1 | ) | | (8 | ) | | (6 | ) |
Amortization of actuarial loss, net of income taxes of $1, $1, $3 and $2, respectively | 3 |
| 3 |
| | 6 |
| | 6 |
|
Total other comprehensive income (loss), net of income taxes | 305 |
| (65 | ) | | 603 |
| | (390 | ) |
Total comprehensive income |
| $758 |
|
| $360 |
| |
| $1,495 |
| |
| $423 |
|
The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
| | | Preferred Stock | | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Total | Preferred Stock | | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Total |
(in millions) | Shares | Amount | | Shares | Amount | Shares | Amount | | Shares | Amount |
Balance at January 1, 2017 | — |
|
| $247 |
| | 512 |
|
| $6 |
|
| $18,722 |
|
| $2,703 |
|
| ($1,263 | ) |
| ($668 | ) |
| $19,747 |
| |
Balance at April 1, 2018 | | — |
|
| $247 |
| | 488 |
|
| $6 |
|
| $18,797 |
|
| $4,437 |
|
| ($2,283 | ) |
| ($1,145 | ) |
| $20,059 |
|
Dividends to common stockholders | — |
| — |
| | — |
| — |
| — |
| (143 | ) | — |
| — |
| (143 | ) | — |
| — |
| | — |
| — |
| — |
| (107 | ) | — |
| — |
| (107 | ) |
Dividends to preferred stockholders | — |
| — |
| — |
| — |
| — |
| — |
| (7 | ) | — |
| — |
| (7 | ) | |
Treasury stock purchased | — |
| — |
| | (7 | ) | — |
| 25 |
| — |
| (285 | ) | — |
| (260 | ) | |
Share-based compensation plans | — |
| — |
| | 1 |
| — |
| 8 |
| — |
| — |
| — |
| 8 |
| |
Employee stock purchase plan shares purchased | — |
| — |
| | — |
| — |
| 6 |
| — |
| — |
| — |
| 6 |
| |
Total comprehensive income: | | | | | |
Net income | — |
| — |
| | — |
| — |
| — |
| 638 |
| — |
| — |
| 638 |
| |
Other comprehensive income | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 75 |
| 75 |
| |
Total comprehensive income | — |
| — |
| | — |
| — |
| — |
| 638 |
| — |
| 75 |
| 713 |
| |
Balance at June 30, 2017 | — |
|
| $247 |
| | 506 |
|
| $6 |
|
| $18,761 |
|
| $3,191 |
|
| ($1,548 | ) |
| ($593 | ) |
| $20,064 |
| |
Balance at January 1, 2018 | — |
|
| $247 |
| | 491 |
|
| $6 |
|
| $18,781 |
|
| $4,164 |
|
| ($2,108 | ) |
| ($820 | ) |
| $20,270 |
| |
Dividends to common stockholders | — |
| — |
| | — |
| — |
| — |
| (215 | ) | — |
| — |
| (215 | ) | |
Dividends to preferred stockholders | — |
| — |
| | — |
| — |
| — |
| (7 | ) | — |
| — |
| (7 | ) | |
Preferred stock issued | 1 |
| 296 |
| | — |
| — |
| — |
| — |
| — |
| — |
| 296 |
| 1 |
| 296 |
| | — |
| — |
| — |
| — |
| — |
| — |
| 296 |
|
Treasury stock purchased | — |
| — |
| | (8 | ) | — |
| — |
| — |
| (325 | ) | — |
| (325 | ) | — |
| — |
| | (4 | ) | — |
| — |
| — |
| (150 | ) | — |
| (150 | ) |
Share-based compensation plans | — |
| — |
| | 1 |
| — |
| 18 |
| — |
| — |
| — |
| 18 |
| — |
| — |
| | — |
| — |
| 5 |
| — |
| — |
| — |
| 5 |
|
Employee stock purchase plan shares purchased | — |
| — |
| | — |
| — |
| 7 |
| — |
| — |
| — |
| 7 |
| — |
| — |
| | — |
| — |
| 4 |
| — |
| — |
| — |
| 4 |
|
Total comprehensive income: | | | | | | | | | |
Net income | — |
| — |
| | — |
| — |
| — |
| 813 |
| — |
| — |
| 813 |
| — |
| — |
| | — |
| — |
| — |
| 425 |
| — |
| — |
| 425 |
|
Other comprehensive loss | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| (390 | ) | (390 | ) | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| (65 | ) | (65 | ) |
Total comprehensive income | — |
| — |
| | — |
| — |
| — |
| 813 |
| — |
| (390 | ) | 423 |
| — |
| — |
| | — |
| — |
| — |
| 425 |
| — |
| (65 | ) | 360 |
|
Balance at June 30, 2018 | 1 |
|
| $543 |
| | 484 |
|
| $6 |
|
| $18,806 |
|
| $4,755 |
|
| ($2,433 | ) |
| ($1,210 | ) |
| $20,467 |
| 1 |
|
| $543 |
| | 484 |
|
| $6 |
|
| $18,806 |
|
| $4,755 |
|
| ($2,433 | ) |
| ($1,210 | ) |
| $20,467 |
|
Balance at April 1, 2019 | | 1 |
|
| $1,132 |
| | 461 |
|
| $6 |
|
| $18,847 |
|
| $5,672 |
|
| ($3,333 | ) |
| ($793 | ) |
| $21,531 |
|
Dividends to common stockholders | | — |
| — |
| | — |
| — |
| — |
| (148 | ) | — |
| — |
| (148 | ) |
Dividends to preferred stockholders | | — |
| — |
| | — |
| — |
| — |
| (18 | ) | — |
| — |
| (18 | ) |
Preferred stock issued | | — |
| 1 |
| | — |
| — |
| — |
| — |
| — |
| — |
| 1 |
|
Treasury stock purchased | | — |
| — |
| | (3 | ) | — |
| — |
| — |
| (120 | ) | — |
| (120 | ) |
Share-based compensation plans | | — |
| — |
| | — |
| — |
| 9 |
| — |
| — |
| — |
| 9 |
|
Employee stock purchase plan shares purchased | | — |
| — |
| | — |
| — |
| 4 |
| — |
| — |
| — |
| 4 |
|
Total comprehensive income: | | | | | | |
Net income | | — |
| — |
| | — |
| — |
| — |
| 453 |
| — |
| — |
| 453 |
|
Other comprehensive income | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 305 |
| 305 |
|
Total comprehensive income | | — |
| — |
| | — |
| — |
| — |
| 453 |
| — |
| 305 |
| 758 |
|
Balance at June 30, 2019 | | 1 |
|
| $1,133 |
| | 458 |
|
| $6 |
|
| $18,860 |
|
| $5,959 |
|
| ($3,453 | ) |
| ($488 | ) |
| $22,017 |
|
The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Total |
(in millions) | Shares | Amount | | Shares | Amount |
Balance at January 1, 2018 | — |
|
| $247 |
| | 491 |
|
| $6 |
|
| $18,781 |
|
| $4,164 |
|
| ($2,108 | ) |
| ($820 | ) |
| $20,270 |
|
Dividends to common stockholders | — |
| — |
| | — |
| — |
| — |
| (215 | ) | — |
| — |
| (215 | ) |
Dividends to preferred stockholders | — |
| — |
| — |
| — |
| — |
| — |
| (7 | ) | — |
| — |
| (7 | ) |
Preferred stock issued | 1 |
| 296 |
| | — |
| — |
| — |
| — |
| — |
| — |
| 296 |
|
Treasury stock purchased | — |
| — |
| | (8 | ) | — |
| — |
| — |
| (325 | ) | — |
| (325 | ) |
Share-based compensation plans | — |
| — |
| | 1 |
| — |
| 18 |
| — |
| — |
| — |
| 18 |
|
Employee stock purchase plan shares purchased | — |
| — |
| | — |
| — |
| 7 |
| — |
| — |
| — |
| 7 |
|
Total comprehensive income: | | | | | | | | | | |
Net income | — |
| — |
| | — |
| — |
| — |
| 813 |
| — |
| — |
| 813 |
|
Other comprehensive loss | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| (390 | ) | (390 | ) |
Total comprehensive income | — |
| — |
| | — |
| — |
| — |
| 813 |
| — |
| (390 | ) | 423 |
|
Balance at June 30, 2018 | 1 |
|
| $543 |
| | 484 |
|
| $6 |
|
| $18,806 |
|
| $4,755 |
|
| ($2,433 | ) |
| ($1,210 | ) |
| $20,467 |
|
Balance at January 1, 2019 | 1 |
|
| $840 |
| | 466 |
|
| $6 |
|
| $18,815 |
|
| $5,385 |
|
| ($3,133 | ) |
| ($1,096 | ) |
| $20,817 |
|
Dividends to common stockholders | — |
| — |
| | — |
| — |
| — |
| (297 | ) | — |
| — |
| (297 | ) |
Dividends to preferred stockholders | — |
| — |
| | — |
| — |
| — |
| (33 | ) | — |
| — |
| (33 | ) |
Preferred stock issued | — |
| 293 |
| | — |
| — |
| — |
| — |
| — |
| — |
| 293 |
|
Treasury stock purchased | — |
| — |
| | (9 | ) | — |
| — |
| — |
| (320 | ) | — |
| (320 | ) |
Share-based compensation plans | — |
| — |
| | 1 |
| — |
| 37 |
| — |
|
|
| — |
| 37 |
|
Employee stock purchase plan shares purchased | — |
| — |
| | — |
| — |
| 8 |
| — |
| — |
| — |
| 8 |
|
Cumulative effect of change in accounting standards | — |
| — |
| | — |
| — |
| — |
| 12 |
| — |
| 5 |
| 17 |
|
Total comprehensive income: | | | | | | | | | | |
Net income | — |
| — |
| | — |
| — |
| — |
| 892 |
| — |
| — |
| 892 |
|
Other comprehensive income | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 603 |
| 603 |
|
Total comprehensive income | — |
| — |
| | — |
| — |
| — |
| 892 |
| — |
| 603 |
| 1,495 |
|
Balance at June 30, 2019 | 1 |
|
| $1,133 |
| | 458 |
|
| $6 |
|
| $18,860 |
|
| $5,959 |
|
| ($3,453 | ) |
| ($488 | ) |
| $22,017 |
|
The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.
CITIZENS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
|
OPERATING ACTIVITIES | | | |
Net income |
| $892 |
| |
| $813 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for credit losses | 182 |
| | 163 |
|
Originations of mortgage loans held for sale | (7,741 | ) | | (1,345 | ) |
Proceeds from sales of mortgage loans held for sale | 7,148 |
| | 1,325 |
|
Purchases of commercial loans held for sale | (1,076 | ) | | (1,024 | ) |
Proceeds from sales of commercial loans held for sale | 1,198 |
| | 1,039 |
|
Depreciation, amortization and accretion | 275 |
| | 243 |
|
Mortgage servicing rights valuation charge-off (recovery) | 14 |
| | (3 | ) |
Debt securities impairment | 1 |
| | 2 |
|
Deferred income taxes | (10 | ) | | 10 |
|
Share-based compensation | 32 |
| | 28 |
|
Net gain on sales of: | | | |
Debt securities | (16 | ) | | (10 | ) |
Premises and equipment | (7 | ) | | — |
|
(Increase) decrease in other assets | (236 | ) | | 283 |
|
Decrease in other liabilities | (79 | ) | | (109 | ) |
Net cash provided by operating activities | 577 |
| | 1,415 |
|
INVESTING ACTIVITIES | | | |
Investment securities: | | | |
Purchases of debt securities available for sale | (3,502 | ) | | (2,343 | ) |
Proceeds from maturities and paydowns of debt securities available for sale | 1,625 |
| | 1,636 |
|
Proceeds from sales of debt securities available for sale | 1,250 |
| | 273 |
|
Proceeds from maturities and paydowns of debt securities held to maturity | 171 |
| | 271 |
|
Purchases of equity securities, at fair value | (549 | ) | | (80 | ) |
Proceeds from sales of equity securities, at fair value | 683 |
| | 78 |
|
Purchases of equity securities, at cost | (258 | ) | | (334 | ) |
Proceeds from sales of equity securities, at cost | 386 |
| | 287 |
|
Net (increase) decrease in interest-bearing deposits in banks | (38 | ) | | 78 |
|
Purchases of mortgage servicing rights | — |
| | (16 | ) |
Acquisitions, net of cash acquired | (129 | ) | | — |
|
Net increase in loans and leases | (806 | ) | | (2,992 | ) |
Net increase in bank-owned life insurance | (13 | ) | | (21 | ) |
Premises and equipment: | | | |
Purchases | (41 | ) | | (94 | ) |
Proceeds from sales | 31 |
| | — |
|
Capitalization of software | (98 | ) | | (116 | ) |
Net cash used in investing activities | (1,288 | ) | | (3,373 | ) |
FINANCING ACTIVITIES | | | |
Net increase in deposits | 4,429 |
| | 1,984 |
|
Net decrease in federal funds purchased and securities sold under agreements to repurchase | (24 | ) | | (489 | ) |
Net increase (decrease) in other short-term borrowed funds | 147 |
| | (2,356 | ) |
Proceeds from issuance of long-term borrowed funds | 4,500 |
| | 11,500 |
|
Repayments of long-term borrowed funds | (9,005 | ) | | (7,584 | ) |
Treasury stock purchased | (320 | ) | | (325 | ) |
Net proceeds from issuance of preferred stock | 293 |
| | 296 |
|
Dividends declared and paid to common stockholders | (297 | ) | | (215 | ) |
Dividends declared and paid to preferred stockholders | (30 | ) | | (7 | ) |
Payments of employee tax withholding for share-based compensation | (21 | ) | | (13 | ) |
Net cash (used in) provided by financing activities | (328 | ) | | 2,791 |
|
(Decrease) increase in cash and cash equivalents (1) | (1,039 | ) | | 833 |
|
Cash and cash equivalents at beginning of period (1) | 4,074 |
| | 3,032 |
|
Cash and cash equivalents at end of period (1) |
| $3,035 |
| |
| $3,865 |
|
|
| | | | | | |
| Six Months Ended June 30, |
(in millions) | 2018 |
| 2017 |
|
OPERATING ACTIVITIES | | |
Net income |
| $813 |
|
| $638 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Provision for credit losses | 163 |
| 166 |
|
Originations of mortgage loans held for sale | (1,345 | ) | (1,394 | ) |
Proceeds from sales of mortgage loans held for sale | 1,325 |
| 1,544 |
|
Purchases of commercial loans held for sale | (1,024 | ) | (1,001 | ) |
Proceeds from sales of commercial loans held for sale | 1,039 |
| 946 |
|
Depreciation, amortization and accretion | 243 |
| 258 |
|
Mortgage servicing rights valuation recovery | (3 | ) | (1 | ) |
Debt securities impairment | 2 |
| 5 |
|
Deferred income taxes | 10 |
| (20 | ) |
Share-based compensation | 28 |
| 27 |
|
Net gain on sales of: | | |
Debt securities | (10 | ) | (7 | ) |
Equity securities | — |
| (1 | ) |
Decrease in other assets | 283 |
| 32 |
|
Decrease in other liabilities | (109 | ) | (655 | ) |
Net cash provided by operating activities | 1,415 |
| 537 |
|
INVESTING ACTIVITIES | | |
Investment securities: | | |
Purchases of debt securities available for sale | (2,343 | ) | (2,282 | ) |
Proceeds from maturities and paydowns of debt securities available for sale | 1,636 |
| 1,670 |
|
Proceeds from sales of debt securities available for sale | 273 |
| 407 |
|
Purchases of debt securities held to maturity | — |
| (171 | ) |
Proceeds from maturities and paydowns of debt securities held to maturity | 271 |
| 277 |
|
Purchases of equity securities, at fair value | (80 | ) | (174 | ) |
Proceeds from sales of equity securities, at fair value | 78 |
| 172 |
|
Purchases of equity securities, at cost | (334 | ) | (243 | ) |
Proceeds from sales of equity securities, at cost | 287 |
| 409 |
|
Net decrease in interest-bearing deposits in banks | 78 |
| 6 |
|
Purchases of mortgage servicing rights | (16 | ) | — |
|
Net increase in loans and leases | (2,992 | ) | (1,785 | ) |
Net increase in bank-owned life insurance | (21 | ) | (24 | ) |
Premises and equipment: | | |
Purchases | (94 | ) | (64 | ) |
Capitalization of software | (116 | ) | (83 | ) |
Net cash used in investing activities | (3,373 | ) | (1,885 | ) |
FINANCING ACTIVITIES | | |
Net increase in deposits | 1,984 |
| 3,809 |
|
Net decrease in federal funds purchased and securities sold under agreements to repurchase | (489 | ) | (719 | ) |
Net decrease in other short-term borrowed funds | (2,356 | ) | (1,208 | ) |
Proceeds from issuance of long-term borrowed funds | 11,500 |
| 10,109 |
|
Repayments of long-term borrowed funds | (7,584 | ) | (9,751 | ) |
Treasury stock purchased | (325 | ) | (260 | ) |
Net proceeds from issuance of preferred stock | 296 |
| — |
|
Dividends declared and paid to common stockholders
| (215 | ) | (143 | ) |
Dividends declared and paid to preferred stockholders | (7 | ) | (7 | ) |
Payments of employee tax withholding for share-based compensation
| (13 | ) | (19 | ) |
Net cash provided by financing activities | 2,791 |
| 1,811 |
|
Increase in cash and cash equivalents (1) | 833 |
| 463 |
|
Cash and cash equivalents at beginning of period (1) | 3,032 |
| 3,704 |
|
Cash and cash equivalents at end of period (1) |
| $3,865 |
|
| $4,167 |
|
(1) Cash and cash equivalents includes cash and due from banks and interest-bearing cash and due from banks as reflected on the Consolidated Balance Sheets.
The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Basis of Presentation
The unaudited interim Consolidated Financial Statements, including the Notes thereto of Citizens Financial Group, Inc., have been prepared in accordance with GAAP interim reporting requirements, and therefore do not include all information and Notes included in the audited Consolidated Financial Statements in conformity with GAAP. These unaudited interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. The Company’s principal business activity is banking, conducted through its subsidiaries,banking subsidiary, Citizens Bank, National Association and Citizens Bank of Pennsylvania.Association.
The unaudited interim Consolidated Financial Statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany transactions and balances have been eliminated. The Company has evaluated its unconsolidated entities and does not believe that any entity in which it has an interest, but does not currently consolidate, meets the requirements to be consolidated as a variable interest entity.
The unaudited interim Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for credit losses, evaluationACL and the fair value of unrealized losses on securities for other-than-temporary impairment, accounting for income taxes, the valuation of AFS and HTM securities, and derivatives.MSRs.
Significant Accounting Policies
For further information regarding the Company’s significant accounting policies, see Note 1 “Basis of Presentation” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017.2018.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounting Pronouncements Adopted in 2018
|
| | |
Pronouncement | Summary of Guidance | Effects on Financial Statements |
Revenue Recognition: Revenue from Contracts with Customers
Issued May 2014
| •
Requires that revenue from contracts with customers be recognized upon transfer of control of a good or service in the amount of consideration expected to be received.
•
Changes the accounting for certain contract costs including whether they may be offset against revenues in the Consolidated Statements of Operations.
•
Requires new qualitative and quantitative disclosures, including information about disaggregation of revenue and performance obligations.
•
May be adopted using a full retrospective approach or a modified cumulative effect approach wherein the guidance is applied only to existing contracts as of the date of initial adoption and to new contracts transacted after that date. | •
The Company adopted the new standard on January 1, 2018 under the modified retrospective method. Net interest income on financial assets and liabilities is explicitly excluded from the scope of the pronouncement.
•
Adoption of the new standard did not result in a change in the timing or amount of revenue recognized from contracts with customers. The Company did not recognize a cumulative adjustment to Retained Earnings upon adoption.
•
Effective January 1, 2018, underwriting fees are presented on a gross basis in capital market fees, while underwriting costs are presented in other operating expense. Prior to adoption, such costs were presented net of the related underwriting fees. |
Stock Compensation
Issued May 2017
| •
Requires modification accounting unless the fair value, vesting conditions, and classification of the modified award are the same as the original award immediately before the modification.
•
Applied prospectively to all modifications of share-based awards after the adoption date.
| •
The Company adopted the new standard as of January 1, 2018.
•
Adoption did not have an impact on the Company’s Consolidated Financial Statements. |
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Issued March 2017
| •
Requires the service cost component of net periodic pension and postretirement benefit cost to be reported separately in the Consolidated Statements of Operations from the other components (e.g., expected return on assets, interest costs, amortization of gains/losses and prior service costs).
•
Requires presentation in the Consolidated Statements of Operations of the service cost component in the same line item as other employee compensation costs and presentation of the other components in a different line item from the service cost component.
•
Retrospective application is required for all periods presented.
| •
The Company retrospectively adopted the new standard as of January 1, 2018.
•
Adoption did not have an impact on the Company’s net income.•
The Company reclassified prior period amounts in the Consolidated Statement of Operations, which resulted in an immaterial increase in salaries and employee benefits and a corresponding decrease in other operating expense. |
Recognition and Measurement of Financial Assets and Financial Liabilities
Issued January 2016
| •
Requires equity securities with readily determinable fair values to be measured at fair value on the balance sheet, with changes in the fair value recognized through earnings.
•
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or in the notes to the financial statements.
•
Makes several other targeted amendments to the existing accounting and disclosure requirements for financial instruments, including revised guidance related to valuation allowance assessments when recognizing deferred tax assets on unrealized losses on debt securities available for sale.
| •
The Company adopted the new standard as of January 1, 2018.
•
Adoption had an immaterial impact on the Company’s Consolidated Financial Statements. |
Classification of Certain Cash Receipts and Cash Payments
Issued August 2016
| •
Amends guidance on specific cashflows to determine the appropriate classification as operating, investing or financing activities which has required significant judgment.
•
The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified.
| •
The Company adopted the new standard as of January 1, 2018.
•
Adoption did not have an impact on the Company’s Consolidated Financial Statements. |
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounting Pronouncements Pending Adoption
|
| | |
Pronouncement | Summary of Guidance | Effects on Financial Statements |
Derivatives and Hedging
Issued August 2017 | • Reduces the complexity and operational burdens of the current hedge accounting model and portrays more clearly the effects of hedge accounting in the financial statements.
• Modifies current requirements to facilitate the application of hedge accounting to partial-term hedges, hedges of prepayable financial instruments, and other strategies. Adoption of these optional changes would occur on a prospective basis.
• Requires the effects of fair value hedges to be classified in the same income statement line as the earnings effect of the hedged item. Adoption of this change will occur on a prospective basis.
• Requires all effects of cash flow hedges to be deferred in other comprehensive income until the hedged cash flows affect earnings. Periodic hedge ineffectiveness will no longer be recognized in earnings. Adoption of this change will occur on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. | • Required effective date:The Company adopted the new standard on January 1, 2019. Early adoption is permitted. The Company does not intend to early adopt this guidance prior to2019 under the required effective date.modified retrospective method.
• The transition entries required upon adoption areAdoption did not expected to have a material impact on the Company’s Consolidated Financial Statements.
• Required disclosures are included in Note 9 “Derivatives”. |
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | |
Pronouncement | Summary of Guidance | Effects on Financial Statements |
Leases
Issued February 2016
| • Requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with a lease term of greater than one year.
• Requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests.
• Requires that for finance leases, a lessee recognize interest expense on the lease liability separately from the amortization of the right-of-use asset in the Consolidated Statements of Operations, while for operating leases, such amounts should be recognized as a combined expense.
• Requires expanded disclosures about the nature and terms of lease agreements.
• Requires adoptionProvides the option to adopt using either a modified cumulative effectcumulative-effect approach wherein the guidance is applied to all periods presented.presented, or through a cumulative-effect adjustment beginning in the period of adoption.
• Requires companies with land easements to assess whether the easement meets the definition of a lease before applying other accounting guidance. | • Required effective date:The Company adopted the new standard under the modified retrospective approach on January 1, 2019. Early adoption2019, which is permitted. The Company does not intendapplicable to adopt the guidance prior to the effective date.both its leasing finance business as well as property and equipment leases in which Citizens is lessee.
• The Company occupies certain banking offices and equipment under non-cancelable operating lease agreements,Adoption resulted in a cumulative-effect adjustment of $12 million, net of taxes, to retained earnings related to leases in which currently are not reflected on its Consolidated Balance Sheets.Citizens is lessee.
• Upon adoption,Adoption resulted in the Company expects to recognizerecognition of a right-of-use asset and corresponding lease liability in the approximate range of $550$734 million to $700and $749 million, respectively in its Consolidated Balance SheetsSheet for non-cancelable operating lease agreements.
• The evaluationRequired lessor disclosures are included in Note 3 “Loans and Leases” and required lessee disclosures are included in Note 6 “Leases”. |
Implementation Costs Incurred in a Cloud Computing Arrangement
Issued August 2018 | • Requires implementation costs incurred in a cloud computing arrangement that is a service contract be deferred and recognized over the term of the impactarrangement if those costs would be capitalized in a software licensing arrangement.
• Requires amortization expense be presented in the same income statement line item as the related hosting service arrangement expense.
• Permits adoption prospectively for all implementation costs incurred after adoption or retrospectively through a cumulative-effect adjustment as of the leasing pronouncement will be adjusted basedbeginning of the first period presented.
| • The Company prospectively adopted the new standard on execution of new leases, termination of existing leases prior to the effective date, and any changes to key lease assumptions such as renewals, extensions and discount rates.January 1, 2019.
• The Company doesAdoption did not expecthave a material change to the timing of expense recognitionimpact on the Company’s Consolidated Statements of Operations.Financial Statements. |
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounting Pronouncements Pending Adoption |
| | |
Pronouncement | Summary of Guidance | Effects on Financial Statements |
Financial Instruments - Credit Losses
Issued June 2016
| • Replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost (including securities HTM), which will reflect management’s estimate of credit losses over the full remaining expected life of the financial assets.
• Amends existing impairment guidance for securities AFS to incorporate an allowance, which will allow for reversals of impairment losses in the event that the credit of an issuer improves.
• Requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.
| • Required effective date: January 1, 2020. Early adoption permitted on January 1, 2019. The Company does not intend to adopt the guidance prior to the effective date.
• The Company established aA company-wide, cross-discipline governance structure is in place to implement the new standard. The Company is currently identifying and researchingfinalizing key interpretive issues, revising policies, procedures and is inrelated internal controls, and completing the processdevelopment, configuration and validation of developingloss forecasting models thatto meet the requirements of the new guidance. The implementation team is also in the process of assessing forecast accuracy, and potential macroeconomicqualitative factors, that will be used to determinehow the reasonable and supportable forecast period.period will be determined and documented, as well as the impacts of that decision in different parts of the credit cycle.
• Analytical testing of the models was completed and parallel testing started in the second quarter of 2019.
• The Company expects the standard will result in earlier recognition of credit losses and an overall increase in the allowance for credit losses,ACL, as it will cover estimated credit losses over the full remaining expected life of loans and commitments and will consider future reasonable and supportable changes in macroeconomic conditions. Since the magnitude of the increase in the Company’s allowance for credit lossesACL will be impacted by economic conditions, forecasted economic conditions, credit quality and trends in the Company’s portfolio at the time of adoption, the quantitative impact cannot yet be reasonably estimated.
• Based on the credit quality of our existing debt securities portfolio, the Company does not expect the allowance for credit losses for HTM and AFS debt securities to be significant.
|
Disclosure Requirements - Fair Value Measurements
Issued August 2018 | • Amends disclosure requirements on fair value measurements.
• The guidance eliminates requirements for certain disclosures that are no longer considered relevant or cost beneficial, requires new disclosures and modifies existing disclosures that are expected to enhance the usefulness of the financial statements.
• Prospective application is required for new disclosure requirements.
• Retrospective application is required for all other amendments for all periods presented.
| • Required effective date: January 1, 2020. Early adoption is permitted. The Company does not intend to adopt this guidance prior to the required effective date.
• Adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements. |
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - SECURITIES
The following table presents the major components of securities at amortized cost and fair value:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
U.S. Treasury and other |
| $90 |
|
| $— |
|
| $— |
|
| $90 |
| |
| $24 |
|
| $— |
|
| $— |
|
| $24 |
|
State and political subdivisions | 5 |
| — |
| — |
| 5 |
| | 5 |
| — |
| — |
| 5 |
|
Mortgage-backed securities: | | | | | | | | | |
Federal agencies and U.S. government sponsored entities | 20,688 |
| 163 |
| (143 | ) | 20,708 |
| | 20,211 |
| 28 |
| (605 | ) | 19,634 |
|
Other/non-agency | 871 |
| 28 |
| (4 | ) | 895 |
| | 236 |
| 3 |
| (7 | ) | 232 |
|
Total mortgage-backed securities, at fair value | 21,559 |
| 191 |
| (147 | ) | 21,603 |
| | 20,447 |
| 31 |
| (612 | ) | 19,866 |
|
Total debt securities available for sale, at fair value |
| $21,654 |
|
| $191 |
|
| ($147 | ) |
| $21,698 |
| |
| $20,476 |
|
| $31 |
|
| ($612 | ) |
| $19,895 |
|
Federal agencies and U.S. government sponsored entities |
| $3,447 |
|
| $18 |
|
| ($24 | ) |
| $3,441 |
| |
| $3,425 |
|
| $— |
|
| ($132 | ) |
| $3,293 |
|
Other/non-agency | — |
| — |
| — |
| — |
| | 740 |
| 8 |
| — |
| 748 |
|
Total mortgage-backed securities, at cost | 3,447 |
| 18 |
| (24 | ) | 3,441 |
| | 4,165 |
| 8 |
| (132 | ) | 4,041 |
|
Total debt securities held to maturity |
| $3,447 |
|
| $18 |
|
| ($24 | ) |
| $3,441 |
| |
| $4,165 |
|
| $8 |
|
| ($132 | ) |
| $4,041 |
|
Money market mutual fund investments |
| $47 |
|
| $— |
|
| $— |
|
| $47 |
| |
| $181 |
|
| $— |
|
| $— |
|
| $181 |
|
Total equity securities, at fair value |
| $47 |
|
| $— |
|
| $— |
|
| $47 |
| |
| $181 |
|
| $— |
|
| $— |
|
| $181 |
|
Federal Reserve Bank stock |
| $577 |
|
| $— |
|
| $— |
|
| $577 |
| |
| $463 |
|
| $— |
|
| $— |
|
| $463 |
|
Federal Home Loan Bank stock | 121 |
| — |
| — |
| 121 |
| | 364 |
| — |
| — |
| 364 |
|
Other equity securities | 8 |
| — |
| — |
| 8 |
| | 7 |
| — |
| — |
| 7 |
|
Total equity securities, at cost |
| $706 |
|
| $— |
|
| $— |
|
| $706 |
| |
| $834 |
|
| $— |
|
| $— |
|
| $834 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
Debt Securities Available for Sale, At Fair Value | | | | | | | | | |
U.S. Treasury and other |
| $12 |
|
| $— |
|
| $— |
|
| $12 |
| |
| $12 |
|
| $— |
|
| $— |
|
| $12 |
|
State and political subdivisions | 6 |
| — |
| — |
| 6 |
| | 6 |
| — |
| — |
| 6 |
|
Mortgage-backed securities: | | | | | | | | | |
Federal agencies and U.S. government sponsored entities | 20,559 |
| 17 |
| (705 | ) | 19,871 |
| | 20,065 |
| 40 |
| (277 | ) | 19,828 |
|
Other/non-agency | 269 |
| 5 |
| (6 | ) | 268 |
| | 311 |
| 7 |
| (7 | ) | 311 |
|
Total mortgage-backed securities | 20,828 |
| 22 |
| (711 | ) | 20,139 |
| | 20,376 |
| 47 |
| (284 | ) | 20,139 |
|
Total debt securities available for sale, at fair value |
| $20,846 |
|
| $22 |
|
| ($711 | ) |
| $20,157 |
| |
| $20,394 |
|
| $47 |
|
| ($284 | ) |
| $20,157 |
|
Debt Securities Held to Maturity | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | |
Federal agencies and U.S. government sponsored entities |
| $3,632 |
|
| $— |
|
| ($159 | ) |
| $3,473 |
| |
| $3,853 |
|
| $7 |
|
| ($46 | ) |
| $3,814 |
|
Other/non-agency | 785 |
| 5 |
| (3 | ) | 787 |
| | 832 |
| 22 |
| — |
| 854 |
|
Total mortgage-backed securities | 4,417 |
| 5 |
| (162 | ) | 4,260 |
| | 4,685 |
| 29 |
| (46 | ) | 4,668 |
|
Total debt securities held to maturity |
| $4,417 |
|
| $5 |
|
| ($162 | ) |
| $4,260 |
| |
| $4,685 |
|
| $29 |
|
| ($46 | ) |
| $4,668 |
|
Equity Securities, at Fair Value | | | | | | | | | |
Money market mutual fund investments |
| $170 |
|
| $— |
|
| $— |
|
| $170 |
| |
| $165 |
|
| $— |
|
| $— |
|
| $165 |
|
Other investments | — |
| — |
| — |
| — |
| | 4 |
| — |
| — |
| 4 |
|
Total equity securities, at fair value |
| $170 |
|
| $— |
|
| $— |
|
| $170 |
| |
| $169 |
|
| $— |
|
| $— |
|
| $169 |
|
Equity Securities, at Cost | | | | | | | | | |
Federal Reserve Bank stock |
| $463 |
|
| $— |
|
| $— |
|
| $463 |
| |
| $463 |
|
| $— |
|
| $— |
|
| $463 |
|
Federal Home Loan Bank stock | 299 |
| — |
| — |
| 299 |
| | 252 |
| — |
| — |
| 252 |
|
Other equity securities | 7 |
| — |
| — |
| 7 |
| | 7 |
| — |
| — |
| 7 |
|
Total equity securities, at cost |
| $769 |
|
| $— |
|
| $— |
|
| $769 |
| |
| $722 |
|
| $— |
|
| $— |
|
| $722 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The amortized cost and fair value of debt securities by contractual maturity as of June 30, 20182019 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.
|
| | | | | | | | | | | | | | | |
| June 30, 2019 |
| Distribution of Maturities |
(in millions) | 1 Year or Less | 1-5 Years | 5-10 Years | After 10 Years | Total |
|
Amortized cost: | | | | | |
U.S. Treasury and other |
| $90 |
|
| $— |
|
| $— |
|
| $— |
|
| $90 |
|
State and political subdivisions | — |
| — |
| — |
| 5 |
| 5 |
|
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| 221 |
| 1,717 |
| 18,750 |
| 20,688 |
|
Other/non-agency | 5 |
| 2 |
| — |
| 864 |
| 871 |
|
Total debt securities available for sale | 95 |
| 223 |
| 1,717 |
| 19,619 |
| 21,654 |
|
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| — |
| — |
| 3,447 |
| 3,447 |
|
Total debt securities held to maturity | — |
| — |
| — |
| 3,447 |
| 3,447 |
|
Total amortized cost of debt securities |
| $95 |
|
| $223 |
|
| $1,717 |
|
| $23,066 |
|
| $25,101 |
|
| | | | | |
Fair value: | | | | | |
U.S. Treasury and other |
| $90 |
|
| $— |
|
| $— |
|
| $— |
|
| $90 |
|
State and political subdivisions | — |
| — |
| — |
| 5 |
| 5 |
|
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| 219 |
| 1,735 |
| 18,754 |
| 20,708 |
|
Other/non-agency | 5 |
| 3 |
| — |
| 887 |
| 895 |
|
Total debt securities available for sale | 95 |
| 222 |
| 1,735 |
| 19,646 |
| 21,698 |
|
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| — |
| — |
| 3,441 |
| 3,441 |
|
Total debt securities held to maturity | — |
| — |
| — |
| 3,441 |
| 3,441 |
|
Total fair value of debt securities |
| $95 |
|
| $222 |
|
| $1,735 |
|
| $23,087 |
|
| $25,139 |
|
|
| | | | | | | | | | | | | | | |
| June 30, 2018 |
| Distribution of Maturities |
(in millions) | 1 Year or Less | 1-5 Years | 5-10 Years | After 10 Years | Total |
|
Amortized Cost: | | | | | |
Debt securities available for sale | | | | | |
U.S. Treasury and other |
| $12 |
|
| $— |
|
| $— |
|
| $— |
|
| $12 |
|
State and political subdivisions | — |
| — |
| — |
| 6 |
| 6 |
|
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| 326 |
| 1,402 |
| 18,831 |
| 20,559 |
|
Other/non-agency | 2 |
| 13 |
| — |
| 254 |
| 269 |
|
Total debt securities available for sale | 14 |
| 339 |
| 1,402 |
| 19,091 |
| 20,846 |
|
Debt securities held to maturity | | | | | |
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| — |
| — |
| 3,632 |
| 3,632 |
|
Other/non-agency | — |
| — |
| — |
| 785 |
| 785 |
|
Total debt securities held to maturity | — |
| — |
| — |
| 4,417 |
| 4,417 |
|
Total amortized cost of debt securities |
| $14 |
|
| $339 |
|
| $1,402 |
|
| $23,508 |
|
| $25,263 |
|
| | | | | |
Fair Value: | | | | | |
Debt securities available for sale | | | | | |
U.S. Treasury and other |
| $12 |
|
| $— |
|
| $— |
|
| $— |
|
| $12 |
|
State and political subdivisions | — |
| — |
| — |
| 6 |
| 6 |
|
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| 321 |
| 1,372 |
| 18,178 |
| 19,871 |
|
Other/non-agency | 2 |
| 13 |
| — |
| 253 |
| 268 |
|
Total debt securities available for sale | 14 |
| 334 |
| 1,372 |
| 18,437 |
| 20,157 |
|
Debt securities held to maturity | | | | | |
Mortgage-backed securities: | | | | | |
Federal agencies and U.S. government sponsored entities | — |
| — |
| — |
| 3,473 |
| 3,473 |
|
Other/non-agency | — |
| — |
| — |
| 787 |
| 787 |
|
Total debt securities held to maturity | — |
| — |
| — |
| 4,260 |
| 4,260 |
|
Total fair value of debt securities |
| $14 |
|
| $334 |
|
| $1,372 |
|
| $22,697 |
|
| $24,417 |
|
Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $165$164 millionand $154$165 millionfor thethree months ended June 30, 2018 2019and 2017, 2018, respectively, and was $333$330 million and $314$333 million for the six months ended June 30, 2019 and 2018, and 2017, respectively.
Realized gains and losses on securities are presented below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Gains on sale of debt securities(1) |
| $8 |
| |
| $2 |
| |
| $16 |
| |
| $10 |
|
Losses on sale of debt securities | — |
| | — |
| | — |
| | — |
|
Debt securities gains, net |
| $8 |
| |
| $2 |
| |
| $16 |
| |
| $10 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Gains on sale of debt securities |
| $2 |
| |
| $3 |
| |
| $10 |
| |
| $7 |
|
Losses on sale of debt securities | — |
| | — |
| | — |
| | — |
|
Debt securities gains, net |
| $2 |
| |
| $3 |
| |
| $10 |
| |
| $7 |
|
Equity securities gains |
| $— |
| |
| $1 |
| |
| $— |
| |
| $1 |
|
(1) For the three and six months ended June 30, 2019, $4 million of gains on sale of debt securities were recognized in mortgage banking fees in the Consolidated Statement of Operations as they related to AFS securities held as economic hedges of the value of the MSR portfolio recognized using the amortization method.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The amortized cost and fair value of debt securities pledged are presented below:
|
| | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(in millions) | Amortized Cost | Fair Value |
| | Amortized Cost | Fair Value |
|
Pledged against repurchase agreements |
| $291 |
|
| $293 |
| |
| $344 |
|
| $338 |
|
Pledged against FHLB borrowed funds | — |
| — |
| | 745 |
| 752 |
|
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law | 3,632 |
| 3,613 |
| | 3,592 |
| 3,460 |
|
|
| | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(in millions) | Amortized Cost | Fair Value |
| | Amortized Cost | Fair Value |
|
Pledged against repurchase agreements |
| $341 |
|
| $328 |
| |
| $358 |
|
| $357 |
|
Pledged against FHLB borrowed funds | 791 |
| 792 |
| | 839 |
| 861 |
|
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law | 4,136 |
| 3,978 |
| | 3,113 |
| 3,082 |
|
The CompanyCitizens regularly enters into security repurchase agreements with unrelated counterparties. Repurchase agreements are financial transactions thatcounterparties, which involve the transfer of a security from one party to another, and a subsequent transfer of substantially the same security back to the original party. The Company’s repurchase agreements are typically short-term transactionsin nature and are accounted for as secured borrowed funds on the Company’s Consolidated Balance Sheets. When permitted by GAAP, the Company offsets short-term receivables associated with its reverse repurchase agreements against short-term payables associated with its repurchase agreements. The CompanyCitizens recognized no offsetting of short-term receivables or payables as of June 30, 20182019 or December 31, 2017. The Company2018. Citizens offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 8 “Derivatives.”9 "Derivatives."
Securitizations of mortgage loans retained in the investment portfolio were $13 millionand$29 millionfor the three months ended June 30, 2019 and 2018, respectively, and 2017 were $29$44 million and $22 million, respectively, and $55 million and $44 million for the six months ended June 30, 20182019 and 2017,2018, respectively. These securitizations include a substantive guarantee by a third party. In 2018 and 2017,2019 the guarantors were Fannie MaeFNMA, FHLMC, and Ginnie Mae.GNMA. In 2018 the guarantors were FNMA and GNMA. The debt securities received from the guarantors are classified as AFS.
The following tables present mortgage-backed debt securities whose fair values are below carrying values, segregatedseparated by those thatthe duration the securities have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer:position:
| | | June 30, 2018 | June 30, 2019 |
| Less than 12 Months | | 12 Months or Longer | | Total | Less than 12 Months | | 12 Months or Longer | | Total |
(dollars in millions) | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses |
Federal agencies and U.S. government sponsored entities | 434 |
|
| $14,384 |
|
| ($434 | ) | | 155 |
|
| $7,358 |
|
| ($430 | ) | | 589 |
|
| $21,742 |
|
| ($864 | ) | 19 |
|
| $882 |
|
| ($1 | ) | | 349 |
|
| $11,307 |
|
| ($166 | ) | | 368 |
|
| $12,189 |
|
| ($167 | ) |
Other/non-agency | 11 |
| 285 |
| (3 | ) | | 10 |
| 76 |
| (6 | ) | | 21 |
| 361 |
| (9 | ) | — |
| — |
| — |
| | 7 |
| 41 |
| (4 | ) | | 7 |
| 41 |
| (4 | ) |
Total | 445 |
|
| $14,669 |
|
| ($437 | ) | | 165 |
|
| $7,434 |
|
| ($436 | ) | | 610 |
|
| $22,103 |
|
| ($873 | ) | 19 |
|
| $882 |
|
| ($1 | ) | | 356 |
|
| $11,348 |
|
| ($170 | ) | | 375 |
|
| $12,230 |
|
| ($171 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Less than 12 Months | | 12 Months or Longer | | Total |
(dollars in millions) | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses |
Federal agencies and U.S. government sponsored entities | 166 |
|
| $4,881 |
|
| ($89 | ) | | 429 |
|
| $15,124 |
|
| ($648 | ) | | 595 |
|
| $20,005 |
|
| ($737 | ) |
Other/non-agency | 10 |
| 139 |
| (1 | ) | | 11 |
| 72 |
| (6 | ) | | 21 |
| 211 |
| (7 | ) |
Total | 176 |
|
| $5,020 |
|
| ($90 | ) | | 440 |
|
| $15,196 |
|
| ($654 | ) | | 616 |
|
| $20,216 |
|
| ($744 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Less than 12 Months | | 12 Months or Longer | | Total |
(dollars in millions) | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses | | Number of Issues | Fair Value | Gross Unrealized Losses |
Federal agencies and U.S. government sponsored entities | 294 |
|
| $10,163 |
|
| ($97 | ) | | 152 |
|
| $8,061 |
|
| ($226 | ) | | 446 |
|
| $18,224 |
|
| ($323 | ) |
Other/non-agency | 6 |
| 55 |
| (1 | ) | | 10 |
| 84 |
| (6 | ) | | 16 |
| 139 |
| (7 | ) |
Total | 300 |
|
| $10,218 |
|
| ($98 | ) | | 162 |
|
| $8,145 |
|
| ($232 | ) | | 462 |
|
| $18,363 |
|
| ($330 | ) |
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the cumulative credit-related losses recognized in earnings on debt securities held by the Company:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Cumulative balance at beginning of period |
| $80 |
| |
| $75 |
| |
| $80 |
| |
| $75 |
|
Credit impairments recognized in earnings on debt securities that have been previously impaired | 1 |
| | 4 |
| | 2 |
| | 5 |
|
Reductions due to increases in cash flow expectations on impaired debt securities(1) | — |
| | — |
| | (1 | ) | | (1 | ) |
Cumulative balance at end of period |
| $81 |
| |
| $79 |
| |
| $81 |
| |
| $79 |
|
(1) Reported in interest income from investment securities on the Consolidated Statements of Operations.
Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of June 30, 2018 and 2017 were $81 million and $79 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of June 30, 2018 and 2017.
For the three months ended June 30, 2018 and 2017, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $1 million and $4 million, respectively. For the six months ended June 30, 2018 and 2017, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $2 million and $5 million, respectively.
There were no credit-impaired debt securities sold during the three and six months ended June 30, 2018 and 2017. The CompanyCitizens does not currently have the intent to sell these impaired debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases.
The Company Citizens has determined that credit losses are not expected to be incurred on the remaining agency and non-agency MBS identified with unrealized losses as of June 30, 2018.2019. The unrealized losses on these debt securities reflect non-credit-related factors such as changing interest rates and market liquidity. Therefore, the CompanyCitizens has determined that these debt securities are not other-than-temporarily impaired because the Company does not currently have the intent to sell these debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases.impaired. Any subsequent increases in the valuation of impaired debt securities dowill not impact their recorded cost bases.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the cumulative credit-related losses recognized in earnings on the Company’s debt securities:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Cumulative balance at beginning of period |
| $78 |
| |
| $80 |
| |
| $81 |
| |
| $80 |
|
Credit impairments recognized in earnings on debt securities that have been previously impaired | — |
| | 1 |
| | 1 |
| | 2 |
|
Reductions due to increases in cash flow expectations on impaired debt securities(1) | — |
| | — |
| | — |
| | (1 | ) |
Reductions for securities sold or matured during the period | (21 | ) | | — |
| | (25 | ) | | — |
|
Cumulative balance at end of period |
| $57 |
| |
| $81 |
| |
| $57 |
| |
| $81 |
|
(1) Reported in interest income from investment securities on the Consolidated Statements of Operations.
Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of June 30, 2019 and June 30, 2018 were $57 million and $81 million respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of June 30, 2019 and 2018. For the three months ended June 30, 2019, the Company did not incur any non-agency MBS credit-related other-than-temporary impairment losses in earnings. For the three months ended June 30, 2018, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $1 million. For the six months ended June 30, 2019 and 2018, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $1 million and $2 million, respectively.
NOTE 3 - LOANS AND LEASES
The Company’s loans and leases are disclosed in portfolio segments and classes. The Company’s loan and lease portfolio segmentsclasses as reflected below.
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Commercial(1) |
| $41,156 |
| |
| $40,857 |
|
Commercial real estate | 13,123 |
| | 13,023 |
|
Leases | 2,684 |
| | 2,903 |
|
Total commercial loans and leases | 56,963 |
| | 56,783 |
|
Residential mortgages | 19,192 |
| | 18,978 |
|
Home equity loans | 938 |
| | 1,073 |
|
Home equity lines of credit | 12,266 |
| | 12,710 |
|
Home equity loans serviced by others | 348 |
| | 399 |
|
Home equity lines of credit serviced by others | 88 |
| | 104 |
|
Automobile | 12,000 |
| | 12,106 |
|
Education | 9,305 |
| | 8,900 |
|
Credit cards | 2,046 |
| | 1,991 |
|
Other retail | 3,692 |
| | 3,616 |
|
Total retail loans(2) | 59,875 |
| | 59,877 |
|
Total loans and leases(3) |
| $116,838 |
| |
| $116,660 |
|
(1) SBA loans we service for others of $18 million are commercial and retail. The classes ofnot included above. These loans and leases are: commercial, commercial real estate, leases, residential mortgages, home equity loans, home equity lines of credit, home equity loans serviced by others, home equity lines of credit serviced by others, automobile, education, credit cards and other retail. The Company’s SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others, whichrepresent the Company services agovernment guaranteed portion of internally. A summary of theSBA loans and leases portfolio is presented below:
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Commercial |
| $39,278 |
| |
| $37,562 |
|
Commercial real estate | 12,528 |
| | 11,308 |
|
Leases | 3,082 |
| | 3,161 |
|
Total commercial loans and leases | 54,888 |
| | 52,031 |
|
Residential mortgages | 17,814 |
| | 17,045 |
|
Home equity loans | 1,211 |
| | 1,392 |
|
Home equity lines of credit | 13,014 |
| | 13,483 |
|
Home equity loans serviced by others | 465 |
| | 542 |
|
Home equity lines of credit serviced by others | 124 |
| | 149 |
|
Automobile | 12,517 |
| | 13,204 |
|
Education | 8,450 |
| | 8,134 |
|
Credit cards | 1,877 |
| | 1,848 |
|
Other retail | 3,047 |
| | 2,789 |
|
Total retail loans | 58,519 |
| | 58,586 |
|
Total loans and leases (1) (2) |
| $113,407 |
| |
| $110,617 |
|
(1) Excluded from the table above are loans held for sale totaling $710 million and $718 millionsold to outside investors as of June 30, 2018 and December 31, 2017, respectively.
(2) Mortgage2019. There were no SBA loans we serviced for others by the Company’s subsidiaries are not included above, and amounted to $21.6at December 31, 2018.
(2) Mortgage loans we service for others of $72.5 billion and $20.3$69.6 billion at June 30, 20182019 and December 31, 2017, respectively.2018, respectively, are not included above.
Loans held(3) LHFS totaling $2.2 billion and $1.3 billion at June 30, 2019 and December 31, 2018, respectively, are not included above.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table shows the composition of LHFS.
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(in millions) | Residential Mortgages(1) | Commercial(2) | Total | | Residential Mortgages(1) | Commercial(2) | Total |
Loans held for sale at fair value |
| $1,615 |
|
| $135 |
|
| $1,750 |
| |
| $967 |
|
| $252 |
|
| $1,219 |
|
Other loans held for sale | — |
| 455 |
| 455 |
| | — |
| 101 |
| 101 |
|
(1) Originated for salesale.
(2) LHFS at fair value asconsist of June 30, 2018 totaled $521 million and consisted of residential mortgages originated for sale of $365 million and loans inmanaged by the Company’s commercial trading portfolio of $156 million. Loans held for sale at fair value as of December 31, 2017 totaled $497 million and consisted of residential mortgages originated for sale of $326 million and loans in the commercial trading portfolio of $171 million.secondary loan desk. Other loans held for sale totaled $189 million and $221 million as of June 30, 2018 and December 31, 2017, respectively, and consistedLHFS consist of commercial loans associated with the Company’s syndication business.
Loans pledged as collateral for FHLB borrowed funds, primarily residential mortgages and home equity loans, totaled $25.3$24.4 billion and $24.9$25.6 billion at June 30, 20182019 and December 31, 2017,2018, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, waswere primarily comprised of auto, commercial and commercial real estate loans, and totaled $18.0$18.6 billion and $18.1$16.8 billion at June 30, 20182019 and December 31, 2017,2018, respectively.
During the three months ended June 30, 2019 and 2018, the Company sold $353purchased $99 million and $223 million of commercialeducation loans. During the six months ended June 30, 2019 and 2018, the Company purchased $300 million and $223 million of education loans, respectively.
The Company sold $492 million of residential mortgages during the three months ended June 30, 2017,2019. During the six months ended June 30, 2019, the Company sold $206 million of residential mortgage loans and $596$182 million of commercial loans.
loans and $628 million of retail loans, including $22 million of TDR sales. During the three and six months ended June 30, 2018 the Company soldhad $353 million and $553 million of commercial loans. Duringloan sales, respectively.
Citizens is engaged in the leasing of equipment for commercial use, primarily focused on Fortune 1000 companies for large capital equipment acquisitions including aircraft and railcars, among other equipment. The Company determines if an arrangement is a lease and the related lease classification at inception. Lease terms predominantly range from three years to seven years and may include options to terminate the lease early or purchase the leased property prior to the end of the lease term. Certain lease agreements include rental payments based on an index or are adjusted periodically for inflation. The Company does not have lease agreements which contain lease and nonlease components.
A lessee is evaluated from a credit perspective using the same underwriting standards and procedures as for a loan borrower. A lessee is expected to make rental payments based on its cash flows and the viability of its operations. Leases are usually not evaluated as collateral-based transactions, and therefore the lessee’s overall financial strength is the most important credit evaluation factor.
The components of the net investment in direct finance leases, before ALLL, are presented below:
|
| | | |
(in millions) | June 30, 2019 |
Total future minimum lease rentals |
| $1,823 |
|
Estimated residual value of leased equipment (non-guaranteed) | 1,071 |
|
Initial direct costs | 12 |
|
Unearned income | (244 | ) |
Total leases |
| $2,662 |
|
Interest income on direct financing leases for the three months and six months ended June 30, 2017, the Company sold $2062019 was $20 million of residential mortgageand $40 million, respectively, and is reported within interest and fees on loans and $596 millionleases in the Consolidated Statements of commercial loans.Operations.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A maturity analysis of direct financing lease receivables at June 30, 2019 is presented below:
|
| | | |
(in millions) | |
2019 |
| $290 |
|
2020 | 458 |
|
2021 | 345 |
|
2022 | 266 |
|
2023 | 191 |
|
Thereafter | 273 |
|
Total undiscounted future minimum lease rentals |
| $1,823 |
|
NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK
The allowance for credit lossesACL consists of the ALLL and the reserve for unfunded commitments. It is increasedadjusted through a provision for credit losses that is charged to earnings, based on the Company’s quarterly evaluation of the loan and lease portfolio and related commitments, and is reduced by net charge-offs and the ALLL associated with sold loans. See Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017,2018, for a detailed discussion of the ALLL reserve methodology and estimation techniques.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On a quarterly basis, the Company reviews and refines its estimate of the allowance for credit losses,ACL, taking into consideration changes in portfolio size and composition, historical loss experience, internal risk ratings, current economic conditions, industry performance trends and other pertinent information. As of June 30, 2018,2019, there were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and the reserve for unfunded lending commitments. As of December 31, 2017, the Company enhanced the method for assessing various qualitative risks, factors and events that may not be measured in the modeled results. The new methodology includes a statistical analysis of prior charge-off rates on a historical basis combined with a qualitative assessment based on quantitative measures affecting the determination of incurred losses in the loan and lease portfolio, and provides better alignment of the qualitative ALLL to the commercial and retail loan portfolios. The impact of the change was an increase of approximately $50 million to the commercial ALLL with a corresponding decrease to the retail ALLL; there was not a significant impact on the total qualitative ALLL as of December 31, 2017.
A summary of changes in the allowance for credit lossesACL is presented below:
| | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
(in millions) | Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
| Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
|
Allowance for loan and lease losses, beginning of period |
| $711 |
|
| $535 |
|
| $1,246 |
| |
| $685 |
|
| $551 |
|
| $1,236 |
|
| $691 |
|
| $554 |
|
| $1,245 |
| |
| $690 |
|
| $552 |
|
| $1,242 |
|
Charge-offs | (14 | ) | (106 | ) | (120 | ) | | (17 | ) | (219 | ) | (236 | ) | (45 | ) | (111 | ) | (156 | ) | | (71 | ) | (223 | ) | (294 | ) |
Recoveries | 2 |
| 42 |
| 44 |
| | 8 |
| 82 |
| 90 |
| 12 |
| 38 |
| 50 |
| | 14 |
| 85 |
| 99 |
|
Net charge-offs | (12 | ) | (64 | ) | (76 | ) | | (9 | ) | (137 | ) | (146 | ) | (33 | ) | (73 | ) | (106 | ) | | (57 | ) | (138 | ) | (195 | ) |
Provision charged to income | 16 |
| 67 |
| 83 |
| | 39 |
| 124 |
| 163 |
| 22 |
| 66 |
| 88 |
| | 47 |
| 133 |
| 180 |
|
Allowance for loan and lease losses, end of period | 715 |
| 538 |
| 1,253 |
| | 715 |
| 538 |
| 1,253 |
| 680 |
| 547 |
| 1,227 |
| | 680 |
| 547 |
| 1,227 |
|
Reserve for unfunded lending commitments, beginning of period | 86 |
| — |
| 86 |
| | 88 |
| — |
| 88 |
| 84 |
| — |
| 84 |
| | 91 |
| — |
| 91 |
|
Provision for unfunded lending commitments | 2 |
| — |
| 2 |
| | — |
| — |
| — |
| 9 |
| — |
| 9 |
| | 2 |
| — |
| 2 |
|
Reserve for unfunded lending commitments, end of period | 88 |
| — |
| 88 |
| | 88 |
| — |
| 88 |
| 93 |
| — |
| 93 |
| | 93 |
| — |
| 93 |
|
Total allowance for credit losses, end of period |
| $803 |
|
| $538 |
|
| $1,341 |
| |
| $803 |
|
| $538 |
|
| $1,341 |
|
| $773 |
|
| $547 |
|
| $1,320 |
| |
| $773 |
|
| $547 |
|
| $1,320 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
(in millions) | Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
|
Allowance for loan and lease losses, beginning of period |
| $653 |
|
| $571 |
|
| $1,224 |
| |
| $663 |
|
| $573 |
|
| $1,236 |
|
Charge-offs | (24 | ) | (104 | ) | (128 | ) | | (48 | ) | (213 | ) | (261 | ) |
Recoveries | 10 |
| 43 |
| 53 |
| | 15 |
| 84 |
| 99 |
|
Net charge-offs | (14 | ) | (61 | ) | (75 | ) | | (33 | ) | (129 | ) | (162 | ) |
Provision charged to income | (25 | ) | 95 |
| 70 |
| | (16 | ) | 161 |
| 145 |
|
Allowance for loan and lease losses, end of period | 614 |
| 605 |
| 1,219 |
| | 614 |
| 605 |
| 1,219 |
|
Reserve for unfunded lending commitments, beginning of period | 93 |
| — |
| 93 |
| | 72 |
| — |
| 72 |
|
Provision for unfunded lending commitments | — |
| — |
| — |
| | 21 |
| — |
| 21 |
|
Reserve for unfunded lending commitments, end of period | 93 |
| — |
| 93 |
| | 93 |
| — |
| 93 |
|
Total allowance for credit losses, end of period |
| $707 |
|
| $605 |
|
| $1,312 |
| |
| $707 |
|
| $605 |
|
| $1,312 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
(in millions) | Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
|
Allowance for loan and lease losses, beginning of period |
| $711 |
|
| $535 |
|
| $1,246 |
| |
| $685 |
|
| $551 |
|
| $1,236 |
|
Charge-offs | (14 | ) | (106 | ) | (120 | ) | | (17 | ) | (219 | ) | (236 | ) |
Recoveries | 2 |
| 42 |
| 44 |
| | 8 |
| 82 |
| 90 |
|
Net charge-offs | (12 | ) | (64 | ) | (76 | ) | | (9 | ) | (137 | ) | (146 | ) |
Provision charged to income | 16 |
| 67 |
| 83 |
| | 39 |
| 124 |
| 163 |
|
Allowance for loan and lease losses, end of period | 715 |
| 538 |
| 1,253 |
| | 715 |
| 538 |
| 1,253 |
|
Reserve for unfunded lending commitments, beginning of period | 86 |
| — |
| 86 |
| | 88 |
| — |
| 88 |
|
Provision for unfunded lending commitments | 2 |
| — |
| 2 |
| | — |
| — |
| — |
|
Reserve for unfunded lending commitments, end of period | 88 |
| — |
| 88 |
| | 88 |
| — |
| 88 |
|
Total allowance for credit losses, end of period |
| $803 |
|
| $538 |
|
| $1,341 |
| |
| $803 |
|
| $538 |
|
| $1,341 |
|
The recorded investment in loans and leases based on the Company’s evaluation methodology is presented below:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(in millions) | Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
|
Individually evaluated |
| $314 |
|
| $686 |
|
| $1,000 |
| |
| $391 |
|
| $723 |
|
| $1,114 |
|
Formula-based evaluation | 56,649 |
| 59,189 |
| 115,838 |
| | 56,392 |
| 59,154 |
| 115,546 |
|
Total loans and leases |
| $56,963 |
|
| $59,875 |
|
| $116,838 |
| |
| $56,783 |
|
| $59,877 |
|
| $116,660 |
|
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(in millions) | Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
|
Individually evaluated |
| $426 |
|
| $742 |
|
| $1,168 |
| |
| $370 |
|
| $761 |
|
| $1,131 |
|
Formula-based evaluation | 54,462 |
| 57,777 |
| 112,239 |
| | 51,661 |
| 57,825 |
| 109,486 |
|
Total loans and leases |
| $54,888 |
|
| $58,519 |
|
| $113,407 |
| |
| $52,031 |
|
| $58,586 |
|
| $110,617 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A summary of the allowance for credit lossesACL by evaluation methodmethodology is presented below:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(in millions) | Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
|
Individually evaluated |
| $34 |
|
| $25 |
|
| $59 |
| |
| $38 |
|
| $26 |
|
| $64 |
|
Formula-based evaluation | 739 |
| 522 |
| 1,261 |
| | 743 |
| 526 |
| 1,269 |
|
Allowance for credit losses |
| $773 |
|
| $547 |
|
| $1,320 |
| |
| $781 |
|
| $552 |
|
| $1,333 |
|
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(in millions) | Commercial |
| Retail |
| Total |
| | Commercial |
| Retail |
| Total |
|
Individually evaluated |
| $62 |
|
| $28 |
|
| $90 |
| |
| $47 |
|
| $34 |
|
| $81 |
|
Formula-based evaluation | 741 |
| 510 |
| 1,251 |
| | 726 |
| 517 |
| 1,243 |
|
Allowance for credit losses |
| $803 |
|
| $538 |
|
| $1,341 |
| |
| $773 |
|
| $551 |
|
| $1,324 |
|
For commercial loans and leases, the CompanyCitizens utilizes regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that the Company believes will be fully repaid in accordance with the contractual loan terms. Commercial loansFor additional information on regulatory classification ratings, see Note 5 “Allowance for Credit Losses, Nonperforming Assets, and leases that are “criticized” are those that have some weakness or potential weakness that indicate an increased probabilityConcentrations of future loss. “Criticized” loans are grouped into three categories, “special mention,” “substandard” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration ofCredit Risk” to the Company’s credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection ofaudited Consolidated Financial Statements in the debt. Doubtful loans haveAnnual Report on Form 10-K for the same weaknesses as substandard, with the added characteristics that the possibility of loss is high and collection of the full amount of the loan is improbable. For retail loans, the Company primarily uses the loan’s payment and delinquency status to monitor credit quality. The further a loan is past due, the greater the likelihood of future credit loss. These credit quality indicators for both commercial and retail loans are continually updated and monitored.year ended December 31, 2018.
The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:
| | | June 30, 2018 | June 30, 2019 |
| | Criticized | | | Criticized | |
(in millions) | Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
| Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
|
Commercial |
| $36,576 |
|
| $1,694 |
|
| $754 |
|
| $254 |
|
| $39,278 |
|
| $39,011 |
|
| $1,174 |
|
| $770 |
|
| $201 |
|
| $41,156 |
|
Commercial real estate | 12,044 |
| 336 |
| 119 |
| 29 |
| 12,528 |
| 12,705 |
| 377 |
| 38 |
| 3 |
| 13,123 |
|
Leases | 2,955 |
| 88 |
| 39 |
| — |
| 3,082 |
| 2,578 |
| 46 |
| 43 |
| 17 |
| 2,684 |
|
Total commercial loans and leases |
| $51,575 |
|
| $2,118 |
|
| $912 |
|
| $283 |
|
| $54,888 |
|
| $54,294 |
|
| $1,597 |
|
| $851 |
|
| $221 |
|
| $56,963 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| | Criticized | |
(in millions) | Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
|
Commercial |
| $35,430 |
|
| $1,143 |
|
| $785 |
|
| $204 |
|
| $37,562 |
|
Commercial real estate | 10,706 |
| 500 |
| 74 |
| 28 |
| 11,308 |
|
Leases | 3,069 |
| 73 |
| 19 |
| — |
| 3,161 |
|
Total commercial loans and leases |
| $49,205 |
|
| $1,716 |
|
| $878 |
|
| $232 |
|
| $52,031 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| | Criticized | |
(in millions) | Pass |
| Special Mention | Substandard |
| Doubtful |
| Total |
|
Commercial |
| $38,600 |
|
| $1,231 |
|
| $828 |
|
| $198 |
|
| $40,857 |
|
Commercial real estate | 12,523 |
| 412 |
| 82 |
| 6 |
| 13,023 |
|
Leases | 2,823 |
| 39 |
| 41 |
| — |
| 2,903 |
|
Total commercial loans and leases |
| $53,946 |
|
| $1,682 |
|
| $951 |
|
| $204 |
|
| $56,783 |
|
The recorded investment in classes of retail loans, categorized by delinquency status is presented below:
|
| | | | | | | | | | | | | | | | | | |
| June 30, 2019 |
| | Days Past Due |
(in millions) | Current |
| 1-29 | 30-59 | 60-89 | 90 or More | Total |
|
Residential mortgages |
| $18,882 |
|
| $129 |
|
| $32 |
|
| $15 |
|
| $134 |
|
| $19,192 |
|
Home equity loans | 825 |
| 73 |
| 11 |
| 5 |
| 24 |
| 938 |
|
Home equity lines of credit | 11,652 |
| 372 |
| 58 |
| 31 |
| 153 |
| 12,266 |
|
Home equity loans serviced by others | 301 |
| 26 |
| 5 |
| 3 |
| 13 |
| 348 |
|
Home equity lines of credit serviced by others | 60 |
| 14 |
| 2 |
| 1 |
| 11 |
| 88 |
|
Automobile | 10,630 |
| 1,083 |
| 201 |
| 67 |
| 19 |
| 12,000 |
|
Education | 9,089 |
| 166 |
| 25 |
| 13 |
| 12 |
| 9,305 |
|
Credit cards | 1,935 |
| 67 |
| 15 |
| 9 |
| 20 |
| 2,046 |
|
Other retail | 3,528 |
| 97 |
| 30 |
| 21 |
| 16 |
| 3,692 |
|
Total retail loans |
| $56,902 |
|
| $2,027 |
|
| $379 |
|
| $165 |
|
| $402 |
|
| $59,875 |
|
|
| | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
| | Days Past Due |
(in millions) | Current |
| 1-29 | 30-59 | 60-89 | 90 or More | Total |
|
Residential mortgages |
| $17,557 |
|
| $104 |
|
| $30 |
|
| $9 |
|
| $114 |
|
| $17,814 |
|
Home equity loans | 1,083 |
| 73 |
| 8 |
| 3 |
| 44 |
| 1,211 |
|
Home equity lines of credit | 12,397 |
| 361 |
| 51 |
| 16 |
| 189 |
| 13,014 |
|
Home equity loans serviced by others | 413 |
| 27 |
| 7 |
| 2 |
| 16 |
| 465 |
|
Home equity lines of credit serviced by others | 98 |
| 15 |
| 3 |
| 1 |
| 7 |
| 124 |
|
Automobile | 11,267 |
| 977 |
| 174 |
| 47 |
| 52 |
| 12,517 |
|
Education | 8,274 |
| 132 |
| 21 |
| 11 |
| 12 |
| 8,450 |
|
Credit cards | 1,795 |
| 46 |
| 11 |
| 8 |
| 17 |
| 1,877 |
|
Other retail | 2,936 |
| 65 |
| 20 |
| 14 |
| 12 |
| 3,047 |
|
Total retail loans |
| $55,820 |
|
| $1,800 |
|
| $325 |
|
| $111 |
|
| $463 |
|
| $58,519 |
|
| | | December 31, 2017 | December 31, 2018 |
| | Days Past Due | | Days Past Due |
(in millions) | Current |
| 1-29 | 30-59 | 60-89 | 90 or More | Total |
| Current |
| 1-29 | 30-59 | 60-89 | 90 or More | Total |
|
Residential mortgages |
| $16,714 |
|
| $147 |
|
| $46 |
|
| $18 |
|
| $120 |
|
| $17,045 |
|
| $18,664 |
|
| $131 |
|
| $37 |
|
| $13 |
|
| $133 |
|
| $18,978 |
|
Home equity loans | 1,212 |
| 102 |
| 20 |
| 4 |
| 54 |
| 1,392 |
| 945 |
| 75 |
| 12 |
| 3 |
| 38 |
| 1,073 |
|
Home equity lines of credit | 12,756 |
| 438 |
| 78 |
| 23 |
| 188 |
| 13,483 |
| 12,042 |
| 386 |
| 65 |
| 22 |
| 195 |
| 12,710 |
|
Home equity loans serviced by others | 477 |
| 29 |
| 10 |
| 4 |
| 22 |
| 542 |
| 355 |
| 21 |
| 7 |
| 3 |
| 13 |
| 399 |
|
Home equity lines of credit serviced by others | 116 |
| 21 |
| 4 |
| 1 |
| 7 |
| 149 |
| 79 |
| 15 |
| 2 |
| 1 |
| 7 |
| 104 |
|
Automobile | 11,596 |
| 1,273 |
| 220 |
| 55 |
| 60 |
| 13,204 |
| 10,729 |
| 1,039 |
| 207 |
| 59 |
| 72 |
| 12,106 |
|
Education | 7,898 |
| 160 |
| 23 |
| 12 |
| 41 |
| 8,134 |
| 8,694 |
| 159 |
| 23 |
| 13 |
| 11 |
| 8,900 |
|
Credit cards | 1,747 |
| 63 |
| 12 |
| 9 |
| 17 |
| 1,848 |
| 1,894 |
| 53 |
| 14 |
| 10 |
| 20 |
| 1,991 |
|
Other retail | 2,679 |
| 68 |
| 20 |
| 12 |
| 10 |
| 2,789 |
| 3,481 |
| 76 |
| 26 |
| 18 |
| 15 |
| 3,616 |
|
Total retail loans |
| $55,195 |
|
| $2,301 |
|
| $433 |
|
| $138 |
|
| $519 |
|
| $58,586 |
|
| $56,883 |
|
| $1,955 |
|
| $393 |
|
| $142 |
|
| $504 |
|
| $59,877 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nonperforming Assets
The following table presents nonperforming loans and leases and loans accruing and 90 days or more past due:
|
| | | | | | | | | | | | | | | |
| Nonperforming | | Accruing and 90 days or more past due |
(in millions) | June 30, 2019 | | December 31, 2018 | | June 30, 2019 | | December 31, 2018 |
Commercial |
| $198 |
| |
| $194 |
| |
| $4 |
| |
| $1 |
|
Commercial real estate | 4 |
| | 7 |
| | — |
| | — |
|
Leases | 17 |
| | — |
| | 1 |
| | — |
|
Total commercial loans and leases | 219 |
| | 201 |
| | 5 |
| | 1 |
|
Residential mortgages (1)(2) | 141 |
| | 136 |
| | 14 |
| | 15 |
|
Home equity loans | 38 |
| | 50 |
| | — |
| | — |
|
Home equity lines of credit | 210 |
| | 231 |
| | — |
| | — |
|
Home equity loans serviced by others | 16 |
| | 17 |
| | — |
| | — |
|
Home equity lines of credit serviced by others | 14 |
| | 15 |
| | — |
| | — |
|
Automobile | 62 |
| | 81 |
| | — |
| | — |
|
Education | 40 |
| | 38 |
| | 3 |
| | 2 |
|
Credit card | 20 |
| | 20 |
| | — |
| | — |
|
Other retail | 10 |
| | 8 |
| | 9 |
| | 7 |
|
Total retail loans | 551 |
| | 596 |
| | 26 |
| | 24 |
|
Total |
| $770 |
| |
| $797 |
| |
| $31 |
| |
| $25 |
|
|
| | | | | | | | | | | | | | | |
| Nonperforming | | Accruing and 90 days or more past due |
(in millions) | June 30, 2018 | | December 31, 2017 | | June 30, 2018 | | December 31, 2017 |
Commercial |
| $249 |
| |
| $238 |
| |
| $3 |
| |
| $5 |
|
Commercial real estate | 31 |
| | 27 |
| | — |
| | 3 |
|
Leases | — |
| | — |
| | — |
| | — |
|
Total commercial loans and leases | 280 |
| | 265 |
| | 3 |
| | 8 |
|
Residential mortgages (1) | 119 |
| | 128 |
| | 14 |
| | 16 |
|
Home equity loans | 59 |
| | 72 |
| | — |
| | — |
|
Home equity lines of credit | 225 |
| | 233 |
| | — |
| | — |
|
Home equity loans serviced by others | 19 |
| | 25 |
| | — |
| | — |
|
Home equity lines of credit serviced by others | 17 |
| | 18 |
| | — |
| | — |
|
Automobile | 62 |
| | 70 |
| | — |
| | — |
|
Education | 40 |
| | 38 |
| | 3 |
| | 3 |
|
Credit card | 17 |
| | 17 |
| | — |
| | — |
|
Other retail | 7 |
| | 5 |
| | 6 |
| | 5 |
|
Total retail loans | 565 |
| | 606 |
| | 23 |
| | 24 |
|
Total |
| $845 |
| |
| $871 |
| |
| $26 |
| |
| $32 |
|
(1) Nonperforming balances exclude first lien residential mortgage loans which are accruing and 90 days or more past due that are 100% guaranteed by the Federal Housing Administration. These loans which are accruing and 90 days or more past due, totaled $11 million and $15$12 million as of June 30, 20182019 and December 31, 2017,2018, respectively.
(2) Nonperforming balances also exclude guaranteed residential mortgage loans sold to GNMA for which the Company has the right, but not the obligation, to repurchase. These loans totaled $23$158 million and $30$133 million as of June 30, 20182019 and December 31, 2017, respectively. These loans2018, respectively, and are included in the Company’s Consolidated Balance Sheets.
Other nonperforming assets consisted primarily consist of other real estate owned and wasare presented in other assets on the Consolidated Balance Sheets. Other real estate owned, net of valuation allowance, was $29$32 million and $36$34 million as of June 30, 20182019 and December 31, 2017,2018, respectively.
A summary of nonperforming loan and lease key performance indicators is presented below:
|
| | | | | |
| June 30, 2019 | | December 31, 2018 |
Nonperforming commercial loans and leases as a percentage of total loans and leases | 0.19 | % | | 0.17 | % |
Nonperforming retail loans as a percentage of total loans and leases | 0.47 |
| | 0.51 |
|
Nonperforming loans and leases as a percentage of total loans and leases | 0.66 | % | | 0.68 | % |
| | | |
Nonperforming commercial assets as a percentage of total assets | 0.13 | % | | 0.13 | % |
Nonperforming retail assets as a percentage of total assets | 0.36 |
| | 0.39 |
|
Nonperforming assets as a percentage of total assets | 0.49 | % | | 0.52 | % |
|
| | | | | |
| June 30, 2018 | | December 31, 2017 |
Nonperforming commercial loans and leases as a percentage of total loans and leases | 0.25 | % | | 0.24 | % |
Nonperforming retail loans as a percentage of total loans and leases | 0.50 |
| | 0.55 |
|
Total nonperforming loans and leases as a percentage of total loans and leases | 0.75 | % | | 0.79 | % |
| | | |
Nonperforming commercial assets as a percentage of total assets | 0.18 | % | | 0.17 | % |
Nonperforming retail assets as a percentage of total assets | 0.38 | % | | 0.43 | % |
Total nonperforming assets as a percentage of total assets | 0.56 | % | | 0.60 | % |
The recorded investment in mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings arewere in process was $175$174 million and $181$172 million as of June 30, 20182019 and December 31, 2017,2018, respectively.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
An analysis of the ageThe aging of both accruing and nonaccruing loan and lease past due amounts is presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Days Past Due | | Days Past Due |
(in millions) | 30-59 | 60-89 | 90 or More | Total |
| | 30-59 | 60-89 | 90 or More | Total |
|
Commercial |
| $12 |
|
| $17 |
|
| $51 |
|
| $80 |
| |
| $85 |
|
| $3 |
|
| $78 |
|
| $166 |
|
Commercial real estate | — |
| 6 |
| 2 |
| 8 |
| | 8 |
| 32 |
| 5 |
| 45 |
|
Leases | 1 |
| — |
| 1 |
| 2 |
| | 7 |
| — |
| — |
| 7 |
|
Total commercial loans and leases | 13 |
| 23 |
| 54 |
| 90 |
| | 100 |
| 35 |
| 83 |
| 218 |
|
Residential mortgages | 32 |
| 15 |
| 134 |
| 181 |
| | 37 |
| 13 |
| 133 |
| 183 |
|
Home equity loans | 11 |
| 5 |
| 24 |
| 40 |
| | 12 |
| 3 |
| 38 |
| 53 |
|
Home equity lines of credit | 58 |
| 31 |
| 153 |
| 242 |
| | 65 |
| 22 |
| 195 |
| 282 |
|
Home equity loans serviced by others | 5 |
| 3 |
| 13 |
| 21 |
| | 7 |
| 3 |
| 13 |
| 23 |
|
Home equity lines of credit serviced by others | 2 |
| 1 |
| 11 |
| 14 |
| | 2 |
| 1 |
| 7 |
| 10 |
|
Automobile | 201 |
| 67 |
| 19 |
| 287 |
| | 207 |
| 59 |
| 72 |
| 338 |
|
Education | 25 |
| 13 |
| 12 |
| 50 |
| | 23 |
| 13 |
| 11 |
| 47 |
|
Credit cards | 15 |
| 9 |
| 20 |
| 44 |
| | 14 |
| 10 |
| 20 |
| 44 |
|
Other retail | 30 |
| 21 |
| 16 |
| 67 |
| | 26 |
| 18 |
| 15 |
| 59 |
|
Total retail loans | 379 |
| 165 |
| 402 |
| 946 |
| | 393 |
| 142 |
| 504 |
| 1,039 |
|
Total |
| $392 |
|
| $188 |
|
| $456 |
|
| $1,036 |
| |
| $493 |
|
| $177 |
|
| $587 |
|
| $1,257 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Days Past Due | | Days Past Due |
(in millions) | 30-59 | 60-89 | 90 or More | Total |
| | 30-59 | 60-89 | 90 or More | Total |
|
Commercial |
| $32 |
|
| $50 |
|
| $78 |
|
| $160 |
| |
| $26 |
|
| $4 |
|
| $243 |
|
| $273 |
|
Commercial real estate | 1 |
| 5 |
| 28 |
| 34 |
| | 38 |
| 20 |
| 30 |
| 88 |
|
Leases | 3 |
| — |
| — |
| 3 |
| | 4 |
| 1 |
| — |
| 5 |
|
Total commercial loans and leases | 36 |
| 55 |
| 106 |
| 197 |
| | 68 |
| 25 |
| 273 |
| 366 |
|
Residential mortgages | 30 |
| 9 |
| 114 |
| 153 |
| | 46 |
| 18 |
| 120 |
| 184 |
|
Home equity loans | 8 |
| 3 |
| 44 |
| 55 |
| | 20 |
| 4 |
| 54 |
| 78 |
|
Home equity lines of credit | 51 |
| 16 |
| 189 |
| 256 |
| | 78 |
| 23 |
| 188 |
| 289 |
|
Home equity loans serviced by others | 7 |
| 2 |
| 16 |
| 25 |
| | 10 |
| 4 |
| 22 |
| 36 |
|
Home equity lines of credit serviced by others | 3 |
| 1 |
| 7 |
| 11 |
| | 4 |
| 1 |
| 7 |
| 12 |
|
Automobile | 174 |
| 47 |
| 52 |
| 273 |
| | 220 |
| 55 |
| 60 |
| 335 |
|
Education | 21 |
| 11 |
| 12 |
| 44 |
| | 23 |
| 12 |
| 41 |
| 76 |
|
Credit cards | 11 |
| 8 |
| 17 |
| 36 |
| | 12 |
| 9 |
| 17 |
| 38 |
|
Other retail | 20 |
| 14 |
| 12 |
| 46 |
| | 20 |
| 12 |
| 10 |
| 42 |
|
Total retail loans | 325 |
| 111 |
| 463 |
| 899 |
| | 433 |
| 138 |
| 519 |
| 1,090 |
|
Total |
| $361 |
|
| $166 |
|
| $569 |
|
| $1,096 |
| |
| $501 |
|
| $163 |
|
| $792 |
|
| $1,456 |
|
Impaired Loans
Impaired loans include nonaccruing larger balance (greater than $3 million carrying value), non-homogeneous commercial and commercial real estate loans, and restructured loans that are deemed TDRs. A summary of impaired loans by class is presented below:
| |
| June 30, 2018 | June 30, 2019 |
(in millions) | Impaired Loans With a Related Allowance | Allowance on Impaired Loans | Impaired Loans Without a Related Allowance | Unpaid Contractual Balance | Total Recorded Investment in Impaired Loans | Impaired Loans With a Related Allowance | Allowance on Impaired Loans | Impaired Loans Without a Related Allowance | Unpaid Contractual Balance | Total Recorded Investment in Impaired Loans |
Commercial |
| $278 |
|
| $57 |
|
| $113 |
|
| $451 |
|
| $391 |
|
| $170 |
|
| $34 |
|
| $118 |
|
| $359 |
|
| $288 |
|
Commercial real estate | 25 |
| 5 |
| 10 |
| 49 |
| 35 |
| — |
| — |
| 26 |
| 26 |
| 26 |
|
Leases | — |
| — |
| — |
| — |
| — |
| |
Total commercial loans and leases | 303 |
| 62 |
| 123 |
| 500 |
| 426 |
| |
Total commercial loans | | 170 |
| 34 |
| 144 |
| 385 |
| 314 |
|
Residential mortgages | 29 |
| 2 |
| 127 |
| 201 |
| 156 |
| 25 |
| 2 |
| 122 |
| 192 |
| 147 |
|
Home equity loans | 36 |
| 3 |
| 75 |
| 150 |
| 111 |
| 26 |
| 2 |
| 70 |
| 130 |
| 96 |
|
Home equity lines of credit | 17 |
| 1 |
| 185 |
| 247 |
| 202 |
| 23 |
| 2 |
| 178 |
| 242 |
| 201 |
|
Home equity loans serviced by others | 25 |
| 2 |
| 21 |
| 60 |
| 46 |
| 19 |
| 1 |
| 17 |
| 48 |
| 36 |
|
Home equity lines of credit serviced by others | 2 |
| — |
| 7 |
| 12 |
| 9 |
| 1 |
| — |
| 6 |
| 10 |
| 7 |
|
Automobile | 2 |
| — |
| 22 |
| 30 |
| 24 |
| 1 |
| — |
| 21 |
| 31 |
| 22 |
|
Education | 140 |
| 12 |
| 23 |
| 164 |
| 163 |
| 121 |
| 9 |
| 23 |
| 144 |
| 144 |
|
Credit cards | 24 |
| 7 |
| — |
| 25 |
| 24 |
| 26 |
| 8 |
| 1 |
| 27 |
| 27 |
|
Other retail | 4 |
| 1 |
| 3 |
| 9 |
| 7 |
| 3 |
| 1 |
| 3 |
| 7 |
| 6 |
|
Total retail loans | 279 |
| 28 |
| 463 |
| 898 |
| 742 |
| 245 |
| 25 |
| 441 |
| 831 |
| 686 |
|
Total |
| $582 |
|
| $90 |
|
| $586 |
|
| $1,398 |
|
| $1,168 |
|
| $415 |
|
| $59 |
|
| $585 |
|
| $1,216 |
|
| $1,000 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
(in millions) | Impaired Loans With a Related Allowance | Allowance on Impaired Loans | Impaired Loans Without a Related Allowance | Unpaid Contractual Balance | Total Recorded Investment in Impaired Loans |
Commercial |
| $186 |
|
| $31 |
|
| $167 |
|
| $450 |
|
| $353 |
|
Commercial real estate | 32 |
| 7 |
| 6 |
| 38 |
| 38 |
|
Total commercial loans | 218 |
| 38 |
| 173 |
| 488 |
| 391 |
|
Residential mortgages | 28 |
| 2 |
| 127 |
| 201 |
| 155 |
|
Home equity loans | 34 |
| 3 |
| 76 |
| 148 |
| 110 |
|
Home equity lines of credit | 21 |
| 1 |
| 181 |
| 244 |
| 202 |
|
Home equity loans serviced by others | 22 |
| 1 |
| 19 |
| 54 |
| 41 |
|
Home equity lines of credit serviced by others | 1 |
| — |
| 7 |
| 11 |
| 8 |
|
Automobile | 1 |
| — |
| 22 |
| 31 |
| 23 |
|
Education | 130 |
| 11 |
| 23 |
| 153 |
| 153 |
|
Credit cards | 24 |
| 7 |
| 1 |
| 25 |
| 25 |
|
Other retail | 4 |
| 1 |
| 2 |
| 8 |
| 6 |
|
Total retail loans | 265 |
| 26 |
| 458 |
| 875 |
| 723 |
|
Total |
| $483 |
|
| $64 |
|
| $631 |
|
| $1,363 |
|
| $1,114 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
(in millions) | Impaired Loans With a Related Allowance | Allowance on Impaired Loans | Impaired Loans Without a Related Allowance | Unpaid Contractual Balance | Total Recorded Investment in Impaired Loans |
Commercial |
| $183 |
|
| $42 |
|
| $159 |
|
| $403 |
|
| $342 |
|
Commercial real estate | 25 |
| 5 |
| 3 |
| 40 |
| 28 |
|
Leases | — |
| — |
| — |
| — |
| — |
|
Total commercial loans and leases | 208 |
| 47 |
| 162 |
| 443 |
| 370 |
|
Residential mortgages | 25 |
| 2 |
| 126 |
| 197 |
| 151 |
|
Home equity loans | 41 |
| 4 |
| 80 |
| 162 |
| 121 |
|
Home equity lines of credit | 16 |
| 1 |
| 181 |
| 241 |
| 197 |
|
Home equity loans serviced by others | 29 |
| 2 |
| 22 |
| 67 |
| 51 |
|
Home equity lines of credit serviced by others | 2 |
| — |
| 7 |
| 14 |
| 9 |
|
Automobile | 2 |
| — |
| 21 |
| 30 |
| 23 |
|
Education | 154 |
| 17 |
| 21 |
| 175 |
| 175 |
|
Credit cards | 24 |
| 7 |
| 1 |
| 25 |
| 25 |
|
Other retail | 5 |
| 1 |
| 4 |
| 10 |
| 9 |
|
Total retail loans | 298 |
| 34 |
| 463 |
| 921 |
| 761 |
|
Total |
| $506 |
|
| $81 |
|
| $625 |
|
| $1,364 |
|
| $1,131 |
|
Additional information on impaired loans is presented below:
| | | Three Months Ended June 30, | Three Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
(in millions) | Interest Income Recognized | Average Recorded Investment | | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | | Interest Income Recognized | Average Recorded Investment |
Commercial |
| $2 |
|
| $332 |
| |
| $1 |
|
| $431 |
|
| $2 |
|
| $310 |
| |
| $2 |
|
| $332 |
|
Commercial real estate | — |
| 36 |
| | — |
| 38 |
| 1 |
| 27 |
| | — |
| 36 |
|
Leases | — |
| — |
| | — |
| — |
| |
Total commercial loans and leases | 2 |
| 368 |
| | 1 |
| 469 |
| |
Total commercial loans | | 3 |
| 337 |
| | 2 |
| 368 |
|
Residential mortgages | 2 |
| 152 |
| | 2 |
| 182 |
| 2 |
| 145 |
| | 2 |
| 152 |
|
Home equity loans | 1 |
| 112 |
| | 1 |
| 141 |
| 1 |
| 97 |
| | 1 |
| 112 |
|
Home equity lines of credit | 2 |
| 198 |
| | 1 |
| 203 |
| 2 |
| 199 |
| | 2 |
| 198 |
|
Home equity loans serviced by others | — |
| 46 |
| | 1 |
| 54 |
| — |
| 36 |
| | — |
| 46 |
|
Home equity lines of credit serviced by others | — |
| 9 |
| | — |
| 9 |
| — |
| 7 |
| | — |
| 9 |
|
Automobile | — |
| 22 |
| | — |
| 20 |
| — |
| 22 |
| | — |
| 22 |
|
Education | 2 |
| 165 |
| | 2 |
| 146 |
| 2 |
| 145 |
| | 2 |
| 165 |
|
Credit cards | 1 |
| 24 |
| | 1 |
| 25 |
| 1 |
| 25 |
| | 1 |
| 24 |
|
Other retail | — |
| 8 |
| | — |
| 10 |
| — |
| 6 |
| | — |
| 8 |
|
Total retail loans | 8 |
| 736 |
| | 8 |
| 790 |
| 8 |
| 682 |
| | 8 |
| 736 |
|
Total |
| $10 |
|
| $1,104 |
| |
| $9 |
|
| $1,259 |
|
| $11 |
|
| $1,019 |
| |
| $10 |
|
| $1,104 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
(in millions) | Interest Income Recognized | Average Recorded Investment | | Interest Income Recognized | Average Recorded Investment |
Commercial |
| $5 |
|
| $304 |
| |
| $4 |
|
| $311 |
|
Commercial real estate | 1 |
| 27 |
| | — |
| 32 |
|
Total commercial loans | 6 |
| 331 |
| | 4 |
| 343 |
|
Residential mortgages | 3 |
| 142 |
| | 3 |
| 149 |
|
Home equity loans | 3 |
| 97 |
| | 3 |
| 112 |
|
Home equity lines of credit | 4 |
| 193 |
| | 4 |
| 192 |
|
Home equity loans serviced by others | 1 |
| 37 |
| | 1 |
| 47 |
|
Home equity lines of credit serviced by others | — |
| 7 |
| | — |
| 9 |
|
Automobile | — |
| 21 |
| | — |
| 21 |
|
Education | 4 |
| 145 |
| | 4 |
| 165 |
|
Credit cards | 1 |
| 24 |
| | 1 |
| 23 |
|
Other retail | — |
| 6 |
| | — |
| 8 |
|
Total retail loans | 16 |
| 672 |
| | 16 |
| 726 |
|
Total |
| $22 |
|
| $1,003 |
| |
| $20 |
|
| $1,069 |
|
|
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
(in millions) | Interest Income Recognized | Average Recorded Investment | | Interest Income Recognized | Average Recorded Investment |
Commercial |
| $4 |
|
| $311 |
| |
| $2 |
|
| $414 |
|
Commercial real estate | — |
| 32 |
| | — |
| 41 |
|
Leases | — |
| — |
| | — |
| — |
|
Total commercial loans and leases | 4 |
| 343 |
| | 2 |
| 455 |
|
Residential mortgages | 3 |
| 149 |
| | 3 |
| 178 |
|
Home equity loans | 3 |
| 112 |
| | 3 |
| 140 |
|
Home equity lines of credit | 4 |
| 192 |
| | 3 |
| 197 |
|
Home equity loans serviced by others | 1 |
| 47 |
| | 2 |
| 54 |
|
Home equity lines of credit serviced by others | — |
| 9 |
| | — |
| 9 |
|
Automobile | — |
| 21 |
| | — |
| 18 |
|
Education | 4 |
| 165 |
| | 4 |
| 146 |
|
Credit cards | 1 |
| 23 |
| | 1 |
| 24 |
|
Other retail | — |
| 8 |
| | — |
| 10 |
|
Total retail loans | 16 |
| 726 |
| | 16 |
| 776 |
|
Total |
| $20 |
|
| $1,069 |
| |
| $18 |
|
| $1,231 |
|
Troubled Debt Restructurings
In situations where, for economic or legal reasons relatedTDR is the classification given to the borrower’s financial difficulties, the Companya loan that has been restructured in a manner that grants a concession to thea borrower experiencing financial hardship that itwe would not otherwise consider, the related loan is classified as a TDR. TDRs typically result frommake. For additional information on regulatory classification ratings, see Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the Company’s loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. The Company’s loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower’s financial needs. Concessions granted in TDRs for all classes of loans may include lowering the interest rate, forgiving a portion of principal, extending the loan term, lowering scheduled payments for a specified period of time, waiving or delaying a scheduled payment of principal or interest for other than an insignificant time period, or capitalizing past due amounts. A rate increase can be a concession if the increased rate is lower than a market rate for debt with risk similar to that of the restructured loan. TDRs for commercial loans and leases may also involve creating a multiple note structure, accepting non-cash assets, accepting an equity interest, or receiving a performance-based fee. In some cases, a TDR may involve multiple concessions. The financial effects of TDRs for all loan classes may include lower income (either due to a lower interest rate or a delayaudited Consolidated Financial Statements in the timing of cash flows), larger loan loss provisions, and accelerated charge-offs ifAnnual Report on Form 10-K for the modification renders the loan collateral-dependent. In some cases, interest income throughout the term of the loan may increase if, for example, the loan is extended or the interest rate is increased as a result of the restructuring.
Because TDRs are impaired loans, the Company measures impairment by comparing the present value of expected future cash flows, or when appropriate, the fair value of collateral less costs to sell, to the loan’s recorded investment. Any excess of recorded investment over the present value of expected future cash flows or collateral value is included in the ALLL. Any portion of the loan’s recorded investment the Company does not expect to collect as a result of the modification is charged off at the time of modification. For Retail TDR accounts where the expected value of cash flows is utilized, any recorded investment in excess of the present value of expected cash flows is recognized by creating or increasing the ALLL. For Retail TDR accounts assessed based on the fair value of collateral, any portion of the loan’s recorded investment in excess of the collateral value less costs to sell is charged off at the time of modification or at the time of subsequent and regularly recurring valuations.year ended December 31, 2018.
The table below summarizes TDRs by class and total unfunded commitments:
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Commercial |
| $253 |
| |
| $304 |
|
Retail | 686 |
| | 723 |
|
Unfunded commitments related to TDRs | 70 |
| | 30 |
|
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Commercial |
| $244 |
| |
| $129 |
|
Retail | 742 |
| | 761 |
|
Unfunded commitments tied to TDRs | 35 |
| | 39 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below summarizes how loans were modified during the three months and six months ended June 30, 2018, the charge-offs related to the modifications,2019 and the impact on the ALLL.2018. The reported balances represent the post-modification outstanding recorded investment and can include loans that became TDRs during the three months ended June 30, 2018period and were paid off in full, charged off, or sold prior to June 30, 2018.period end. Pre-modification balances for modified loans approximate the post-modification balances shown.
| | | | | | | | | | | | | | Three Months Ended June 30, 2019 |
| Primary Modification Types | Primary Modification Types |
| Interest Rate Reduction (1) | | Maturity Extension (2) | Interest Rate Reduction1 | | Maturity Extension2 | | Other3 |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment |
Commercial | 4 |
|
| $1 |
|
| $1 |
| | 4 |
|
| $— |
|
| $— |
| 1 |
|
| $— |
| | 7 |
|
| $— |
| | 6 |
|
| $47 |
|
Commercial real estate | — |
| — |
| — |
| | — |
| — |
| — |
| — |
| — |
| | 1 |
| — |
| | — |
| — |
|
Leases | — |
| — |
| — |
| | — |
| — |
| — |
| |
Total commercial loans and leases | 4 |
| 1 |
| 1 |
| | 4 |
| — |
| — |
| |
Total commercial loans | | 1 |
| — |
| | 8 |
| — |
| | 6 |
| 47 |
|
Residential mortgages | 16 |
| 1 |
| 2 |
| | 23 |
| 3 |
| 3 |
| 9 |
| 2 |
| | 10 |
| 1 |
| | 32 |
| 5 |
|
Home equity loans | 11 |
| 1 |
| 1 |
| | 1 |
| — |
| — |
| 6 |
| 1 |
| | — |
| — |
| | 18 |
| 1 |
|
Home equity lines of credit | 13 |
| 1 |
| 1 |
| | 47 |
| 6 |
| 6 |
| 43 |
| 4 |
| | 15 |
| 3 |
| | 77 |
| 4 |
|
Home equity loans serviced by others | — |
| — |
| — |
| | — |
| — |
| — |
| — |
| — |
| | — |
| — |
| | 3 |
| 1 |
|
Home equity lines of credit serviced by others | 2 |
| — |
| — |
| | 1 |
| — |
| — |
| — |
| — |
| | — |
| — |
| | 2 |
| — |
|
Automobile | 41 |
| 1 |
| 1 |
| | 16 |
| — |
| — |
| 40 |
| 1 |
| | 7 |
| — |
| | 335 |
| 5 |
|
Education | — |
| — |
| — |
| | — |
| — |
| — |
| — |
| — |
| | — |
| — |
| | 13 |
| 1 |
|
Credit cards | 559 |
| 3 |
| 3 |
| | — |
| — |
| — |
| 941 |
| 5 |
| | — |
| — |
| | 141 |
| — |
|
Other retail | — |
| — |
| — |
| | — |
| — |
| — |
| — |
| — |
| | — |
| — |
| | 2 |
| — |
|
Total retail loans | 642 |
| 7 |
| 8 |
| | 88 |
| 9 |
| 9 |
| 1,039 |
| 13 |
| | 32 |
| 4 |
| | 623 |
| 17 |
|
Total | 646 |
|
| $8 |
|
| $9 |
| | 92 |
|
| $9 |
|
| $9 |
| 1,040 |
|
| $13 |
| | 40 |
|
| $4 |
| | 629 |
|
| $64 |
|
| | | | | | | | | | | | | Three Months Ended June 30, 2018 |
| Primary Modification Types | | | Primary Modification Types |
| Other (3) | | | Interest Rate Reduction1 | | Maturity Extension2 | | Other3 |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Net Change to ALLL Resulting from Modification | Charge-offs Resulting from Modification | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment |
Commercial | 17 |
|
| $59 |
|
| $59 |
| |
| $— |
|
| $— |
| 4 |
|
| $1 |
| | 4 |
|
| $— |
| | 17 |
|
| $59 |
|
Commercial real estate | 2 |
| 31 |
| 31 |
| | — |
| — |
| — |
| — |
| | — |
| — |
| | 2 |
| 31 |
|
Leases | — |
| — |
| — |
| | — |
| — |
| |
Total commercial loans and leases | 19 |
| 90 |
| 90 |
| | — |
| — |
| |
Total commercial loans | | 4 |
| 1 |
| | 4 |
| — |
| | 19 |
| 90 |
|
Residential mortgages | 33 |
| 4 |
| 5 |
| | — |
| — |
| 16 |
| 2 |
| | 23 |
| 3 |
| | 33 |
| 5 |
|
Home equity loans | 34 |
| 1 |
| 1 |
| | — |
| — |
| 11 |
| 1 |
| | 1 |
| — |
| | 34 |
| 1 |
|
Home equity lines of credit | 113 |
| 8 |
| 7 |
| | — |
| — |
| 13 |
| 1 |
| | 47 |
| 6 |
| | 113 |
| 7 |
|
Home equity loans serviced by others | 8 |
| — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
| | 8 |
| — |
|
Home equity lines of credit serviced by others | 2 |
| — |
| — |
| | — |
| — |
| 2 |
| — |
| | 1 |
| — |
| | 2 |
| — |
|
Automobile | 309 |
| 5 |
| 5 |
| | — |
| 1 |
| 41 |
| 1 |
| | 16 |
| — |
| | 309 |
| 5 |
|
Education | 139 |
| 3 |
| 3 |
| | — |
| — |
| — |
| — |
| | — |
| — |
| | 139 |
| 3 |
|
Credit cards | — |
| — |
| — |
| | 1 |
| — |
| 559 |
| 3 |
| | — |
| — |
| | — |
| — |
|
Other retail | — |
| — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
| | — |
| — |
|
Total retail loans | 638 |
| 21 |
| 21 |
| | 1 |
| 1 |
| 642 |
| 8 |
| | 88 |
| 9 |
| | 638 |
| 21 |
|
Total | 657 |
|
| $111 |
|
| $111 |
| |
| $1 |
|
| $1 |
| 646 |
|
| $9 |
| | 92 |
|
| $9 |
| | 657 |
|
| $111 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Primary Modification Types |
| Interest Rate Reduction1 | | Maturity Extension2 | | Other3 |
(dollars in millions) | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment |
Commercial | 1 |
|
| $— |
| | 12 |
|
| $1 |
| | 18 |
|
| $87 |
|
Commercial real estate | — |
| — |
| | 1 |
| — |
| | — |
| — |
|
Total commercial loans | 1 |
| — |
| | 13 |
| 1 |
| | 18 |
| 87 |
|
Residential mortgages | 13 |
| 4 |
| | 21 |
| 3 |
| | 62 |
| 9 |
|
Home equity loans | 13 |
| 1 |
| | — |
| — |
| | 45 |
| 2 |
|
Home equity lines of credit | 72 |
| 8 |
| | 50 |
| 9 |
| | 182 |
| 12 |
|
Home equity loans serviced by others | — |
| — |
| | — |
| — |
| | 7 |
| 1 |
|
Home equity lines of credit serviced by others | — |
| — |
| | — |
| — |
| | 4 |
| — |
|
Automobile | 65 |
| 1 |
| | 12 |
| — |
| | 624 |
| 9 |
|
Education | — |
| — |
| | — |
| — |
| | 80 |
| 3 |
|
Credit cards | 1,557 |
| 9 |
| | — |
| — |
| | 141 |
| — |
|
Other retail | — |
| — |
| | — |
| — |
| | 3 |
| — |
|
Total retail loans | 1,720 |
| 23 |
| | 83 |
| 12 |
| | 1,148 |
| 36 |
|
Total | 1,721 |
|
| $23 |
| | 96 |
|
| $13 |
| | 1,166 |
|
| $123 |
|
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| Primary Modification Types |
| Interest Rate Reduction1 | | Maturity Extension2 | | Other3 |
(dollars in millions) | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment | | Number of Contracts | Recorded Investment |
Commercial | 5 |
|
| $1 |
| | 10 |
|
| $1 |
| | 35 |
|
| $134 |
|
Commercial real estate | — |
| — |
| | 1 |
| — |
| | 2 |
| 31 |
|
Total commercial loans | 5 |
| 1 |
| | 11 |
| 1 |
| | 37 |
| 165 |
|
Residential mortgages | 23 |
| 3 |
| | 30 |
| 4 |
| | 86 |
| 11 |
|
Home equity loans | 22 |
| 2 |
| | 1 |
| — |
| | 66 |
| 3 |
|
Home equity lines of credit | 28 |
| 2 |
| | 89 |
| 11 |
| | 206 |
| 14 |
|
Home equity loans serviced by others | 1 |
| — |
| | — |
| — |
| | 15 |
| — |
|
Home equity lines of credit serviced by others | 4 |
| — |
| | 1 |
| — |
| | 5 |
| — |
|
Automobile | 77 |
| 2 |
| | 33 |
| 1 |
| | 578 |
| 9 |
|
Education | — |
| — |
| | — |
| — |
| | 251 |
| 4 |
|
Credit cards | 1,153 |
| 6 |
| | — |
| — |
| | — |
| — |
|
Other retail | 1 |
| — |
| | — |
| — |
| | 4 |
| — |
|
Total retail loans | 1,309 |
| 15 |
| | 154 |
| 16 |
| | 1,211 |
| 41 |
|
Total | 1,314 |
|
| $16 |
| | 165 |
|
| $17 |
| | 1,248 |
|
| $206 |
|
(1) Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.
(2) Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).
(3) Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forgiveness, and capitalizing arrearages. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below summarizes hownet change to ALLL resulting from modifications of loans were modified duringfor the three months ended June 30, 2017, the charge-offs related2019 and 2018 was $2 million and $1 million, respectively. The net change to theALLL resulting from modifications and the impact on the ALLL. The reported balances can includeof loans that became TDRs during the three months endedJune 30, 2017 and were paid off in full, charged off, or sold prior to June 30, 2017.
|
| | | | | | | | | | | | | | | | | |
| Primary Modification Types |
| Interest Rate Reduction (1) | | Maturity Extension (2) |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment |
Commercial | 2 |
|
| $— |
|
| $— |
| | 11 |
|
| $13 |
|
| $13 |
|
Commercial real estate | — |
| — |
| — |
| | — |
| — |
| — |
|
Leases | — |
| — |
| — |
| | — |
| — |
| — |
|
Total commercial loans and leases | 2 |
| — |
| — |
| | 11 |
| 13 |
| 13 |
|
Residential mortgages | 25 |
| 4 |
| 3 |
| | 25 |
| 5 |
| 5 |
|
Home equity loans | 22 |
| 1 |
| 2 |
| | — |
| — |
| — |
|
Home equity lines of credit | 14 |
| — |
| — |
| | 67 |
| 9 |
| 9 |
|
Home equity loans serviced by others | 5 |
| — |
| — |
| | — |
| — |
| — |
|
Home equity lines of credit serviced by others | 2 |
| — |
| — |
| | — |
| — |
| — |
|
Automobile | 25 |
| — |
| — |
| | 7 |
| — |
| — |
|
Education | — |
| — |
| — |
| | — |
| — |
| — |
|
Credit cards | 624 |
| 4 |
| 4 |
| | — |
| — |
| — |
|
Other retail | — |
| — |
| — |
| | — |
| — |
| — |
|
Total retail loans | 717 |
| 9 |
| 9 |
| | 99 |
| 14 |
| 14 |
|
Total | 719 |
|
| $9 |
|
| $9 |
| | 110 |
|
| $27 |
|
| $27 |
|
|
| | | | | | | | | | | | | | | |
| Primary Modification Types | | | |
| Other (3) | | | |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Net Change to ALLL Resulting from Modification | Charge-offs Resulting from Modification |
Commercial | 4 |
|
| $32 |
|
| $31 |
| |
| $1 |
|
| $— |
|
Commercial real estate | — |
| — |
| — |
| | — |
| — |
|
Leases | — |
| — |
| — |
| | — |
| — |
|
Total commercial loans and leases | 4 |
| 32 |
| 31 |
| | 1 |
| — |
|
Residential mortgages | 44 |
| 6 |
| 6 |
| | — |
| — |
|
Home equity loans | 42 |
| 2 |
| 2 |
| | — |
| — |
|
Home equity lines of credit | 112 |
| 8 |
| 7 |
| | — |
| — |
|
Home equity loans serviced by others | 16 |
| — |
| — |
| | — |
| — |
|
Home equity lines of credit serviced by others | 2 |
| — |
| — |
| | — |
| — |
|
Automobile | 349 |
| 6 |
| 6 |
| | — |
| 1 |
|
Education | 7 |
| 1 |
| 1 |
| | 1 |
| — |
|
Credit cards | — |
| — |
| — |
| | 1 |
| — |
|
Other retail | 2 |
| — |
| — |
| | (1 | ) | — |
|
Total retail loans | 574 |
| 23 |
| 22 |
| | 1 |
| 1 |
|
Total | 578 |
|
| $55 |
|
| $53 |
| |
| $2 |
|
| $1 |
|
(1) Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.
(2) Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).
(3) Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forgiveness, and capitalizing arrearages. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below summarizes how loans were modified during the six months ended June 30, 2019 and 2018 was $4 million and $2 million, respectively. Charge-offs may also be recorded on TDRs. Citizens recorded $1 million of charge-offs resulting from the charge-offs related tomodification of loans in the modifications,three months ended June 30, 2019 and the impact on the ALLL. The reported balances can include loans that became TDRs during2018, and $2 million in the six months ended June 30, 20182019 and were paid off in full, charged off, or sold prior to June 30, 2018.
|
| | | | | | | | | | | | | | | | | |
| Primary Modification Types |
| Interest Rate Reduction (1) | | Maturity Extension (2) |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment |
Commercial | 5 |
|
| $1 |
|
| $1 |
| | 10 |
|
| $1 |
|
| $1 |
|
Commercial real estate | — |
| — |
| — |
| | 1 |
| — |
| — |
|
Leases | — |
| — |
| — |
| | — |
| — |
| — |
|
Total commercial loans and leases | 5 |
| 1 |
| 1 |
| | 11 |
| 1 |
| 1 |
|
Residential mortgages | 23 |
| 2 |
| 3 |
| | 30 |
| 4 |
| 4 |
|
Home equity loans | 22 |
| 2 |
| 2 |
| | 1 |
| — |
| — |
|
Home equity lines of credit | 28 |
| 2 |
| 2 |
| | 89 |
| 11 |
| 11 |
|
Home equity loans serviced by others | 1 |
| — |
| — |
| | — |
| — |
| — |
|
Home equity lines of credit serviced by others | 4 |
| — |
| — |
| | 1 |
| — |
| — |
|
Automobile | 77 |
| 2 |
| 2 |
| | 33 |
| 1 |
| 1 |
|
Education | — |
| — |
| — |
| | — |
| — |
| — |
|
Credit cards | 1,153 |
| 6 |
| 6 |
| | — |
| — |
| — |
|
Other retail | 1 |
| — |
| — |
| | — |
| — |
| — |
|
Total retail loans | 1,309 |
| 14 |
| 15 |
| | 154 |
| 16 |
| 16 |
|
Total | 1,314 |
|
| $15 |
|
| $16 |
| | 165 |
|
| $17 |
|
| $17 |
|
|
| | | | | | | | | | | | | | | |
| Primary Modification Types | | | |
| Other (3) | | | |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Net Change to ALLL Resulting from Modification | Charge-offs Resulting from Modification |
Commercial | 35 |
|
| $133 |
|
| $134 |
| |
| $— |
|
| $— |
|
Commercial real estate | 2 |
| 31 |
| 31 |
| | — |
| — |
|
Leases | — |
| — |
| — |
| | — |
| — |
|
Total commercial loans and leases | 37 |
| 164 |
| 165 |
| | — |
| — |
|
Residential mortgages | 86 |
| 10 |
| 11 |
| | — |
| — |
|
Home equity loans | 66 |
| 3 |
| 3 |
| | — |
| — |
|
Home equity lines of credit | 206 |
| 15 |
| 14 |
| | — |
| — |
|
Home equity loans serviced by others | 15 |
| — |
| — |
| | — |
| — |
|
Home equity lines of credit serviced by others | 5 |
| — |
| — |
| | — |
| — |
|
Automobile | 578 |
| 10 |
| 9 |
| | — |
| 2 |
|
Education | 251 |
| 4 |
| 4 |
| | — |
| — |
|
Credit cards | — |
| — |
| — |
| | 2 |
| — |
|
Other retail | 4 |
| — |
| — |
| | — |
| — |
|
Total retail loans | 1,211 |
| 42 |
| 41 |
| | 2 |
| 2 |
|
Total | 1,248 |
|
| $206 |
|
| $206 |
| |
| $2 |
|
| $2 |
|
(1) Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.
(2) Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).
(3) Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forgiveness, and capitalizing arrearages. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below summarizes how loans were modified during the six months ended June 30, 2017, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances can include loans that became TDRs during the six months endedJune 30, 2017 and were paid off in full, charged off, or sold prior to June 30, 2017.
|
| | | | | | | | | | | | | | | | | |
| Primary Modification Types |
| Interest Rate Reduction (1) | | Maturity Extension (2) |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment |
Commercial | 4 |
|
| $1 |
|
| $1 |
| | 18 |
|
| $14 |
|
| $14 |
|
Commercial real estate | — |
| — |
| — |
| | — |
| — |
| — |
|
Leases | — |
| — |
| — |
| | — |
| — |
| — |
|
Total commercial loans and leases | 4 |
| 1 |
| 1 |
| | 18 |
| 14 |
| 14 |
|
Residential mortgages | 43 |
| 5 |
| 5 |
| | 36 |
| 8 |
| 8 |
|
Home equity loans | 43 |
| 2 |
| 3 |
| | 1 |
| — |
| — |
|
Home equity lines of credit | 30 |
| 1 |
| 1 |
| | 118 |
| 15 |
| 15 |
|
Home equity loans serviced by others | 11 |
| 1 |
| 1 |
| | — |
| — |
| — |
|
Home equity lines of credit serviced by others | 3 |
| — |
| — |
| | 2 |
| — |
| — |
|
Automobile | 65 |
| 1 |
| 1 |
| | 15 |
| — |
| — |
|
Education | — |
| — |
| — |
| | — |
| — |
| — |
|
Credit cards | 1,189 |
| 7 |
| 7 |
| | — |
| — |
| — |
|
Other retail | 1 |
| — |
| — |
| | — |
| — |
| — |
|
Total retail loans | 1,385 |
| 17 |
| 18 |
| | 172 |
| 23 |
| 23 |
|
Total | 1,389 |
|
| $18 |
|
| $19 |
| | 190 |
|
| $37 |
|
| $37 |
|
|
| | | | | | | | | | | | | | | |
| Primary Modification Types | | | |
| Other (3) | | | |
(dollars in millions) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | | Net Change to ALLL Resulting from Modification | Charge-offs Resulting from Modification |
Commercial | 4 |
|
| $32 |
|
| $31 |
| |
| $1 |
|
| $— |
|
Commercial real estate | — |
| — |
| — |
| | — |
| — |
|
Leases | 1 |
| 4 |
| 4 |
| | — |
| — |
|
Total commercial loans and leases | 5 |
| 36 |
| 35 |
| | 1 |
| — |
|
Residential mortgages | 92 |
| 10 |
| 10 |
| | — |
| — |
|
Home equity loans | 144 |
| 8 |
| 8 |
| | — |
| — |
|
Home equity lines of credit | 187 |
| 14 |
| 13 |
| | — |
| — |
|
Home equity loans serviced by others | 30 |
| 1 |
| 1 |
| | — |
| — |
|
Home equity lines of credit serviced by others | 13 |
| 1 |
| 1 |
| | — |
| — |
|
Automobile | 625 |
| 11 |
| 10 |
| | — |
| 2 |
|
Education | 22 |
| 2 |
| 2 |
| | 1 |
| — |
|
Credit cards | — |
| — |
| — |
| | 2 |
| — |
|
Other retail | 3 |
| — |
| — |
| | (1 | ) | — |
|
Total retail loans | 1,116 |
| 47 |
| 45 |
| | 2 |
| 2 |
|
Total | 1,121 |
|
| $83 |
|
| $80 |
| |
| $3 |
|
| $2 |
|
(1) Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.
(2) Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).
(3) Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forgiveness, and capitalizing arrearages. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below summarizes TDRs that defaulted within 12 months of their modification date during the six months ended June 30, 2018 and 2017, respectively. For purposes of this table, a A payment default refers to a loan that becomes 90 days or more past due under the modified terms. Amounts representLoan data includes loans meeting the loan’scriteria that were paid off in full, charged off, or sold prior to June 30, 2019 and 2018. For commercial loans, recorded investment atin TDRs that defaulted within 12 months of their modification date for the timethree months ended June 30, 2019 and 2018 were $1 million and $17 million, respectively, and $1 millionand $20 million for the six months ended June 30, 2019 and 2018, respectively. For retail loans, there were $10 million and $10 million of payment default. If a TDRloans which defaulted within 12 months of any loan type becomes 90 days past due after being modified,their restructuring date for the loan is written down tothree months ended June 30, 2019 and 2018, respectively, and there were $19 million of loans which defaulted within 12 months of their restructuring date for the fair value of collateral less cost to sell. The amount written off is charged to the ALLL.six months ended June 30, 2019 and 2018.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
(dollars in millions) | Number of Contracts | Balance Defaulted | | Number of Contracts | Balance Defaulted | | Number of Contracts | Balance Defaulted | | Number of Contracts | Balance Defaulted |
Commercial | 3 |
|
| $17 |
| | 4 |
|
| $1 |
| | 6 |
|
| $20 |
| | 5 |
|
| $1 |
|
Commercial real estate | 1 |
| — |
| | — |
| — |
| | 1 |
| — |
| | 1 |
| 4 |
|
Leases | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
|
Total commercial loans and leases | 4 |
| 17 |
| | 4 |
| 1 |
| | 7 |
| 20 |
| | 6 |
| 5 |
|
Residential mortgages | 44 |
| 5 |
| | 41 |
| 4 |
| | 70 |
| 8 |
| | 86 |
| 10 |
|
Home equity loans | 7 |
| — |
| | 14 |
| 1 |
| | 18 |
| 1 |
| | 23 |
| 1 |
|
Home equity lines of credit | 40 |
| 3 |
| | 65 |
| 4 |
| | 106 |
| 8 |
| | 100 |
| 7 |
|
Home equity loans serviced by others | 5 |
| — |
| | 9 |
| — |
| | 10 |
| — |
| | 10 |
| — |
|
Home equity lines of credit serviced by others | — |
| — |
| | 1 |
| — |
| | 1 |
| — |
| | 4 |
| — |
|
Automobile | 30 |
| 1 |
| | 27 |
| 1 |
| | 76 |
| 1 |
| | 61 |
| 1 |
|
Education | 7 |
| 1 |
| | 9 |
| — |
| | 12 |
| 1 |
| | 16 |
| — |
|
Credit cards | 102 |
| — |
| | 102 |
| 1 |
| | 221 |
| 1 |
| | 228 |
| 2 |
|
Other retail | — |
| — |
| | — |
| — |
| | — |
| — |
| | 2 |
| — |
|
Total retail loans | 235 |
| 10 |
| | 268 |
| 11 |
| | 514 |
| 20 |
| | 530 |
| 21 |
|
Total | 239 |
|
| $27 |
| | 272 |
|
| $12 |
| | 521 |
|
| $40 |
| | 536 |
|
| $26 |
|
Concentrations of Credit Risk
Most of the Company’s lending activity is with customers located in the New England, Mid-Atlantic and Midwest regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of June 30, 20182019 and December 31, 2017, the Company2018, Citizens had a significant amount of loans collateralized by residential and commercial real estate. There were no significant concentration risks within the commercial loan or retail loan portfolios. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which may not perform according to contractual agreements. The Company’s policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.
Certain loan products, including residential mortgages, home equity loans and lines of credit, and credit cards, have contractual features that may increase credit exposure to the Company in the event of an increase in interest rates or a decline in housing values. These products include loans that exceed 90% of the value of the underlying collateral (high LTV loans), interest-only and negative amortization residential mortgages, and loans with low introductory rates. Certain loans have more than one of these characteristics. The following tables present balances of loans with these characteristics:
| | | June 30, 2018 | June 30, 2019 |
(in millions) | Residential Mortgages | Home Equity Loans and Lines of Credit | Home Equity Products Serviced by Others | Credit Cards |
| Education |
| Total |
| Residential Mortgages | Home Equity Loans and Lines of Credit | Home Equity Products Serviced by Others | Credit Cards |
| Total |
|
High loan-to-value |
| $430 |
|
| $145 |
|
| $205 |
|
| $— |
|
| $— |
|
| $780 |
|
| $441 |
|
| $78 |
|
| $125 |
|
| $— |
|
| $644 |
|
Interest-only/negative amortization | 1,770 |
| — |
| — |
| — |
| — |
| 1,770 |
| 1,765 |
| — |
| — |
| — |
| 1,765 |
|
Low introductory rate | — |
| — |
| — |
| 197 |
| — |
| 197 |
| — |
| — |
| — |
| 221 |
| 221 |
|
Multiple characteristics and other | 1 |
| — |
| — |
| — |
| — |
| 1 |
| 3 |
| — |
| — |
| — |
| 3 |
|
Total |
| $2,201 |
|
| $145 |
|
| $205 |
|
| $197 |
|
| $— |
|
| $2,748 |
|
| $2,209 |
|
| $78 |
|
| $125 |
|
| $221 |
|
| $2,633 |
|
CITIZENS FINANCIAL GROUP, INC. |
| | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
(in millions) | Residential Mortgages | Home Equity Loans and Lines of Credit | Home Equity Products Serviced by Others | Credit Cards |
| Education |
| Total |
|
High loan-to-value |
| $318 |
|
| $87 |
|
| $148 |
|
| $— |
|
| $— |
|
| $553 |
|
Interest-only/negative amortization | 1,794 |
| — |
| — |
| — |
| 1 |
| 1,795 |
|
Low introductory rate | — |
| — |
| — |
| 217 |
| — |
| 217 |
|
Multiple characteristics and other | 1 |
| — |
| — |
| — |
| — |
| 1 |
|
Total |
| $2,113 |
|
| $87 |
|
| $148 |
|
| $217 |
|
| $1 |
|
| $2,566 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
(in millions) | Residential Mortgages | Home Equity Loans and Lines of Credit | Home Equity Products Serviced by Others | Credit Cards |
| Education |
| Total |
|
High loan-to-value |
| $366 |
|
| $166 |
|
| $264 |
|
| $— |
|
| $— |
|
| $796 |
|
Interest-only/negative amortization | 1,763 |
| — |
| — |
| — |
| 1 |
| 1,764 |
|
Low introductory rate | — |
| — |
| — |
| 197 |
| — |
| 197 |
|
Multiple characteristics and other | 1 |
| — |
| — |
| — |
| — |
| 1 |
|
Total |
| $2,130 |
|
| $166 |
|
| $264 |
|
| $197 |
|
| $1 |
|
| $2,758 |
|
NOTE 5 - MORTGAGE BANKING
In its mortgage banking business, theThe Company sells residential mortgages to government-sponsored entitiesGSEs and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. The Company is obligated to subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud or servicing violations. This primarily occurs duringthat should have been identified in a loan file review.
Information relatedCITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company recognizes the right to service residential mortgage loan sales and the Company's mortgage banking activity is presented below:
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| 2018 |
| | 2017 |
|
Residential mortgage loan sale proceeds |
| $670 |
| |
| $729 |
|
| $1,325 |
| |
| $1,544 |
|
Gain on sales | 17 |
| | 19 |
| 30 |
| | 29 |
|
Mortgage servicing fees | 16 |
| | 14 |
| 31 |
| | 27 |
|
Repurchased residential mortgages | — |
| | — |
| 2 |
| | 1 |
|
Valuation recoveries | — |
| | 1 |
| 3 |
| | 1 |
|
loans for others, or MSRs, as separate assets, which are presented in other assets on the Consolidated Balance Sheets. ChangesSheets, when purchased or when servicing is contractually separated from the underlying mortgage loans by sale with servicing rights retained. The following table summarizes activity related to MSRs are presented below:residential mortgage loans sold with servicing rights retained for the three and six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
MSRs: | | | | | | | |
Balance as of beginning of period |
| $201 |
| |
| $170 |
| |
| $201 |
| |
| $168 |
|
Amount capitalized | 8 |
| | 8 |
| | 15 |
| | 18 |
|
Purchases | 16 |
| | — |
| | 16 |
| | — |
|
Amortization | (8 | ) | | (8 | ) | | (15 | ) | | (16 | ) |
Carrying amount before valuation allowance | 217 |
| | 170 |
| | 217 |
| | 170 |
|
Valuation allowance for servicing assets: | | | | | | | |
Balance as of beginning of period | — |
| | 5 |
| | 3 |
| | 5 |
|
Valuation recoveries | — |
| | (1 | ) | | (3 | ) | | (1 | ) |
Balance at end of period | — |
| | 4 |
| | — |
| | 4 |
|
Net carrying value of MSRs |
| $217 |
| |
| $166 |
| |
| $217 |
| |
| $166 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Residential mortgage loans sold with servicing retained |
| $4,229 |
| |
| $670 |
| |
| $7,148 |
| |
| $1,325 |
|
Gain on sales (1) | 55 |
| | 17 |
| | 92 |
| | 30 |
|
Contractually specified servicing, late and other ancillary fees (1) | 51 |
| | 16 |
| | 99 |
| | 31 |
|
(1) Reported in mortgage banking fees on the Consolidated Statements of Operations.
In connection with the August 1, 2018 acquisition of FAMC, the Company began maintaining two separate classes of MSRs which, at the time of initial capitalization, were differentiated by how the risk associated with valuation changes of the MSRs was being managed. The acquired FAMC portfolio is accounted for under the fair value method while the Company’s MSR portfolio held before the FAMC acquisition is accounted for under the amortization method. Beginning January 1, 2019, all of the Company’s newly originated MSRs are accounted for under the fair value method. The Company implemented an active hedging strategy to manage the risk associated with changes in the value of the MSR portfolio accounted for under the fair value method, which includes the purchase of freestanding derivatives. Depending on the interest rate environment, economic hedges may be used to protect the market value of MSRs accounted for under the amortization method. Any changes in fair value during the period for MSRs carried under the fair value method, as well as amortization and impairment of MSRs under the amortization method, are recorded in mortgage banking fees in the Consolidated Statements of Operations.
The following table summarizes changes in MSRs recorded using the amortization method for the three and six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Mortgage servicing rights: | | | | | | | |
Balance as of beginning of period |
| $212 |
| |
| $201 |
| |
| $221 |
| |
| $201 |
|
Amount capitalized | — |
| �� | 8 |
| | — |
| | 15 |
|
Purchases | — |
| | 16 |
| | — |
| | 16 |
|
Amortization | (9 | ) | | (8 | ) | | (18 | ) | | (15 | ) |
Carrying amount before valuation allowance | 203 |
| | 217 |
| | 203 |
| | 217 |
|
Valuation allowance for servicing assets: | | | | | | | |
Balance as of beginning of period | — |
| | — |
| | — |
| | 3 |
|
Valuation charge-offs (recoveries) | 14 |
| | — |
| | 14 |
| | (3 | ) |
Balance at end of period | 14 |
| | — |
| | 14 |
| | — |
|
Net carrying value of MSRs |
| $189 |
| |
| $217 |
| |
| $189 |
| |
| $217 |
|
The following table summarizes changes in MSRs recorded using the fair value method for the three months ended June 30, 2019. There were no MSRs recorded using the fair value method for the three or six months ended June 30, 2018.
|
| | | | | | | |
(in millions) | As of and for the Three Months Ended June 30, 2019 | | As of and for the Six Months Ended June 30, 2019 |
Fair value as of beginning of the period |
| $563 |
| |
| $600 |
|
Amounts capitalized | 57 |
| | 92 |
|
Changes in unpaid principal balance during the period (1) | (31 | ) | | (57 | ) |
Changes in fair value during the period (2) | (58 | ) | | (104 | ) |
Fair value at end of the period |
| $531 |
| |
| $531 |
|
(1) Represents changes in value due to i) passage of time including the impact from both regularly scheduled loan principal payments and partial paydowns, and ii)
loans that paid off during the period.
(2) Represents changes in value primarily due to market driven changes in interest rates and prepayment speeds.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The fair value of MSRs is estimated by using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, contractual servicing fee income, servicing costs, default rates, ancillary income, and other economic factors, which are determined based on current market conditions.interest rates. The valuation model uses a static discounted cash flow methodology incorporating current market interest rates. A static model does not attempt to forecast or predict the future direction of interest rates; rather it estimates the amount and timing of future servicing cash flows using current market interest rates. The current mortgage interest rate influences the expected prepayment rate and therefore, the length of the cash flows associated with the servicing asset, while the discount rate determines
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the present value of those cash flows. Expected mortgage loan prepayment assumptions are obtained using the QRM Multi-Component prepayment model. The Company periodically obtains third-party valuations of its MSRs to assess the reasonableness of the fair value calculated by the valuation model.
The key economic assumptions used to estimate the value of MSRs are presented in the following table:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Weighted Average | | | Weighted Average | |
(dollars in millions) | Range | | Range |
Fair value | $254 | Min | Max | | $218 | Min | Max |
Weighted average life (in years) | 6.4 | 2.4 | 8.7 | | 5.9 | 2.3 | 8.4 |
Weighted average constant prepayment rate | 9.4% | 6.0% | 20.8% | | 10.0% | 6.6% | 20.1% |
Weighted average discount rate | 9.8% | 9.1% | 12.1% | | 9.9% | 9.1% | 12.1% |
The key economic assumptions used in estimating the fair value of MSRs capitalized during the period are presented below:
|
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Weighted average life (in years) | 7.3 | | 6.2 | | 7.4 | | 6.6 |
Weighted average constant prepayment rate | 7.6% | | 11.1% | | 7.5% | | 9.9% |
Weighted average discount rate | 9.8% | | 9.9% | | 9.8% | | 9.9% |
The sensitivity analysisanalyses below presentspresent the impact to current fair value of an immediate 50 basis point and 100 basis point adverse change in the key economic assumptions and presents the decline in fair value that would occur if the respective adverse change werewas realized. These sensitivities are hypothetical, with the effect of a variation in a particular assumption on the fair value of the mortgage servicing rightsMSRs calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in interest rates, which drive changes in prepayment rates, could result in changes in the discount rates), which may amplify or counteract the sensitivities. The primary risk inherent in the Company’s MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is dependent upon market movements ofin market interest rates.
For MSRs under the amortization method, key economic assumptions used to estimate the fair value are presented below: |
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Prepayment rate: | | | |
Decline in fair value from a 50 basis point decrease in interest rates |
| $16 |
| |
| $22 |
|
Decline in fair value from a 100 basis point decrease in interest rates | 47 |
| | 46 |
|
Weighted average discount rate: | | | |
Decline in fair value from a 50 basis point increase in weighted average discount rate |
| $5 |
| |
| $4 |
|
Decline in fair value from a 100 basis point increase in weighted average discount rate | 9 |
| | 8 |
|
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Actual | Decline in fair value due to | | Actual | Decline in fair value due to |
(dollars in millions) | |
Fair value | $193 | 50 bps adverse change | 100 bps adverse change | | $243 | 50 bps adverse change | 100 bps adverse change |
Weighted average life (in years) | 5.5 | | 6.5 |
Weighted average constant prepayment rate | 11.6% | $29 | $54 | | 8.5% | $24 | $56 |
Weighted average discount rate | 9.3% | 4 | 7 | | 9.3% | 5 | 9 |
For MSRs under the fair value method, key economic assumptions used to estimate the fair value are presented below:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Actual | Decline in fair value due to | | Actual | Decline in fair value due to |
(dollars in millions) | |
Fair value | $531 | 50 bps adverse change | 100 bps adverse change | | $600 | 50 bps adverse change | 100 bps adverse change |
Weighted average life (in years) | 5.5 | | 8.0 |
Weighted average constant prepayment rate | 13.8% | $117 | $241 | | 8.2% | $68 | $148 |
Weighted average option adjusted spread | 434 bps | 10 | 21 | | 609 bps | 13 | 26 |
Citizens accounts for derivatives in its mortgage banking operations at fair value on the Consolidated Balance Sheets as derivative assets or derivative liabilities, depending on whether the derivative had a positive (asset) or negative (liability) fair value as of the balance sheet date. The Company’s mortgage banking derivatives include commitments to originate mortgages held for sale, certain loan sale agreements, and other financial instruments that meet the definition of a derivative. Refer to Note 9 "Derivatives" for additional information.
NOTE 6 - LEASES
The Company determines if an arrangement is a lease at inception and records a right-of-use asset and a corresponding lease liability. A right-of-use asset represents the value of the Company’s contractual right to use an underlying leased asset and a lease liability represents the Company’s contractual obligation to make payments on the same underlying leased asset. Operating and finance lease right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the non-cancelable lease term. As most of the Company’s leases do not specify an implicit rate, the Company uses an incremental borrowing rate based on information available at the lease commencement date to determine the present value of the lease payments. The Company evaluates right-of-use assets for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
In its normal course of business, the Company leases both equipment and real estate, including office and branch space. Lease terms predominantly range from one year to ten years and may include options to extend the lease, terminate the lease, or purchase the underlying asset at the end of the lease. Certain lease agreements include rental payments based on an index or are adjusted periodically for inflation. The Company has lease
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
agreements that contain lease and non-lease components and for certain real estate leases, these components are accounted for as a single lease component.
Leases with an initial term of 12 months or less are not recorded on the Company’s Consolidated Balance Sheets and are recognized in occupancy expense in the Company’s Consolidated Statements of Operations on a straight-line basis over the remaining lease term. The Company may also enter into subleases with third parties for certain leased real estate properties that are no longer occupied.
The components of operating lease cost are presented below:
|
| | | | | | | |
(in millions) | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease cost |
| $41 |
| |
| $81 |
|
Short-term lease cost | 3 |
| | 6 |
|
Variable lease cost | 2 |
| | 4 |
|
Sublease income | (1 | ) | | (2 | ) |
Total |
| $45 |
| |
| $89 |
|
Operating lease cost is recognized on a straight line basis over the lease term and recorded in occupancy expense on the Consolidated Statements of Operations.
Supplemental Consolidated Balance Sheet information related to the Company’s operating lease arrangements is presented below:
|
| | | | |
(in millions) | June 30, 2019 | Affected Line Item in Consolidated Balance Sheets |
Operating lease right-of-use assets |
| $732 |
| Other assets |
Operating lease liabilities | 750 |
| Other liabilities |
Supplemental information related to the Company’s operating lease arrangements is presented below:
|
| | | |
(in millions) | Six Months Ended June 30, 2019 |
Cash paid for amounts included in measurement of liabilities: | |
Operating cash flows from operating leases |
| $80 |
|
Right-of-use assets in exchange for new operating lease liabilities | 72 |
|
The weighted average remaining lease term and weighted average discount rate for operating leases is seven years and 3.23%, respectively.
At June 30, 2019, lease liabilities maturing under non-cancelable operating leases are presented below for the years ended December 31:
|
| | | |
(in millions | Operating Leases |
2019 |
| $69 |
|
2020 | 160 |
|
2021 | 143 |
|
2022 | 118 |
|
2023 | 93 |
|
Thereafter | 262 |
|
Total lease payments | 845 |
|
Less interest | 95 |
|
Present value of lease liabilities |
| $750 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 67 - VARIABLE INTEREST ENTITIES
The CompanyCitizens is involved in various entities that are considered VIEs, including investments in limited partnerships that sponsor affordable housing projects, limited liability companies that sponsor renewable energy projects and lending to special purpose entities. The Company’sCitizens’ maximum exposure to loss as a result of its involvement with these entities is limited to the balance sheet carrying amount of its equity investment and outstanding principal balance of loans to special purpose entities. A summary of these investments is presented below:
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
LIHTC investment included in other assets |
| $1,303 |
| |
| $1,236 |
|
LIHTC unfunded commitments included in other liabilities | 659 |
| | 673 |
|
Renewable energy investments included in other assets | 311 |
| | 319 |
|
Lending to special purpose entities included in loans and leases | 848 |
| | 613 |
|
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
LIHTC investment included in other assets |
| $1,057 |
| |
| $951 |
|
LIHTC unfunded commitments included in other liabilities | 548 |
| | 491 |
|
Renewable energy investments included in other assets | 326 |
| | 335 |
|
Lending to special purpose entities included in loans and leases | 354 |
| | — |
|
Low Income Housing Tax Credit Partnerships
The purpose of the Company’s equity investments is to assist in achieving the goals of the Community Reinvestment Act and to earn an adequate return of capital. LIHTC partnerships are managed by unrelated general partners that have the power to direct the activities which most significantly affect the performance of the partnerships. The CompanyCitizens is therefore not the primary beneficiary of any LIHTC partnerships. Accordingly, the CompanyCitizens does not consolidate these VIEs and accounts for these investments in other assets on the Consolidated Balance Sheets.
The CompanyCitizens applies the proportional amortization method to account for its LIHTC investments. Under the proportional amortization method, the Company applies a practical expedient and amortizes the initial cost of the investment in proportion to the tax credits received in the current period as compared to the total tax credits expected to be received over the life of the investment. The amortization and tax benefits are included as a component of income tax expense. The tax credits received are reported as a reduction of income tax expense (or an increase to income tax benefit) related to these transactions.
The following table presents other information related to the Company’s affordable housing tax credit investments:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Tax credits included in income tax expense |
| $34 |
| |
| $26 |
| |
| $69 |
| |
| $51 |
|
Amortization expense included in income tax expense | 35 |
| | 28 |
| | 72 |
| | 55 |
|
Other tax benefits included in income tax expense | 8 |
| | 6 |
| | 16 |
| | 12 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Tax credits included in income tax expense |
| $26 |
| |
| $22 |
| |
| $51 |
| |
| $43 |
|
Amortization expense included in income tax expense | 28 |
| | 22 |
| | 55 |
| | 45 |
|
Other tax benefits included in income tax expense | 6 |
| | 8 |
| | 12 |
| | 15 |
|
No LIHTC investment impairment losses were recognized during the three and six months ended June 30, 2019 and 2018, and 2017, respectively.
Renewable Energy Entities
The Company’s investments in renewable energy entities provide benefits from a return generated by government incentives plus other tax attributes that are associated with tax ownership (e.g., tax depreciation). As a tax equity investor, the CompanyCitizens does not have the power to direct the activities which most significantly affect the performance of these entities and therefore is not the primary beneficiary of any renewable energy entities. Accordingly, the CompanyCitizens does not consolidate these VIEs and accounts for these investments in other assets on the Consolidated Balance Sheets.
Lending to Special Purpose Entities
The CompanyCitizens provides lending facilities to third-party sponsored special purpose entities. Because the sponsor for each respective entity has the power to direct how proceeds from the Company are utilized, as well as maintains responsibility for any associated servicing commitments, the CompanyCitizens is not the primary beneficiary of these entities. Accordingly, the CompanyCitizens does not consolidate these VIEs on the Consolidated Balance Sheets. As of June 30, 2019 and December 31, 2018, the lending facilities had aggregate unpaid principal balances of $354$848 million and $613 million, respectively, and undrawn commitments to extend credit of $660 million and $584 million, respectively.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
commitments to extend credit of $279 million. The Company did not provide these lending facilities as of December 31, 2017.
NOTE 78 - BORROWED FUNDS
A summary of the Company’s short-term borrowed funds is presented below: |
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Federal funds purchased |
| $840 |
| |
| $820 |
|
Securities sold under agreements to repurchase | 292 |
| | 336 |
|
Other short-term borrowed funds | 309 |
| | 161 |
|
Total short-term borrowed funds |
| $1,441 |
| |
| $1,317 |
|
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Federal funds purchased |
| $— |
| |
| $460 |
|
Securities sold under agreements to repurchase | 326 |
| | 355 |
|
Other short-term borrowed funds (1) | 1,499 |
| | 1,856 |
|
Total short-term borrowed funds |
| $1,825 |
| |
| $2,671 |
|
(1) June 30, 2018 includes $1.5 billion of debt issued under CBNA’s Global Bank Note Program maturing within one year, with unamortized deferred issuance costs and/or discounts of ($1) million and other basis adjustments of ($10) million. December 31, 2017 includes $750 million of debt issued under CBNA’s Global Bank Note Program maturing within one year, with unamortized deferred issuance costs and/or discounts of ($1) million and other basis adjustments of ($4) million.
Key data related to short-term borrowed funds is presented in the following table:below:
|
| | | | | | | | | | | | | | | | | | | |
| As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, | | As of and for the Year Ended December 31, |
(dollars in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
| | 2018 |
Weighted-average interest rate at period-end:(1) | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase | 1.93 | % | | — | % | | 1.93 | % | | — | % | | 1.72 | % |
Other short-term borrowed funds | 2.47 |
| | 3.22 |
| | 2.47 |
| | 3.22 |
| | 2.73 |
|
Maximum amount outstanding at any month-end during the period: | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase(2) |
| $1,499 |
| |
| $1,045 |
| |
| $1,499 |
| |
| $1,045 |
| |
| $1,282 |
|
Other short-term borrowed funds | 508 |
| | 1,110 |
| | 511 |
| | 1,110 |
| | 1,110 |
|
Average amount outstanding during the period: | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase(2) |
| $818 |
| |
| $504 |
| |
| $729 |
| |
| $574 |
| |
| $654 |
|
Other short-term borrowed funds | 45 |
| | 191 |
| | 52 |
| | 388 |
| | 467 |
|
Weighted-average interest rate during the period:(1) | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase | 1.76 | % | | 0.71 | % | | 1.54 | % | | 0.68 | % | | 0.92 | % |
Other short-term borrowed funds | 2.66 |
| | 1.90 |
| | 2.71 |
| | 1.73 |
| | 2.10 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As of and for the Three Months Ended June 30, | | As of and for the Six Months Ended June 30, | | As of and for the Year Ended December 31, |
(dollars in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| | 2017 |
Weighted-average interest rate at period-end:(1) | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase | — | % | | — | % | | — | % | | — | % | | 0.74 | % |
Other short-term borrowed funds | 2.41 |
| | 1.31 |
| | 2.41 |
| | 1.31 |
| | 1.72 |
|
Maximum amount outstanding at month-end during the period: | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase(2) |
| $1,045 |
| |
| $1,075 |
| |
| $1,045 |
| |
| $1,174 |
| |
| $1,174 |
|
Other short-term borrowed funds | 2,247 |
| | 2,507 |
| | 2,247 |
| | 3,508 |
| | 3,508 |
|
Average amount outstanding during the period: | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase(2) |
| $504 |
| |
| $808 |
| |
| $574 |
| |
| $845 |
| |
| $776 |
|
Other short-term borrowed funds | 1,677 |
| | 2,275 |
| | 1,579 |
| | 2,617 |
| | 2,321 |
|
Weighted-average interest rate during the period:(1) | | | | | | | | | |
Federal funds purchased and securities sold under agreements to repurchase | 0.71 | % | | 0.36 | % | | 0.68 | % | | 0.28 | % | | 0.36 | % |
Other short-term borrowed funds | 2.49 |
| | 1.22 |
| | 2.33 |
| | 1.14 |
| | 1.32 |
|
(1) Rates exclude certain hedging costs.
(2) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A summary of the Company’s long-term borrowed funds is presented below:
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Parent Company: | | | |
2.375% fixed-rate senior unsecured debt, due July 2021 |
| $349 |
| |
| $349 |
|
4.150% fixed-rate subordinated debt, due September 2022 | 348 |
| | 348 |
|
3.750% fixed-rate subordinated debt, due July 2024 | 250 |
| | 250 |
|
4.023% fixed-rate subordinated debt, due October 2024 | 42 |
| | 42 |
|
4.350% fixed-rate subordinated debt, due August 2025 | 249 |
| | 249 |
|
4.300% fixed-rate subordinated debt, due December 2025 | 750 |
| | 749 |
|
Banking and Other Subsidiaries: | | | |
2.500% senior unsecured notes, due March 2019 (1) | — |
| | 748 |
|
2.450% senior unsecured notes, due December 2019 (1) | 747 |
| | 744 |
|
2.250% senior unsecured notes, due March 2020 (1) | 698 |
| | 691 |
|
3.060% floating-rate senior unsecured notes, due March 2020 (1) (2) | 300 |
| | 300 |
|
3.091% floating-rate senior unsecured notes, due May 2020 (1) (2) | 250 |
| | 250 |
|
2.200% senior unsecured notes, due May 2020 (1) | 499 |
| | 499 |
|
2.250% senior unsecured notes, due October 2020 (1) | 748 |
| | 738 |
|
2.550% senior unsecured notes, due May 2021 (1) | 986 |
| | 964 |
|
3.250% senior unsecured notes, due February 2022 (1) | 711 |
| | — |
|
3.248% floating-rate senior unsecured notes, due February 2022 (1) (2) | 299 |
| | — |
|
3.331% floating-rate senior unsecured notes, due May 2022 (1) (2) | 250 |
| | 249 |
|
2.650% senior unsecured notes, due May 2022 (1) | 500 |
| | 487 |
|
3.700% senior unsecured notes, due March 2023 (1) | 517 |
| | 502 |
|
3.280% floating-rate senior unsecured notes, due March 2023 (1) (2) | 249 |
| | 249 |
|
3.750% senior unsecured notes, due February 2026 (1) | 521 |
| | — |
|
Federal Home Loan Bank advances, 2.575% weighted average rate, due through 2038 | 2,258 |
| | 7,508 |
|
Other | 17 |
| | 9 |
|
Total long-term borrowed funds |
| $11,538 |
| |
| $15,925 |
|
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Parent Company: | | | |
2.375% fixed-rate senior unsecured debt, due 2021 |
| $349 |
| |
| $349 |
|
4.150% fixed-rate subordinated debt, due 2022 | 348 |
| | 348 |
|
5.158% fixed-to-floating rate callable subordinated debt, due 2023(1) | — |
| | 333 |
|
3.750% fixed-rate subordinated debt, due 2024 | 250 |
| | 250 |
|
4.023% fixed-rate subordinated debt, due 2024 | 42 |
| | 42 |
|
4.350% fixed-rate subordinated debt, due 2025 | 249 |
| | 249 |
|
4.300% fixed-rate subordinated debt, due 2025 | 749 |
| | 749 |
|
Banking Subsidiaries: | | | |
2.450% senior unsecured notes, due 2019 (2) | 740 |
| | 743 |
|
2.500% senior unsecured notes, due 2019 (2) (3) | — |
| | 741 |
|
2.250% senior unsecured notes, due 2020 (2) | 687 |
| | 692 |
|
Floating-rate senior unsecured notes, due 2020 (2) | 299 |
| | 299 |
|
Floating-rate senior unsecured notes, due 2020 (2) | 250 |
| | 249 |
|
2.200% senior unsecured notes, due 2020 (2) | 499 |
| | 498 |
|
2.250% senior unsecured notes, due 2020 (2) | 732 |
| | 742 |
|
2.550% senior unsecured notes, due 2021 (2) | 951 |
| | 964 |
|
Floating-rate senior unsecured notes, due 2022 (2) | 249 |
| | 249 |
|
2.650% senior unsecured notes, due 2022 (2) | 480 |
| | 491 |
|
3.700% senior unsecured notes, due 2023 (2) | 496 |
| | — |
|
Floating-rate senior unsecured notes, due 2023 (2) | 249 |
| | — |
|
Federal Home Loan advances due through 2038 | 6,010 |
| | 3,761 |
|
Other | 12 |
| | 16 |
|
Total long-term borrowed funds |
| $13,641 |
| |
| $11,765 |
|
(1) Redeemed on June 29, 2018.
(2) Issued under CBNA’s Global Bank Note Program.
(3)(2) Reclassified to short-term borrowed funds.Rate disclosed reflects the floating rate as of June 30, 2019.
The Parent Company’s long-term borrowed funds as of June 30, 20182019 and December 31, 20172018 included principal balances of $2.0 billion for each period, respectively, and $2.3unamortized deferred issuance costs and/or discounts of ($4) million and ($5) million, respectively. The banking and other subsidiaries’ long-term borrowed funds as of June 30, 2019 and December 31, 2018 included principal balances of $9.5 billion and $14.0 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($5) million for each period. The banking subsidiaries’ long-term borrowed funds as of June 30, 2018 and December 31, 2017 included principal balances of $11.8 billion and $9.5 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($18)17) million and ($19)14) million, respectively, and hedging basis adjustments of ($100)$43 million and ($63)66) million, respectively. See Note 8 “Derivatives”9 "Derivatives" for further information about the Company’s hedging of certain long-term borrowed funds.
Advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and pledged securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $10.8$7.4 billion and $9.4$13.0 billion at June 30, 20182019 and December 31, 2017,2018, respectively. The Company’s available FHLB borrowing capacity was $7.0$9.0 billion and $8.0$4.8 billion at June 30, 20182019 and December 31, 2017,2018, respectively. The CompanyCitizens can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At June 30, 2018,2019, the Company’s unused secured borrowing capacity was approximately $39.1$42.8 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.
On June 29, 2018, the Parent Company redeemed $333 million of its 5.158% fixed-to-floating rate callable subordinated debt due 2023.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A summary of maturities for the Company’s long-term borrowed funds at June 30, 20182019 is presented below:
|
| | | | | | | | | |
(in millions) | Parent Company | Banking and Other Subsidiaries | Consolidated |
|
Year | | | |
2019 |
| $— |
|
| $747 |
|
| $747 |
|
2020 | — |
| 4,748 |
| 4,748 |
|
2021 | 349 |
| 992 |
| 1,341 |
|
2022 | 348 |
| 1,766 |
| 2,114 |
|
2023 | — |
| 768 |
| 768 |
|
2024 and thereafter | 1,291 |
| 529 |
| 1,820 |
|
Total |
| $1,988 |
|
| $9,550 |
|
| $11,538 |
|
|
| | | | | | | | | |
(in millions) | Parent Company | Banking Subsidiaries | Consolidated |
|
Year | | | |
2019 |
| $— |
|
| $6,743 |
|
| $6,743 |
|
2020 | — |
| 2,471 |
| 2,471 |
|
2021 | 349 |
| 954 |
| 1,303 |
|
2022 | 348 |
| 734 |
| 1,082 |
|
2023 | — |
| 745 |
| 745 |
|
2024 and thereafter | 1,290 |
| 7 |
| 1,297 |
|
Total |
| $1,987 |
|
| $11,654 |
|
| $13,641 |
|
NOTE 89 - DERIVATIVES
In the normal course of business, the CompanyCitizens enters into a variety of derivative transactions in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. These transactions include interest rate swap contracts, interest rate options, foreign exchange contracts, residential loan commitment rate locks, interest rate future contracts, swaptions, forward commitments to sell to-be-announced mortgage securities (“TBAs”), forward sale contracts and purchase options. The Company monitors the results of each transaction to ensure that management’s intent is satisfied. The Company does not use derivatives for speculative purposes.
The Company’s derivative instruments are recognized on the Consolidated Balance Sheets at fair value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 1213 "Fair Value Measurements" to the Company’s unaudited interim Consolidated Financial Statements in the Quarterly Report on Form 10-Q for the period ended March 31, 2019 and Note 19 “Fair Value Measurements.”Measurements” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.
The following table presents derivative instruments included on the Consolidated Balance Sheets in derivative assets and derivative liabilities:
| | | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
(in millions) | Notional Amount(1) | Derivative Assets | Derivative Liabilities | | Notional Amount(1) | Derivative Assets | Derivative Liabilities | Notional Amount(1) | Derivative Assets | Derivative Liabilities | | Notional Amount(1) | Derivative Assets | Derivative Liabilities |
Derivatives designated as hedging instruments: | | | | | | |
Interest rate contracts |
| $12,690 |
|
| $4 |
|
| $1 |
| |
| $13,300 |
|
| $— |
|
| $— |
|
| $25,096 |
|
| $— |
|
| $3 |
| |
| $12,050 |
|
| $5 |
|
| $— |
|
Derivatives not designated as hedging instruments: | | | | | | |
Interest rate contracts | 99,182 |
| 202 |
| 435 |
| | 80,180 |
| 538 |
| 379 |
| 133,570 |
| 808 |
| 127 |
| | 117,076 |
| 301 |
| 277 |
|
Foreign exchange contracts | 10,320 |
| 143 |
| 126 |
| | 9,882 |
| 148 |
| 149 |
| 13,431 |
| 132 |
| 116 |
| | 9,866 |
| 129 |
| 113 |
|
Other contracts | 1,343 |
| 8 |
| 6 |
| | 1,039 |
| 7 |
| 5 |
| 8,040 |
| 29 |
| 34 |
| | 3,555 |
| 14 |
| 25 |
|
Total derivatives not designated as hedging instruments | | 353 |
| 567 |
| | | 693 |
| 533 |
| | 969 |
| 277 |
| | | 444 |
| 415 |
|
Gross derivative fair values | | 357 |
| 568 |
| | | 693 |
| 533 |
| | 969 |
| 280 |
| | | 449 |
| 415 |
|
Less: Gross amounts offset in the Consolidated Balance Sheets (2) | | (93 | ) | (93 | ) | | | (72 | ) | (72 | ) | | (83 | ) | (83 | ) | | | (87 | ) | (87 | ) |
Less: Cash collateral applied (2) | | (40 | ) | (50 | ) | | | (4 | ) | (151 | ) | | (53 | ) | (91 | ) | | | (45 | ) | (36 | ) |
Total net derivative fair values presented in the Consolidated Balance Sheets | |
| $224 |
|
| $425 |
| | |
| $617 |
|
| $310 |
| |
| $833 |
|
| $106 |
| | |
| $317 |
|
| $292 |
|
(1) The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate contracts, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they do not measure the true economic risk of these contracts.
(2) Amounts represent the impact of enforceable master netting agreements that allow the Company to net settle positive and negative positions.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan. The CompanyCitizens has certain derivative transactions which are designated as fair value or cash flow hedges, described as follows:
Derivatives designated as hedging instrumentsDesignated As Hedging Instruments
The Company’s institutional derivatives portfolio qualifies for hedge accounting treatment. This includes interest rate swaps that are designated as highly effective fair value and cash flow hedging relationships. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, Citizens monitors the Company uses dollar offset or regression
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
analysis ateffectiveness of its hedge relationships during the hedge’s inception, and monthly thereafter,duration of the hedge relationship. The methods utilized to assess whetherhedge effectiveness vary based on the derivatives are expected to be, or have been, highly effective in offsetting changes in the hedged item’s expected cash flows.type of item being hedged. The Company discontinues hedge accounting treatment when it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge and then reflects changes in fair value in earnings after termination of the hedge relationship.
Fair value hedgesValue Hedges
The CompanyCitizens has outstanding interest rate swap agreements to manage the interest rate exposure on its medium-term borrowings.borrowings as well as certain fixed rate residential mortgages. The changechanges in the fair value of fair value hedges, to the extent that the hedging relationship is effective, is recorded through other incomederivative instrument and offset against the changechanges in the fair value of the hedged item.asset or liability attributable to the hedged risk are recorded in the same income statement line in the Consolidated Statements of Operations.
The following table presentsreflects the effect on other incomechange in fair value of interest rate contracts, designated as fair value hedges, described above:as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | 2019 |
| | 2018 |
| | 2019 | | 2018 | Affected Line Item in the Consolidated Statements of Operations |
Change in fair value of interest rate swaps hedging borrowed funds |
| $64 |
| |
| $12 |
| |
| $104 |
| |
| ($26 | ) | Interest expense - borrowed funds |
Change in fair value of hedged long-term debt attributable to the risk being hedged | (64 | ) | | (13 | ) | | (103 | ) | | 24 |
| Interest expense - borrowed funds |
Change in fair value of interest rate swaps hedging fixed rate loans | (16 | ) | | — |
| | (16 | ) | | — |
| Interest and fees on loans and leases |
Change in fair value of hedged fixed rate loans attributable to the risk being hedged | 16 |
| | — |
| | 16 |
| | — |
| Interest and fees on loans and leases |
The following table reflects amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:
| | | Amounts Recognized in Other Income for the | | | | | | |
| Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 | June 30, 2019 |
(in millions) | Derivative | Hedged Item | Hedge Ineffectiveness | | Derivative | Hedged Item | Hedge Ineffectiveness | Residential mortgages | Long-term borrowed funds |
Hedges of interest rate risk on borrowings using interest rate swaps |
| $12 |
|
| ($13 | ) |
| ($1 | ) | |
| $16 |
|
| ($15 | ) |
| $1 |
| |
Carrying amount of the hedged assets | |
| $975 |
|
| $— |
|
Carrying amount of the hedged liabilities | | — |
| 5,249 |
|
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items(1) | | 16 |
| 43 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Amounts Recognized in Other Income for the |
| Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
(in millions) | Derivative | Hedged Item | Hedge Ineffectiveness | | Derivative | Hedged Item | Hedge Ineffectiveness |
Hedges of interest rate risk on borrowings using interest rate swaps |
| ($26 | ) |
| $24 |
|
| ($2 | ) | |
| $10 |
|
| ($9 | ) |
| $1 |
|
(1)The balance reported for long-term borrowed funds includes ($3) million of cumulative hedging adjustments recorded on discontinued fair value hedging relationships.Cash flow hedgesFlow Hedges
The CompanyCitizens has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets and financing liabilities (including its borrowed funds).liabilities. All of these swaps have been deemed as highly effective cash flow hedges. The effective portionentire change in the fair value of the hedging gains and losses associated with these hedges are recordedinterest rate swap included in OCI; the ineffective portionassessment of the hedging gains and losseshedge effectiveness is recorded in earnings (other income). Hedging gainsOCI and losses on derivative contracts reclassified from OCI to current period earnings are included in the line item in the accompanying Consolidated Statements of Operations in which the hedged item is recorded and(interest income or interest expense) in the same period that the hedged item affects earnings. During the next 12 months, there are $7$11 million in pre-tax net losses on derivative instruments included in OCI expected to be reclassified to net interest income in the Consolidated Statements of Operations.
Hedging gains and losses associated with the Company’s cash flow hedges are immediately reclassified from OCI to current period earnings (other income) if it becomes probable that the hedged forecasted transactions will not occur during the originally specified time period.
The following table presents the effect of cash flow hedges on net income and stockholders' equity:
|
| | | | | | | | | | | | | | | |
| Amounts Recognized for the |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Effective portion of (loss) gain recognized in OCI (1) |
| ($17 | ) | |
| $42 |
| |
| ($87 | ) | |
| $37 |
|
Amounts reclassified from OCI to interest income (2) | (13 | ) | | 8 |
| | (19 | ) | | 20 |
|
Amounts reclassified from OCI to interest expense (2) | 4 |
| | (1 | ) | | 8 |
| | (3 | ) |
(1) The cumulative effective gains and losses on the Company’s cash flow hedging activities are included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets.
(2) This amount includes both (i)could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the amortizationaddition of effective gains and losses associated with the Company’s terminated cash flowother hedges and (ii) the current reporting period’s interest settlements realized on the Company’s active cash flow hedges. Both (i) and (ii) were previously included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets and were subsequently recorded as adjustmentssubsequent to the interest income or expense of the underlying hedged item.June 30, 2019.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the three and six months ended June 30, 2019 and 2018, there were no gains or losses reclassified from OCI to current period earnings (other income) associated with the discontinuance of the Company’s cash flow hedges because it was probable that the original forecasted transaction would no longer occur by the end of the originally specified time period.
The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018(1) | | 2019 | | 2018(1) |
Amount of pre-tax net gains (losses) recognized in OCI |
| $91 |
| |
| ($17 | ) | |
| $143 |
| |
| ($87 | ) |
Amount of pre-tax net losses reclassified from OCI into interest income | (20 | ) | | (13 | ) | | (40 | ) | | (19 | ) |
Amount of pre-tax net gains reclassified from OCI into interest expense | 1 |
| | 4 |
| | 1 |
| | 8 |
|
(1) For the three and six months ended June 30, 2018, the amount of pre-tax net gains (losses) recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and ineffectiveness was reported within noninterest income.
Derivatives not designated as hedging instrumentsNot Designated As Hedging Instruments
Economic hedgesHedges
The Company’s customer derivatives are recorded on the Consolidated Balance Sheets at fair value. These include interest rate and foreign exchange derivative contracts that are designed to meet the hedging and financing needs of the Company’s customers. Mark-to-market adjustments to the fair value of these contracts are included in foreign exchange and interest rate products on the Consolidated Statements of Operations. The mark-to-market gains and losses associated with the customer derivatives are mitigated by the mark-to-market gains and losses on the offsetting interest rate and foreign exchange derivative contracts transacted. Citizens also purchases interest rate floors primarily to hedge the exposure related to customer deposit products that have embedded minimum interest rate guarantees. Citizens utilizes interest rate floors in non-qualifying hedging relationships.
The Company’s residential loan derivatives (including residential loan commitments and forward sales contracts) are recorded on the Consolidated Balance Sheets at fair value. Mark-to-market adjustmentsCitizens also uses derivatives to hedge the risk of changes in the fair value of its residential loan commitmentsMSR portfolio. Certain residential MSRs are accounted for at fair value with changes in the fair value influenced primarily by changes in interest rates. Derivatives used to hedge the value of residential MSRs include TBAs, AFS securities, interest rate swaptions, interest rate futures and forward sale contracts are included in noninterest income under mortgage banking fees.interest rate swaps.
The following table presents the effect of customer derivatives and economic hedges on noninterest income:
|
| | | | | | | | | | | | | | | | |
| Amounts Recognized in Noninterest Income for the | |
| Three Months Ended June 30, | | Six Months Ended June 30, | Affected Line Item in the Consolidated Statements of Operations |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Economic hedge type: | | | | | | | | |
Customer interest rate contracts |
| $425 |
| |
| ($75 | ) | |
| $654 |
| |
| ($279 | ) | Foreign exchange and interest rate products |
Customer foreign exchange contracts | (47 | ) | | (68 | ) | | (81 | ) | | (57 | ) | Foreign exchange and interest rate products |
Derivatives transactions to hedge interest rate risk | (410 | ) | | 90 |
| | (627 | ) | | 306 |
| Foreign exchange and interest rate products |
Derivatives transactions to hedge foreign exchange risk | 54 |
| | 92 |
| | 94 |
| | 75 |
| Foreign exchange and interest rate products |
Residential loan commitments | 11 |
| | 1 |
| | 16 |
| | — |
| Mortgage banking fees |
Forward sale contracts | (9 | ) | | (2 | ) | | (5 | ) | | (2 | ) | Mortgage banking fees |
Interest rate derivative contracts used to hedge residential MSRs | 71 |
| | — |
| | 116 |
| | — |
| Mortgage banking fees |
Total |
| $95 |
| |
| $38 |
| |
| $167 |
| |
| $43 |
| |
|
| | | | | | | | | | | | | | | |
| Amounts Recognized in Noninterest Income for the |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Customer derivative contracts | | | | | | | |
Customer interest rate contracts (1) |
| ($75 | ) | |
| $83 |
| |
| ($279 | ) | |
| $80 |
|
Customer foreign exchange contracts (1) | (68 | ) | | 78 |
| | (57 | ) | | 96 |
|
Residential loan commitments (2) | 1 |
| | (2 | ) | | — |
| | 3 |
|
Economic hedges | | | | | | | |
Offsetting derivatives transactions to hedge interest rate risk on customer interest rate contracts (1) | 90 |
| | (71 | ) | | 306 |
| | (56 | ) |
Offsetting derivatives transactions to hedge foreign exchange risk on customer foreign exchange contracts (1) | 92 |
| | (71 | ) | | 75 |
| | (85 | ) |
Forward sale contracts (2) | (2 | ) | | 5 |
| | (2 | ) | | (6 | ) |
Total |
| $38 |
| |
| $22 |
| |
| $43 |
| |
| $32 |
|
(1) Reported in foreign exchange and interest rate products on the Consolidated Statements of Operations.
(2) Reported in mortgage banking fees on the Consolidated Statements of Operations.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 910 - RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presentstables present the changes in the balances, net of income taxes, of each component of AOCI:
| | | | As of and for the Three Months Ended June 30, | | As of and for the Three Months Ended June 30, |
(in millions) | (in millions) | Net Unrealized (Losses) Gains on Derivatives | | Net Unrealized (Losses) Gains on Debt Securities | | Employee Benefit Plans | | Total AOCI |
| (in millions) | Net Unrealized (Losses) Gains on Derivatives | | Net Unrealized (Losses) Gains on Debt Securities | | Employee Benefit Plans | | Total AOCI |
Balance at April 1, 2017 |
| ($97 | ) | |
| ($195 | ) | |
| ($391 | ) | |
| ($683 | ) | |
Balance at April 1, 2018 | | Balance at April 1, 2018 |
| ($193 | ) | |
| ($514 | ) | |
| ($438 | ) | |
| ($1,145 | ) |
Other comprehensive loss before reclassifications | | Other comprehensive loss before reclassifications | (13 | ) | | (60 | ) | | — |
| | (73 | ) |
Other-than-temporary impairment not recognized in earnings on debt securities | | Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | — |
| | — |
| | — |
|
Amounts reclassified to the Consolidated Statements of Operations | | Amounts reclassified to the Consolidated Statements of Operations | 6 |
| | (1 | ) | | 3 |
| | 8 |
|
Net other comprehensive (loss) income | | Net other comprehensive (loss) income | (7 | ) | | (61 | ) | | 3 |
| | (65 | ) |
Balance at June 30, 2018 | | Balance at June 30, 2018 |
| ($200 | ) | |
| ($575 | ) | |
| ($435 | ) | |
| ($1,210 | ) |
Balance at April 1, 2019 | | Balance at April 1, 2019 |
| ($89 | ) | |
| ($244 | ) | |
| ($460 | ) | |
| ($793 | ) |
Other comprehensive income before reclassifications | Other comprehensive income before reclassifications | 26 |
| | 56 |
| | — |
| | 82 |
| Other comprehensive income before reclassifications | 68 |
| | 221 |
| | — |
| | 289 |
|
Other-than-temporary impairment not recognized in earnings on debt securities | Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | 10 |
| | — |
| | 10 |
| Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | 1 |
| | — |
| | 1 |
|
Amounts reclassified to the Consolidated Statements of Operations | Amounts reclassified to the Consolidated Statements of Operations | (5 | ) | | 1 |
| | 2 |
| | (2 | ) | Amounts reclassified to the Consolidated Statements of Operations | 15 |
| | (3 | ) | | 3 |
| | 15 |
|
Net other comprehensive income | Net other comprehensive income | 21 |
| | 67 |
| | 2 |
| | 90 |
| Net other comprehensive income | 83 |
| | 219 |
| | 3 |
| | 305 |
|
Balance at June 30, 2017 |
| ($76 | ) | |
| ($128 | ) | |
| ($389 | ) | |
| ($593 | ) | |
Balance at April 1, 2018 |
| ($193 | ) | |
| ($514 | ) | |
| ($438 | ) | |
| ($1,145 | ) | |
Other comprehensive loss before reclassifications | (13 | ) | | (60 | ) | | — |
| | (73 | ) | |
Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | — |
| | — |
| | — |
| |
Amounts reclassified to the Consolidated Statements of Operations | 6 |
| | (1 | ) | | 3 |
| | 8 |
| |
Net other comprehensive loss | (7 | ) | | (61 | ) | | 3 |
| | (65 | ) | |
Balance at June 30, 2018 |
| ($200 | ) | |
| ($575 | ) | |
| ($435 | ) | |
| ($1,210 | ) | |
Balance at June 30, 2019 | | Balance at June 30, 2019 |
| ($6 | ) | |
| ($25 | ) | |
| ($457 | ) | |
| ($488 | ) |
|
| | | | | | | | | | | | | | | | |
| | As of and for the Six Months Ended June 30, |
(in millions) | Net Unrealized (Losses) Gains on Derivatives | | Net Unrealized (Losses) Gains on Debt Securities | | Employee Benefit Plans | | Total AOCI |
Balance at January 1, 2018 |
| ($143 | ) | |
| ($236 | ) | |
| ($441 | ) | |
| ($820 | ) |
Other comprehensive loss before reclassifications | (65 | ) | | (332 | ) | | — |
| | (397 | ) |
Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | (1 | ) | | — |
| | (1 | ) |
Amounts reclassified to the Consolidated Statements of Operations | 8 |
| | (6 | ) | | 6 |
| | 8 |
|
Net other comprehensive (loss) income | (57 | ) | | (339 | ) | | 6 |
| | (390 | ) |
Balance at June 30, 2018 |
| ($200 | ) | |
| ($575 | ) | |
| ($435 | ) | |
| ($1,210 | ) |
Balance at January 1, 2019 |
| ($143 | ) | |
| ($490 | ) | |
| ($463 | ) | |
| ($1,096 | ) |
Other comprehensive income before reclassifications | 107 |
| | 467 |
| | — |
| | 574 |
|
Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | 1 |
| | — |
| | 1 |
|
Amounts reclassified to the Consolidated Statements of Operations | 30 |
| | (8 | ) | | 6 |
| | 28 |
|
Net other comprehensive income | 137 |
| | 460 |
| | 6 |
| | 603 |
|
Cumulative effect of change in accounting standards | — |
| | 5 |
| | — |
| | 5 |
|
Balance at June 30, 2019 |
| ($6 | ) | |
| ($25 | ) | |
| ($457 | ) | |
| ($488 | ) |
|
| | | | | | | | | | | | | | | | |
| | As of and for the Six Months Ended June 30, |
(in millions) | Net Unrealized (Losses) Gains on Derivatives | | Net Unrealized (Losses) Gains on Debt Securities | | Employee Benefit Plans | | Total AOCI |
|
Balance at January 1, 2017 |
| ($88 | ) | |
| ($186 | ) | |
| ($394 | ) | |
| ($668 | ) |
Other comprehensive income before reclassifications | 23 |
| | 61 |
| | — |
| | 84 |
|
Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | (2 | ) | | — |
| | (2 | ) |
Amounts reclassified to the Consolidated Statements of Operations | (11 | ) | | (1 | ) | | 5 |
| | (7 | ) |
Net other comprehensive income | 12 |
| | 58 |
| | 5 |
| | 75 |
|
Balance at June 30, 2017 |
| ($76 | ) | |
| ($128 | ) | |
| ($389 | ) | |
| ($593 | ) |
Balance at January 1, 2018 |
| ($143 | ) | |
| ($236 | ) | |
| ($441 | ) | |
| ($820 | ) |
Other comprehensive loss before reclassifications | (65 | ) | | (332 | ) | | — |
| | (397 | ) |
Other-than-temporary impairment not recognized in earnings on debt securities | — |
| | (1 | ) | | — |
| | (1 | ) |
Amounts reclassified to the Consolidated Statements of Operations | 8 |
| | (6 | ) | | 6 |
| | 8 |
|
Net other comprehensive loss | (57 | ) | | (339 | ) | | 6 |
| | (390 | ) |
Balance at June 30, 2018 |
| ($200 | ) | |
| ($575 | ) | |
| ($435 | ) | |
| ($1,210 | ) |
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the amounts reclassified out of each component of AOCI and into the Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
| |
Details about AOCI Components | | | | | | | | Affected Line Item in the Consolidated Statements of Operations |
Reclassification adjustment for net derivative losses included in net income: |
| ($20 | ) | |
| ($13 | ) | |
| ($40 | ) | |
| ($19 | ) | Interest income |
| 1 |
| | 4 |
| | 1 |
| | 8 |
| Interest expense |
| (19 | ) | | (9 | ) | | (39 | ) | | (11 | ) | Income before income tax expense |
| (4 | ) | | (3 | ) | | (9 | ) | | (3 | ) | Income tax expense |
|
| ($15 | ) | |
| ($6 | ) | |
| ($30 | ) | |
| ($8 | ) | Net income |
Reclassification of net debt securities gains to net income: |
| $4 |
| |
| $2 |
| |
| $12 |
| |
| $10 |
| Securities gains, net |
| — |
| | (1 | ) | | (1 | ) | | (2 | ) | Net debt securities impairment losses recognized in earnings |
| 4 |
| | 1 |
| | 11 |
| | 8 |
| Income before income tax expense |
| 1 |
| | — |
| | 3 |
| | 2 |
| Income tax expense |
|
| $3 |
| |
| $1 |
| |
| $8 |
| |
| $6 |
| Net income |
Reclassification of changes related to the employee benefit plan: |
| ($4 | ) | |
| ($4 | ) | |
| ($9 | ) | |
| ($8 | ) | Other operating expense |
| (4 | ) | | (4 | ) | | (9 | ) | | (8 | ) | Income before income tax expense |
| (1 | ) | | (1 | ) | | (3 | ) | | (2 | ) | Income tax expense |
|
| ($3 | ) | |
| ($3 | ) | |
| ($6 | ) | |
| ($6 | ) | Net income |
Total reclassification losses |
| ($15 | ) | |
| ($8 | ) | |
| ($28 | ) | |
| ($8 | ) | Net income |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| |
Details about AOCI Components | | | | | | | | Affected Line Item in the Consolidated Statements of Operations |
Reclassification adjustment for net derivative (losses) gains included in net income: |
| ($13 | ) | |
| $8 |
| |
| ($19 | ) | |
| $20 |
| Interest income |
| 4 |
| | (1 | ) | | 8 |
| | (3 | ) | Interest expense |
| (9 | ) | | 7 |
| | (11 | ) | | 17 |
| Income before income tax expense |
| (3 | ) | | 2 |
| | (3 | ) | | 6 |
| Income tax expense |
|
| ($6 | ) | |
| $5 |
| |
| ($8 | ) | |
| $11 |
| Net income |
Reclassification of net debt securities gains (losses) to net income: |
| $2 |
| |
| $3 |
| |
| $10 |
| |
| $7 |
| Securities gains, net |
| (1 | ) | | (4 | ) | | (2 | ) | | (5 | ) | Net debt securities impairment losses recognized in earnings |
| 1 |
| | (1 | ) | | 8 |
| | 2 |
| Income before income tax expense |
| — |
| | — |
| | 2 |
| | 1 |
| Income tax expense |
|
| $1 |
| |
| ($1 | ) | |
| $6 |
| |
| $1 |
| Net income |
Reclassification of changes related to the employee benefit plan: |
| ($4 | ) | |
| ($4 | ) | |
| ($8 | ) | |
| ($9 | ) | Other operating expense |
| (4 | ) | | (4 | ) | | (8 | ) | | (9 | ) | Income before income tax expense |
| (1 | ) | | (2 | ) | | (2 | ) | | (4 | ) | Income tax expense |
|
| ($3 | ) | |
| ($2 | ) | |
| ($6 | ) | |
| ($5 | ) | Net income |
Total reclassification (losses) gains |
| ($8 | ) | |
| $2 |
| |
| ($8 | ) | |
| $7 |
| Net income |
The following table presents the effects on net income of the amounts reclassified out of AOCI:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Net interest income (includes ($19),($9), ($39) and ($11) of AOCI reclassifications, respectively) |
| $1,166 |
| |
| $1,121 |
| |
| $2,326 |
| |
| $2,212 |
|
Provision for credit losses | 97 |
| | 85 |
| | 182 |
| | 163 |
|
Noninterest income (includes $4, $1, $11 and $8 of AOCI reclassifications, respectively) | 462 |
| | 388 |
| | 890 |
| | 759 |
|
Noninterest expense (includes $4, $4, $9 and $8 of AOCI reclassifications, respectively) | 951 |
| | 875 |
| | 1,888 |
| | 1,758 |
|
Income before income tax expense | 580 |
| | 549 |
| | 1,146 |
| | 1,050 |
|
Income tax expense (includes ($4), ($4), ($9) and ($3) income tax net expense from reclassification items, respectively) | 127 |
| | 124 |
| | 254 |
| | 237 |
|
Net income |
| $453 |
| |
| $425 |
| |
| $892 |
| |
| $813 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Net interest income (includes ($9), $7, ($11) and $17 of AOCI reclassifications, respectively) |
| $1,121 |
| |
| $1,026 |
| |
| $2,212 |
| |
| $2,031 |
|
Provision for credit losses | 85 |
| | 70 |
| | 163 |
| | 166 |
|
Noninterest income (includes $1, ($1), $8 and $2 of AOCI reclassifications, respectively) | 388 |
| | 370 |
| | 759 |
| | 749 |
|
Noninterest expense (includes $4, $4, $8 and $9 of AOCI reclassifications, respectively) | 875 |
| | 864 |
| | 1,758 |
| | 1,718 |
|
Income before income tax expense | 549 |
| | 462 |
| | 1,050 |
| | 896 |
|
Income tax expense (includes ($4), $0, ($3) and $3 income tax net expense from reclassification items, respectively) | 124 |
| | 144 |
| | 237 |
| | 258 |
|
Net income |
| $425 |
| |
| $318 |
| |
| $813 |
| |
| $638 |
|
NOTE 10 - STOCKHOLDERS’ EQUITY
Preferred Stock
The Company had 100,000,000 shares authorized of $25.00 par value undesignated preferred stock as of June 30, 2018 and December 31, 2017. At June 30, 2018 and December 31, 2017, the Company had 550,000 and 250,000 shares of preferred stock issued and outstanding, respectively, with carrying amounts of $543 million and $247 million, respectively.
On May 24, 2018, the Company issued $300 million, or 300,000 shares, of 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (the “Series B Preferred Stock”). As a result of this issuance, the Company received net proceeds of $296 million after the underwriting discount and other expenses. The Series B Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. Dividends, if declared, will accrue and be payable semi-annually, in arrears, at a rate equal to 6.000% from the date of issuance to, but excluding, January 6, 2023, and thereafter at a floating rate per annum equal to three-month LIBOR plus 3.003%, payable quarterly, in arrears, beginning October 6, 2023.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 11 - STOCKHOLDERS’ EQUITY
Preferred Stock
The following table summarizes the Company’s preferred stock: |
| | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
(in millions, except per share and share data) | Liquidation value per share | | Preferred Shares | | Carrying Amount | | Preferred Shares | | Carrying Amount |
Authorized ($25 par value) | | | 100,000,000 |
| | | | 100,000,000 |
| | |
Issued and outstanding: | | | | | | | | | |
Series A | $1,000 | | 250,000 |
| | $247 | | 250,000 |
| | $247 |
Series B | 1,000 |
| | 300,000 | | 296 |
| | 300,000 |
| | 296 |
|
Series C | 1,000 |
| | 300,000 |
| | 297 |
| | 300,000 |
| | 297 |
|
Series D | 1,000 |
| (1) | 300,000 |
| (2) | 293 |
| | — |
| | — |
|
Total | | | 1,150,000 |
| | $1,133 | | 850,000 |
| | $840 |
(1)Equivalent to $25 per depositary share.
(2)Represented by 12,000,000 depositary shares each representing a 1/40th interest in the Series D Preferred Stock.
The Series B Preferred Stock is redeemablefollowing table provides information related to the Company’s preferred stock outstanding as of June 30, 2019:
|
| | | | | |
(in millions, except share data) |
Preferred Stock(1) | Issue Date | Number of Shares Outstanding | Dividend Dates(2) | Annual Per Share Dividend Rate | Optional Redemption Date(3) |
Series A | April 6, 2015 | 250,000 | Semi-annually beginning October 6, 2015 until April 6, 2020 | 5.500% until April 6, 2020 | April 6, 2020 |
| | | Quarterly beginning July 6, 2020 | 3 Mo. LIBOR plus 3.960% beginning April 6, 2020 | |
Series B | May 24, 2018 | 300,000 | Semi-annually beginning January 6, 2019 until July 6, 2023 | 6.000% until July 6, 2023 | July 6, 2023 |
| | | Quarterly beginning October 6, 2023 | 3 Mo. LIBOR plus 3.003% beginning July 6, 2023 | |
Series C | October 25, 2018 | 300,000 | Quarterly beginning January 6, 2019 until April 6, 2024 | 6.375% until April 6, 2024 | April 6, 2024 |
| | | Quarterly beginning July 6, 2024 | 3 Mo. LIBOR plus 3.157% beginning April 6, 2024 | |
Series D | January 29, 2019 | 300,000(4) | Quarterly beginning April 6, 2019 until April 6, 2024 | 6.350% until April 6, 2024 | April 6, 2024 |
| | | Quarterly beginning July 6, 2024 | 3 Mo. LIBOR plus 3.642% beginning April 6, 2024 | |
(1) All outstanding series are non-cumulative fixed-to-floating rate perpetual preferred stock. Except in limited circumstances, the preferred stock does not have voting rights.
(2) Dividends are payable when, and if, declared by the Company’s Board of Directors or an authorized committee thereof.
(3) Redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after July 6, 2023the date stated, or in whole but not in part, at any time within the 90 days following a regulatory capital treatment event a as defined in the applicable certificate of designations, in each case at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share for the Series D Preferred Stock), plus any declared and unpaid dividends, without accumulation of any undeclared dividends. The Company may not redeemUnder current rules, any redemption is subject to approval by the FRB.
(4)Represented by 12,000,000 depositary shares ofeach representing a 1/40th interest in the Series BD Preferred Stock without obtaining the prior approval of the FRB if then required under applicable capital guidelines. Except in certain limited circumstances, the Series B Preferred Stock does not have any voting rights.Stock.
At June 30, 2018 and December 31, 2017, the Company had 250,000 shares of 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock issued and outstanding with liquidation preference of $1,000CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dividends
The following table provides information related to dividends per share and a carrying amount of $247 million. For further detail regarding the terms and conditions of the Company’s Series A Preferred Stock see Note 16 “Stockholders’ Equity” to the Company’s audited Financial Statements in the Annual Report on Form 10-Kaggregate, declared and paid, for the year ended December 31, 2017.each type of stock issued and outstanding:
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
(in millions, except per share data) | | Dividends Declared per Share | Dividends Declared | Dividends Paid | | Dividends Declared per Share | Dividends Declared | Dividends Paid |
Common stock | |
| $0.32 |
|
| $148 |
|
| $148 |
| |
| $0.22 |
|
| $107 |
|
| $107 |
|
Preferred stock | | | | | | | | |
Series A | |
| $— |
|
| $— |
|
| $7 |
| |
| $— |
|
| $— |
|
| $7 |
|
Series B | | 30.00 |
| 9 |
| — |
| | — |
| — |
| — |
|
Series C | | 15.94 |
| 4 |
| 5 |
| | — |
| — |
| — |
|
Series D | | 15.88 |
| 5 |
| 3 |
| | — |
| — |
| — |
|
Total preferred stock | | |
| $18 |
|
| $15 |
| | |
| $— |
|
| $7 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
(in millions, except per share data) | | Dividends Declared per Share | Dividends Declared | Dividends Paid | | Dividends Declared per Share | Dividends Declared | Dividends Paid |
Common stock | |
| $0.64 |
|
| $297 |
|
| $297 |
| |
| $0.44 |
|
| $215 |
|
| $215 |
|
Preferred stock | | | | | | | | |
Series A | |
| $27.50 |
|
| $7 |
|
| $7 |
| |
| $27.50 |
|
| $7 |
|
| $7 |
|
Series B | | 30.00 |
| 9 |
| 11 |
| | — |
| — |
| — |
|
Series C | | 31.88 |
| 9 |
| 9 |
| | — |
| — |
| — |
|
Series D | | 27.70 |
| 8 |
| 3 |
| | — |
| — |
| — |
|
Total preferred stock | | |
| $33 |
|
| $30 |
| | |
| $7 |
|
| $7 |
|
Treasury Stock
During the six months ended June 30, 2018,2019, the Company repurchased $325$320 million, or 7,486,1659,287,644 shares, of its outstanding common stock. The repurchased sharesstock, which are held in treasury stock.
NOTE 1112 - COMMITMENTS AND CONTINGENCIES
A summary of outstanding off-balance sheet arrangements is presented below:below. For more information on these arrangements, see Note 18 “Commitments and Contingencies” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Commitments to extend credit |
| $70,217 |
| |
| $69,553 |
|
Letters of credit | 2,252 |
| | 2,125 |
|
Marketing rights | 35 |
| | 37 |
|
Risk participation agreements | 41 |
| | 19 |
|
Loans sold with recourse | 23 |
| | 5 |
|
Total |
| $72,568 |
| |
| $71,739 |
|
|
| | | | | | | |
(in millions) | June 30, 2018 | | December 31, 2017 |
Undrawn commitments to extend credit |
| $65,389 |
| |
| $62,959 |
|
Financial standby letters of credit | 1,974 |
| | 2,036 |
|
Performance letters of credit | 120 |
| | 47 |
|
Commercial letters of credit | 56 |
| | 53 |
|
Marketing rights | 39 |
| | 41 |
|
Risk participation agreements | 14 |
| | 16 |
|
Residential mortgage loans sold with recourse | 6 |
| | 7 |
|
Total |
| $67,598 |
| |
| $65,159 |
|
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to customers in accordance with conditions contractually agreed upon in advance. Generally, the commitments have fixed expiration dates or termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.
Letters of Credit
Standby letters of credit, both financial and performance, are issued by the Company for its customers. They are used as conditional guarantees of payment to a third party in the event the customer either fails to make specific payments (financial) or fails to complete a specific project (performance). Commercial letters of credit are used to facilitate the import of goods. The commercial letter of credit is used as the method of payment to the Company’s customers’ suppliers. The Company’s exposure to credit loss in the event of counterparty nonperformance in connection with the above instruments is represented by the contractual amount of those instruments, net of the value of collateral held. Standby letters of credit and commercial letters of credit are issued for terms of up to ten years and one year, respectively.
Generally, letters of credit are collateralized by cash, accounts receivable, inventory or investment securities. Credit risk associated with letters of credit is considered in determining the appropriate amounts of reserves for unfunded commitments.
The Company recognizes a liability on the Consolidated Balance Sheets representing its obligation to stand ready to perform over the term of the standby letters of credit in the event that the specified triggering events occur. The liability for these guarantees was $3 million at June 30, 2018 and December 31, 2017, respectively.
Marketing Rights
During 2003, the Company entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania. The Company paid $2 million for the six months ended June 30, 2018 and
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
paid $3 million for the year ended December 31, 2017. As of June 30, 2018, the Company is obligated to pay $39 million over the remainder of the contract.
Risk Participation Agreements
RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. Under the terms of these agreements, the “participating bank” receives a fee from the “lead bank” in exchange for the guarantee of reimbursement if the customer defaults on an interest rate swap. The interest rate swap is transacted such that any and all exchanges of interest payments (favorable and unfavorable) are made between the lead bank and the customer. In the event that an early termination of the swap occurs and the customer is unable to make a required close out payment, the participating bank assumes that obligation and is required to make this payment.
RPAs where the Company acts as the lead bank are referred to as “participations-out,” in reference to the credit risk associated with the customer derivatives being transferred out of the Company. Participations-out generally occur concurrently with the sale of new customer derivatives. RPAs where the Company acts as the participating bank are referred to as “participations-in,” in reference to the credit risk associated with the counterparty’s derivatives being assumed by the Company. The Company’s maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivable from the customer. The Company’s estimate of the credit exposure associated with its risk participations-in as of June 30, 2018 and December 31, 2017 is $14 million and $16 million, respectively. The current amount of credit exposure is spread out over 84 counterparties. RPAs generally have terms ranging from one to five years; however, certain outstanding agreements have terms as long as ten years.
Residential Loans Sold with Recourse
The Company is an originator and servicer of residential mortgages and routinely sells such mortgage loans in the secondary market and to government-sponsored entities. In the context of such sales, the Company makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of those representations and warranties.
Other Commitments
In secondfirst quarter 2018,2019, the Company entered into an agreement to purchase education loans on a quarterly basis beginning with secondfirst quarter 20182019 and ending with fourth quarter 2018.2019. The total minimum and maximum amount of the aggregate purchase principal balance of loans under the terms of the agreement are $425$600 million and $700 million,$1.0 billion, respectively, and the remaining maximum principal purchase commitment is $375$700 million as
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
of June 30, 2018. The agreement may be extended by written agreement of the parties for an additional four quarters. The agreement will terminate immediately if at any time during its term the aggregate purchase principal balance of loans equals the maximum amount. The Company may also terminate the agreement at will with payment of a termination fee equal to the product of $1 million times the number of quarters remaining under the agreement.2019.
The Company’s commercial loan trading desk provides ongoing secondary market support and liquidity to its clients. Unsettled loan trades (i.e., loan purchase contracts) represent firm commitments to purchase loans from a third party at an agreed-upon price. Principal amounts associated with unsettled commercial loan trades are off-balance sheet commitments until delivery of the loans has taken place. Fair value adjustments associated with each unsettled loan trade are recognized on the Consolidated Balance Sheets and classified within other assets or other liabilities, depending on whether the fair value of the unsettled trade represents an unrealized gain or unrealized loss. The principal balances of unsettled commercial loan trade purchases and sales were $202$106 million and $186$114 million, respectively, at June 30, 20182019 and $65$68 million and $132$161 million, respectively, at December 31, 2017. Settled loans purchased2018.
Letters of Credit
Letters of credit in the table above reflect commercial, standby financial and standby performance letters of credit. Standby letters of credit, both financial and performance, are issued by the trading deskCompany for its customers. They are classifiedused as conditional guarantees of payment to a third party in the event the customer either fails to make specific payments (financial) or fails to complete a specific project (performance). The Company’s exposure to credit loss in the event of counterparty nonperformance in connection with the above instruments is represented by the contractual amount of those instruments, net of the value of collateral held. Generally, letters of credit are collateralized by cash, accounts receivable, inventory or investment securities. Credit risk associated with letters of credit is considered in determining the appropriate amounts of reserves for unfunded commitments. Standby letters of credit and commercial letters of credit are issued for terms of up to ten years and one year, respectively.
Other Commitments
Citizens has additional off-balance sheet arrangements that are summarized below:
| |
• | Marketing Rights - During 2003, Citizens entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania. |
Loans sold with recourse - Citizens is an originator and servicer of residential mortgages and routinely sells such mortgage loans heldin the secondary market and to GSEs. In the context of such sales, the Company makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for sale, at fair value oncertain breaches of those representations and warranties. The Company also sells the Consolidated Balance Sheets. Refergovernment guaranteed portion of certain SBA loans to Note 12 “Fair Value Measurements”outside investors, for further information.which it retains the servicing rights.
| |
• | Risk Participation Agreements - RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. The current amount of credit exposure is spread out over 83 counterparties. RPAs generally have terms ranging from one year to five years; however, certain outstanding agreements have terms as long as nine years. |
Contingencies
The Company operates in a legal and regulatory environment that exposes it to potentially significant risks. A certain amount of litigation ordinarily results from the nature of the Company’s banking and other businesses. The Company is a party to legal proceedings, including class actions. The Company is also the subject of investigations, reviews, subpoenas, and regulatory matters arising out of its normal business operations, which, in some instances, relate to concerns about fair lending, unfair and/or deceptive practices, mortgage-related issues, and mis-selling
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
of certain products. In addition, the Company engages in discussions with relevant governmental and regulatory authorities on a regular and ongoing basis regarding various issues, and any issues discussed or identified may result in investigatory or other action being taken. Litigation and regulatory matters may result in settlements, damages, fines, penalties, public or private censure, increased costs, required remediation, restrictions on business activities, or other impacts on the Company.
In these disputes and proceedings, the Company contests liability and the amount of damages as appropriate. Given their complex nature, and based on the Company's experience, it may be years before some of these matters are finally resolved. Moreover, before liability can be reasonably estimated for a claim, numerous legal and factual issues may need to be examined, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal issues relevant to the proceedings in question.
The Company cannot predict with certainty if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages. The Company recognizes a provision for a claim when, in the opinion of management after seeking legal advice, it is probable that a liability exists and the amount
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
of loss can be reasonably estimated. In many proceedings, however, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.
Based on information currently available, the advice of legal counsel and other advisers, and established reserves, management believes that the aggregate liabilities, if any, potentially arising from these proceedings will not have a materially adverse effect on the Company’s unaudited interim Consolidated Financial Statements.
As previously reported, CBNA entered into a consent order with the OCC in November 2015 in connection with past billing practices. All financial penalties and remediation associated with this legacy matter have been paid and completed. Since the Company’s last quarterly report, the OCC notified CBNA that they had terminated the consent order after determining that CBNA had satisfied the required actions under the consent order.
NOTE 1213 - FAIR VALUE MEASUREMENTS
As discussed in Note 19 “Fair Value Measurements,” to the Company’s audited Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017, the CompanyCitizens measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. The CompanyCitizens also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this Note for assets and liabilities that are not required to be reported at fair value in the financial statements.
The Company elected to account for residential mortgage loans held for sale and certain commercial and commercial real estate loans held for sale at fair value. Applying fair value accounting to the residential mortgage loans held for sale better aligns the reported results of the economic changes in the value of these loans and their related economic hedge instruments. Certain commercial and commercial real estate held for sale loans are managed by a commercial secondary loan desk that provides liquidity to banks, finance companies and institutional investors. Applying fair value accounting to this portfolio is appropriate because the Company holds these loans with the intent to sell within the near-term periods.
Fair Value Option
Residential Mortgage Loans HeldCitizens elected to account for Sale
Theresidential mortgage LHFS and certain commercial and commercial real estate LHFS at fair value. For these LHFS, the aggregate fair value of residential mortgage loans held for sale is derived from observable mortgage security prices and includes adjustments for loan servicing value, agency guarantee fees, and other loan level attributes which are mostly observable inapproximates the marketplace. Credit risk does not significantly impactaggregate unpaid principal balance. For more information on the valuation since these loans are sold shortly after origination. Therefore, the Company classifies the residential mortgage loans held for sale in Level 2 of the fair value hierarchy.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The election of the fair value option for financialthese assets and financial liabilities is optional and irrevocable. The residential mortgage loans accounted for undersee Note 19 “Fair Value Measurements,” to the fair value option are initially measured at fair value (i.e., acquisition cost) whenCompany’s audited Consolidated Financial Statements in the financial asset is acquired. Subsequent changes in fair value are recognized in mortgage banking feesAnnual Report on the Consolidated Statements of Operations. The Company recognized changes in fair value in mortgage banking income of $4 million and $3 millionForm 10-K for the three monthsyear ended June 30, 2018 and 2017, respectively. The Company recognized changes in fair value in mortgage banking income of $1 million and $10 million for the six months ended June 30, 2018 and 2017, respectively.
Interest income on residential mortgage loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income.
Commercial and Commercial Real Estate Loans Held for Sale
The fair value of commercial and commercial real estate loans held for sale is estimated using observable prices of similar loans that transact in the marketplace. In addition, the Company uses external pricing services that provide estimates of fair values based on quotes from various dealers transacting in the market, sector curves or benchmarking techniques. Therefore, the Company classifies the commercial and commercial real estate loans managed by the commercial secondary loan desk in Level 2 of the fair value hierarchy given the observable market inputs.
There were no loans in this portfolio that were 90 days or more past due or nonaccruing as of June 30, 2018 and December 31, 2017. The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in other noninterest income on the Consolidated Statements of Operations. Since all loans in the Company’s commercial trading portfolio consist of floating rate obligations, all changes in fair value are due to changes in credit risk. Such credit-related fair value changes may include observed changes in overall credit spreads and/or changes to the creditworthiness of an individual borrower. Unsettled trades within the commercial trading portfolio are not recognized on the Consolidated Balance Sheets and represent off-balance sheet commitments. Refer to Note 11 “Commitments and Contingencies” for further information.
Interest income on commercial and commercial real estate loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income. The Company recognized ($1) million in other noninterest income related to its commercial trading portfolio for the three months ended June 30, 2018 and $1 million for the three months ended June 30, 2017.The Company recognized no other noninterest income related to its commercial trading portfolio for the six months ended June 30, 2018 and $3 million for the six months ended June 30, 2017.2018.
The following table presents the difference between the aggregatechanges in fair value andfor assets where the aggregate unpaid principal balance of loans held for sale measured atCompany has elected the fair value:value option:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 | Affected Line Item in the Consolidated Statements of Operations |
Residential mortgage loans held for sale, at fair value |
| $10 |
| |
| $4 |
| |
| $9 |
| |
| $1 |
| Mortgage banking fees |
Commercial and commercial real estate loans held for sale, at fair value | 1 |
| | (1 | ) | | 4 |
| | — |
| Other income |
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(in millions) | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Less Aggregate Unpaid Principal | | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Less Aggregate Unpaid Principal |
Residential mortgage loans held for sale, at fair value |
| $365 |
|
| $365 |
|
| $— |
| |
| $326 |
|
| $326 |
|
| $— |
|
Commercial and commercial real estate loans held for sale, at fair value | 156 |
| 156 |
| — |
| | 171 |
| 171 |
| — |
|
Recurring Fair Value Measurements
The CompanyCitizens utilizes a variety of valuation techniques to measure its assets and liabilities at fair value. The valuation methodologies used for significant assets and liabilities carried on the balance sheet at fair value on a recurring basis are presented below:
Debt securities available for sale
Thebasis. For more information on the valuation techniques utilized to measure recurring fair value of debt securities classified as AFS is based upon quoted prices, if available. Where observable quoted prices are available in an active market,see Note 13 “Fair Value Measurements,” to the security is classified as Level 1Company’s unaudited interim Consolidated Financial Statements in the fair value hierarchy.Quarterly Report on Form 10-Q for the three months ended March 31, 2019.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Classes of instruments that are valued using this market approach include debt securities issued by the U.S. Treasury. If quoted market prices are not available, the fair value for the security is estimated under the market or income approach using pricing models. These instruments are classified as Level 2 because they currently trade in active markets and the inputs to the valuations are observable. The pricing models used to value securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each security’s value to changes in interest rates and prepayment speeds. Classes of instruments that are valued using this market approach include specified pool mortgage “pass-through” securities and other debt securities issued by U.S. government-sponsored entities and state and political subdivisions. The pricing models used to value securities under the income approach generally begin with the contractual cash flows of each security and make adjustments based on forecasted prepayment speeds, default rates, and other market-observable information. The adjusted cash flows are then discounted at a rate derived from observed rates of return for comparable assets or liabilities that are traded in the market. Classes of instruments that are valued using this market approach include residential and commercial CMOs.
A significant majority of the Company’s Level 1 and 2 debt securities are priced using an external pricing service. The Company verifies the accuracy of the pricing provided by its primary outside pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for the Company’s securities portfolio for comparison purposes. Any valuation discrepancies beyond a certain threshold are researched and, if necessary, corroborated by an independent outside broker.
In certain cases where there is limited activity or less transparency around inputs to the valuation model, securities are classified as Level 3.
Residential loans held for sale
See the “Fair Value Option, Residential Mortgage Loans Held for Sale” discussion above.
Commercial loans held for sale
See the “Fair Value Option, Commercial and Commercial Real Estate Loans Held for Sale” discussion above.
Derivatives
The vast majority of the Company’s derivatives portfolio is composed of “plain vanilla” interest rate swaps, which are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined utilizing models that primarily use market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instrument’s fixed and variable cash flows, which are then discounted using an appropriate yield curve (i.e., LIBOR or Overnight Index Swap curve) to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity as the methodologies used do not require significant judgment. The Company also considers certain adjustments to the modeled price that market participants would make when pricing each instrument, including a credit valuation adjustment that reflects the credit quality of the swap counterparty. The Company incorporates the effect of exposure to a particular counterparty’s credit by netting its derivative contracts with the available collateral and calculating a credit valuation adjustment on the basis of the net position with the counterparty where permitted. The determination of this adjustment requires judgment on behalf of Company management; however, the total amount of this portfolio-level adjustment is not material to the total fair value of the interest rate swaps in their entirety. Therefore, interest rate swaps are classified as Level 2 in the valuation hierarchy.
The Company’s other derivatives include foreign exchange contracts. The fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Money Market Mutual Fund Investments
Fair value is determined based upon unadjusted quoted market prices and is considered a Level 1 fair value measurement.
Other equity securities
The fair values of the Company’s other equity securities are based on security prices in markets that are not active; therefore, these investments are classified as Level 2 in the fair value hierarchy.
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at June 30, 2018:2019:
|
| | | | | | | | | | | | |
(in millions) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
Debt securities available for sale: | | | | |
Mortgage-backed securities |
| $21,603 |
|
| $— |
|
| $21,603 |
|
| $— |
|
State and political subdivisions | 5 |
| — |
| 5 |
| — |
|
U.S. Treasury and other | 90 |
| 90 |
| — |
| — |
|
Total debt securities available for sale | 21,698 |
| 90 |
| 21,608 |
| — |
|
Loans held for sale, at fair value: | | | | |
Residential loans held for sale | 1,615 |
| — |
| 1,615 |
| — |
|
Commercial loans held for sale | 135 |
| — |
| 135 |
| — |
|
Total loans held for sale, at fair value | 1,750 |
| — |
| 1,750 |
| — |
|
Mortgage servicing rights | 531 |
| — |
| — |
| 531 |
|
Derivative assets: | | | | |
Interest rate contracts | 808 |
| — |
| 808 |
| — |
|
Foreign exchange contracts | 132 |
| — |
| 132 |
| — |
|
Other contracts | 29 |
| — |
| 4 |
| 25 |
|
Total derivative assets | 969 |
| — |
| 944 |
| 25 |
|
Equity securities, at fair value: | | | | |
Money market mutual fund investments | 47 |
| 47 |
| — |
| — |
|
Total equity securities, at fair value | 47 |
| 47 |
| — |
| — |
|
Total assets |
| $24,995 |
|
| $137 |
|
| $24,302 |
|
| $556 |
|
Derivative liabilities: | | | | |
Interest rate contracts |
| $130 |
|
| $— |
|
| $130 |
|
| $— |
|
Foreign exchange contracts | 116 |
| — |
| 116 |
| — |
|
Other contracts | 34 |
| — |
| 34 |
| — |
|
Total derivative liabilities | 280 |
| — |
| 280 |
| — |
|
Total liabilities |
| $280 |
|
| $— |
|
| $280 |
|
| $— |
|
|
| | | | | | | | | | | | |
(in millions) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
Debt securities available for sale: | | | | |
Mortgage-backed securities |
| $20,139 |
|
| $— |
|
| $20,139 |
|
| $— |
|
State and political subdivisions | 6 |
| — |
| 6 |
| — |
|
U.S. Treasury and other | 12 |
| 12 |
| — |
| — |
|
Total debt securities available for sale | 20,157 |
| 12 |
| 20,145 |
| — |
|
Loans held for sale, at fair value: | | | | |
Residential loans held for sale | 365 |
| — |
| 365 |
| — |
|
Commercial loans held for sale | 156 |
| — |
| 156 |
| — |
|
Total loans held for sale, at fair value | 521 |
| — |
| 521 |
| — |
|
Derivative assets: | | | | |
Interest rate swaps | 206 |
| — |
| 206 |
| — |
|
Foreign exchange contracts | 143 |
| — |
| 143 |
| — |
|
Other contracts | 8 |
| — |
| 8 |
| — |
|
Total derivative assets | 357 |
| — |
| 357 |
| — |
|
Equity securities, at fair value: | | | | |
Money market mutual fund investments | 170 |
| 170 |
| — |
| — |
|
Other investments | — |
| — |
| — |
| — |
|
Total equity securities, at fair value | 170 |
| 170 |
| — |
| — |
|
Total assets |
| $21,205 |
|
| $182 |
|
| $21,023 |
|
| $— |
|
Derivative liabilities: | | | | |
Interest rate swaps |
| $436 |
|
| $— |
|
| $436 |
|
| $— |
|
Foreign exchange contracts | 126 |
| — |
| 126 |
| — |
|
Other contracts | 6 |
| — |
| 6 |
| — |
|
Total derivative liabilities | 568 |
| — |
| 568 |
| — |
|
Total liabilities |
| $568 |
|
| $— |
|
| $568 |
|
| $— |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at December 31, 2017:2018:
|
| | | | | | | | | | | | |
(in millions) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
Debt securities available for sale: | | | | |
Mortgage-backed securities |
| $19,866 |
|
| $— |
|
| $19,866 |
|
| $— |
|
State and political subdivisions | 5 |
| — |
| 5 |
| — |
|
U.S. Treasury and other | 24 |
| 24 |
| — |
| — |
|
Total debt securities available for sale | 19,895 |
| 24 |
| 19,871 |
| — |
|
Loans held for sale, at fair value: | | | | |
Residential loans held for sale | 967 |
| — |
| 967 |
| — |
|
Commercial loans held for sale | 252 |
| — |
| 252 |
| — |
|
Total loans held for sale, at fair value | 1,219 |
| — |
| 1,219 |
| — |
|
Mortgage servicing rights | 600 |
| — |
| — |
| 600 |
|
Derivative assets: | | | | |
Interest rate contracts | 306 |
| — |
| 306 |
| — |
|
Foreign exchange contracts | 129 |
| — |
| 129 |
| — |
|
Other contracts | 14 |
| — |
| 14 |
| — |
|
Total derivative assets | 449 |
| — |
| 449 |
| — |
|
Equity securities, at fair value: | | | | |
Money market mutual fund investments | 181 |
| 181 |
| — |
| — |
|
Total equity securities, at fair value | 181 |
| 181 |
| — |
| — |
|
Total assets |
| $22,344 |
|
| $205 |
|
| $21,539 |
|
| $600 |
|
Derivative liabilities: | | | | |
Interest rate contracts |
| $277 |
|
| $— |
|
| $277 |
|
| $— |
|
Foreign exchange contracts | 113 |
| — |
| 113 |
| — |
|
Other contracts | 25 |
| — |
| 25 |
| — |
|
Total derivative liabilities | 415 |
| — |
| 415 |
| — |
|
Total liabilities |
| $415 |
|
| $— |
|
| $415 |
|
| $— |
|
|
| | | | | | | | | | | | |
(in millions) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
Debt securities available for sale: | | | | |
Mortgage-backed securities |
| $20,139 |
|
| $— |
|
| $20,139 |
|
| $— |
|
State and political subdivisions | 6 |
| — |
| 6 |
| — |
|
U.S. Treasury and other | 12 |
| 12 |
| — |
| — |
|
Total debt securities available for sale | 20,157 |
| 12 |
| 20,145 |
| — |
|
Loans held for sale, at fair value: | | | | |
Residential loans held for sale | 326 |
| — |
| 326 |
| — |
|
Commercial loans held for sale | 171 |
| — |
| 171 |
| — |
|
Total loans held for sale, at fair value | 497 |
| — |
| 497 |
| — |
|
Derivative assets: | | | | |
Interest rate swaps | 538 |
| — |
| 538 |
| — |
|
Foreign exchange contracts | 148 |
| — |
| 148 |
| — |
|
Other contracts | 7 |
| — |
| 7 |
| — |
|
Total derivative assets | 693 |
| — |
| 693 |
| — |
|
Equity securities, at fair value: | | | | |
Money market mutual fund investments | 165 |
| 165 |
| — |
| — |
|
Other investments | 4 |
| — |
| 4 |
| — |
|
Total equity securities, at fair value | 169 |
| 165 |
| 4 |
| — |
|
Total assets |
| $21,516 |
|
| $177 |
|
| $21,339 |
|
| $— |
|
Derivative liabilities: | | | | |
Interest rate swaps |
| $379 |
|
| $— |
|
| $379 |
|
| $— |
|
Foreign exchange contracts | 149 |
| — |
| 149 |
| — |
|
Other contracts | 5 |
| — |
| 5 |
| — |
|
Total derivative liabilities | 533 |
| — |
| 533 |
| — |
|
Total liabilities |
| $533 |
|
| $— |
|
| $533 |
|
| $— |
|
There were no Level 3The following tables present a rollforward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as ofLevel 3 for the three and six months ended June 30, 20182019. There were no assets measured at fair value on a recurring basis and December 31, 2017.classified as Level 3 for the three and six months ended June 30, 2018.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, 2019 |
(in millions) | Mortgage Servicing Rights | | Other Derivative Contracts | | Mortgage Servicing Rights | | Other Derivative Contracts |
Beginning balance |
| $563 |
| |
| $18 |
| |
| $600 |
| |
| $— |
|
Issuances | 57 |
| | 43 |
| | 92 |
| | 43 |
|
Settlements (1) | (31 | ) | | (43 | ) | | (57 | ) | | (43 | ) |
Changes in fair value during the period recognized in earnings (2) | (58 | ) | | 7 |
| | (104 | ) | | 7 |
|
Transfers from Level 2 to Level 3(3) | — |
| | — |
| | — |
| | 18 |
|
Ending balance |
| $531 |
| |
| $25 |
| |
| $531 |
| |
| $25 |
|
(1) Represents changes in value of the MSRs due to i) passage of time including the impact from both regularly scheduled loan principal payments and partial
paydowns, and ii) loans that paid off during the period.
(2) Represents changes in value primarily driven by market conditions. These changes are recorded in mortgage banking fees in the Consolidated Statements of Operations.
(3) Reflects changes in the significance of unobservable inputs on derivative contracts associated with mortgage origination activities.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nonrecurring Fair Value Measurements
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include MSRs accounted for by the amortization method and loan impairments for certain loans and leases.
The following For more information on the valuation techniques are utilized to measure significant assets for which the Company utilizesnonrecurring fair value on a nonrecurring basis:
Impaired Loans
The carrying amount of collateral-dependent impaired loans is compared to the appraised value of the collateral less costs to dispose and is classified as Level 2. Any excess of carrying amount over the appraised value is charged to the ALLL.
Mortgage Servicing Rights
MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. The fair value was calculated using a discounted cash flow model which used assumptions, including weighted-average life, weighted-average constant prepayment rate and weighted-average discount rate. Refer tosee Note 8 “Mortgage Banking”19 “Fair Value Measurements,” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017 and Note 5 “Mortgage Banking” for more information.2018.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Foreclosed assets
Foreclosed assets consist primarily of residential properties. Foreclosed assets are carried at the lower of cost or fair value less costs to sell. Fair value is based upon independent market prices or appraised values of the collateral and is classified as Level 2.
Leased assets
The fair value of assets under operating leases is determined using collateral specific pricing digests, external appraisals, broker opinions, recent sales data from industry equipment dealers, and discounted cash flows derived from the underlying lease agreement. As market data for similar assets and lease agreements is available and used in the valuation, these assets are classified as Level 2 fair value measurement.
The following table presents gains (losses) on assets and liabilities measured at fair value on a nonrecurring basis and recorded in earnings:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Impaired collateral-dependent loans |
| ($24 | ) | |
| ($4 | ) | |
| ($28 | ) | |
| ($6 | ) |
MSRs | (14 | ) | | — |
| | (14 | ) | | 3 |
|
Foreclosed assets | (1 | ) | | — |
| | (1 | ) | | (1 | ) |
Leased assets | — |
| | (2 | ) | | (3 | ) | | (2 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Impaired collateral-dependent loans |
| ($4 | ) | |
| ($8 | ) | |
| ($6 | ) | |
| ($27 | ) |
MSRs | — |
| | 1 |
| | 3 |
| | 1 |
|
Foreclosed assets | — |
| | (1 | ) | | (1 | ) | | (2 | ) |
Leased assets | (2 | ) | | (15 | ) | | (2 | ) | | (15 | ) |
The following table presents assets and liabilities measured at fair value on a nonrecurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(in millions) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
| | Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
Impaired collateral-dependent loans |
| $300 |
|
| $— |
|
| $300 |
|
| $— |
| |
| $338 |
|
| $— |
|
| $338 |
|
| $— |
|
MSRs | 193 |
| — |
| — |
| 193 |
| | 243 |
| — |
| — |
| 243 |
|
Foreclosed assets | 27 |
| — |
| 27 |
| — |
| | 29 |
| — |
| 29 |
| — |
|
Leased assets | 61 |
| — |
| 61 |
| — |
| | 92 |
| — |
| 92 |
| — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(in millions) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
| | Total |
| Level 1 |
| Level 2 |
| Level 3 |
|
Impaired collateral-dependent loans |
| $408 |
|
| $— |
|
| $408 |
|
| $— |
| |
| $393 |
|
| $— |
|
| $393 |
|
| $— |
|
MSRs | 254 |
| — |
| — |
| 254 |
| | 218 |
| — |
| — |
| 218 |
|
Foreclosed assets | 25 |
| — |
| 25 |
| — |
| | 31 |
| — |
| 31 |
| — |
|
Leased assets | 108 |
| — |
| 108 |
| — |
| | 112 |
| — |
| 112 |
| — |
|
Disclosures about Fair Value of Financial Instruments
Following is a description of valuation methodologies used to estimate the fair value of financial instruments for disclosure purposes (these instruments are not recorded in the financial statements at fair value):
Debt securities held to maturity
The fair values of debt securities classified as HTM are estimated under the market or income approach using the same pricing models as those used to measure the fair value of the Company’s AFS securities. For more information, see “Recurring Fair Value Measurements — Debt securities Available for Sale,” within this Note.
Equity securities, at cost
The cost basis of equity securities, at cost, such as FHLB stock and FRB stock, is assumed to approximate the fair value of these securities. As a member of the FHLB and FRB, the Company is required to hold FHLB and FRB stock. The stock can be sold only to the FHLB and FRB upon termination of membership, or redeemed at the FHLB’s or FRB’s sole discretion. The stock may only be sold or redeemed at par, and therefore the cost basis represents the best estimate of fair value.
Loans and leases
For loans and leases not recorded at fair value on a recurring basis that are not accounted for as collateral-dependent impaired loans, fair value is estimated by using one of two methods: a discounted cash flow method or a securitization method. The discounted cash flow method involves discounting the expected future cash flows using current rates which a market participant would likely use to value similar pools of loans. Inputs used in this method include observable information such as contractual cash flows (net of servicing cost) and unobservable information such as estimated prepayment speeds, credit loss exposures, and discount rates. The securitization method involves utilizing market securitization data to value the assets as if a securitization transaction had been executed. Inputs
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
used include observable market-based MBS data and pricing adjustments based on unobservable data reflecting the liquidity risk, credit loss exposure and other characteristics of the underlying loans. The internal risk-weighted balances of loans are grouped by product type for purposes of these estimated valuations. For nonaccruing loans, fair value is estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets. Fair value of collateral-dependent loans is primarily based on the appraised value of the collateral.
Other loans held for sale
Balances represent loans that were transferred to other loans held for sale and are reported at the lower of cost or fair value. When applicable, the fair value of other loans held for sale is estimated using one of two methods: a discounted cash flow method or a securitization method (as described above).
Deposits
The fair value of demand deposits, checking with interest accounts, regular savings, money market accounts and other deposits is the amount payable on demand at the balance sheet date. The fair value of term deposits is estimated by discounting the expected future cash flows using rates currently offered for deposits of similar remaining maturities.
Federal funds purchased and securities sold under agreements to repurchase, other short-term borrowed funds, and long-term borrowed funds
Rates currently available to the Company for debt of similar terms and remaining maturities are used to discount the expected cash flows of existing debt.
The following table presents the estimated fair value for financial instruments not recorded at fair value in the unaudited interim Consolidated Financial Statements. The carrying amounts are recorded in the Consolidated Balance Sheets under the indicated captions:
| | | June 30, 2018 | June 30, 2019 |
| Total | | Level 1 | | Level 2 | | Level 3 | Total | | Level 1 | | Level 2 | | Level 3 |
(in millions) | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value |
Financial Assets: | | | | | | | | |
Financial assets: | | | | | | | | |
Securities held to maturity |
| $4,417 |
|
| $4,260 |
| |
| $— |
|
| $— |
| |
| $4,417 |
|
| $4,260 |
| |
| $— |
|
| $— |
|
| $3,447 |
|
| $3,441 |
| |
| $— |
|
| $— |
| |
| $3,447 |
|
| $3,441 |
| |
| $— |
|
| $— |
|
Equity securities, at cost | 769 |
| 769 |
| | — |
| — |
| | 769 |
| 769 |
| | — |
| — |
| 706 |
| 706 |
| | — |
| — |
| | 706 |
| 706 |
| | — |
| — |
|
Other loans held for sale | 189 |
| 189 |
| | — |
| — |
| | — |
| — |
| | 189 |
| 189 |
| 455 |
| 455 |
| | — |
| — |
| | — |
| — |
| | 455 |
| 455 |
|
Loans and leases | 113,407 |
| 112,637 |
| | — |
| — |
| | 408 |
| 408 |
| | 112,999 |
| 112,229 |
| 116,838 |
| 117,494 |
| | — |
| — |
| | 300 |
| 300 |
| | 116,538 |
| 117,194 |
|
Financial Liabilities: | | | | | | | | |
Financial liabilities: | | | | | | | | |
Deposits | 117,073 |
| 116,907 |
| | — |
| — |
| | 117,073 |
| 116,907 |
| | — |
| — |
| 124,004 |
| 124,028 |
| | — |
| — |
| | 124,004 |
| 124,028 |
| | — |
| — |
|
Federal funds purchased and securities sold under agreements to repurchase | 326 |
| 326 |
| | — |
| — |
| | 326 |
| 326 |
| | — |
| — |
| 1,132 |
| 1,132 |
| | — |
| — |
| | 1,132 |
| 1,132 |
| | — |
| — |
|
Other short-term borrowed funds | 1,499 |
| 1,499 |
| | — |
| — |
| | 1,499 |
| 1,499 |
| | — |
| — |
| 309 |
| 309 |
| | — |
| — |
| | 309 |
| 309 |
| | — |
| — |
|
Long-term borrowed funds | 13,641 |
| 13,643 |
| | — |
| — |
| | 13,641 |
| 13,643 |
| | — |
| — |
| 11,538 |
| 11,639 |
| | — |
| — |
| | 11,538 |
| 11,639 |
| | — |
| — |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Total | | Level 1 | | Level 2 | | Level 3 |
(in millions) | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value |
Financial assets: | | | | | | | | | | | |
Securities held to maturity |
| $4,165 |
|
| $4,041 |
| |
| $— |
|
| $— |
| |
| $4,165 |
|
| $4,041 |
| |
| $— |
|
| $— |
|
Equity securities, at cost | 834 |
| 834 |
| | — |
| — |
| | 834 |
| 834 |
| | — |
| — |
|
Other loans held for sale | 101 |
| 101 |
| | — |
| — |
| | — |
| — |
| | 101 |
| 101 |
|
Loans and leases | 116,660 |
| 116,627 |
| | — |
| — |
| | 338 |
| 338 |
| | 116,322 |
| 116,289 |
|
Financial liabilities: | | | | | | | | | | | |
Deposits | 119,575 |
| 119,503 |
| | — |
| — |
| | 119,575 |
| 119,503 |
| | — |
| — |
|
Federal funds purchased and securities sold under agreements to repurchase | 1,156 |
| 1,156 |
| | — |
| — |
| | 1,156 |
| 1,156 |
| | — |
| — |
|
Other short-term borrowed funds | 161 |
| 161 |
| | — |
| — |
| | 161 |
| 161 |
| | — |
| — |
|
Long-term borrowed funds | 15,925 |
| 15,877 |
| | — |
| — |
| | 15,925 |
| 15,877 |
| | — |
| — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Total | | Level 1 | | Level 2 | | Level 3 |
(in millions) | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value | | Carrying Value | Estimated Fair Value |
Financial Assets: | | | | | | | | | | | |
Securities held to maturity |
| $4,685 |
|
| $4,668 |
| |
| $— |
|
| $— |
| |
| $4,685 |
|
| $4,668 |
| |
| $— |
|
| $— |
|
Equity securities, at cost | 722 |
| 722 |
| | — |
| — |
| | 722 |
| 722 |
| | — |
| — |
|
Other loans held for sale | 221 |
| 221 |
| | — |
| — |
| | — |
| — |
| | 221 |
| 221 |
|
Loans and leases | 110,617 |
| 111,168 |
| | — |
| — |
| | 393 |
| 393 |
| | 110,224 |
| 110,775 |
|
Financial Liabilities: | | | | | | | | | | | |
Deposits | 115,089 |
| 115,039 |
| | — |
| — |
| | 115,089 |
| 115,039 |
| | — |
| — |
|
Federal funds purchased and securities sold under agreements to repurchase | 815 |
| 815 |
| | — |
| — |
| | 815 |
| 815 |
| | — |
| — |
|
Other short-term borrowed funds | 1,856 |
| 1,856 |
| | — |
| — |
| | 1,856 |
| 1,856 |
| | — |
| — |
|
Long-term borrowed funds | 11,765 |
| 11,891 |
| | — |
| — |
| | 11,765 |
| 11,891 |
| | — |
| — |
|
NOTE 1314 - NONINTEREST INCOME
The following table presents noninterest income, segregated between revenue from contracts with customers and revenue from other sources:
|
| | | | | | |
(in millions) | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
Revenue from contracts with customers |
| $283 |
|
| $548 |
|
Revenue from other sources | 105 |
| 211 |
|
Noninterest income |
| $388 |
|
| $759 |
|
Revenues from Contracts with Customers
The Company recognizes revenue from contracts with customers in the amount of consideration it expects to receive upon the transfer of control of a good or service. The timing of recognition is dependent on whether the Company satisfies a performance obligation by transferring control of the product or service to a customer over time or at a point in time. Judgments are made in the recognition of income including the timing of satisfaction of performance obligations and determination of the transaction price.
The following table presents the components of revenue from contracts with customers disaggregated by revenue stream and business operating segment:
| | | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
(in millions) | Consumer Banking | Commercial Banking | Consolidated (1) | Consumer Banking | Commercial Banking | Consolidated (1) | Consumer Banking | Commercial Banking | Consolidated (1) | | Consumer Banking | Commercial Banking | Consolidated (1) |
Service charges and fees |
| $100 |
|
| $27 |
|
| $127 |
|
| $198 |
|
| $53 |
|
| $251 |
|
| $99 |
|
| $26 |
|
| $125 |
| |
| $100 |
|
| $27 |
|
| $127 |
|
Card fees | 51 |
| 9 |
| 60 |
| 103 |
| 18 |
| 121 |
| 55 |
| 9 |
| 64 |
| | 51 |
| 9 |
| 60 |
|
Capital markets fees | — |
| 51 |
| 51 |
| — |
| 88 |
| 88 |
| — |
| 53 |
| 53 |
| | — |
| 51 |
| 51 |
|
Trust and investment services fees | 43 |
| — |
| 43 |
| 83 |
| — |
| 83 |
| 53 |
| — |
| 53 |
| | 43 |
| — |
| 43 |
|
Other banking fees | — |
| 2 |
| 2 |
| — |
| 5 |
| 5 |
| — |
| 3 |
| 3 |
| | — |
| 2 |
| 2 |
|
Total revenue from contracts with customers |
| $194 |
|
| $89 |
|
| $283 |
|
| $384 |
|
| $164 |
|
| $548 |
|
| $207 |
|
| $91 |
|
| $298 |
| |
| $194 |
|
| $89 |
|
| $283 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
(in millions) | Consumer Banking | Commercial Banking | Consolidated (1) | | Consumer Banking | Commercial Banking | Consolidated (1) |
Service charges and fees |
| $196 |
|
| $52 |
|
| $248 |
| |
| $198 |
|
| $53 |
|
| $251 |
|
Card fees | 105 |
| 18 |
| 123 |
| | 103 |
| 18 |
| 121 |
|
Capital markets fees | — |
| 102 |
| 102 |
| | — |
| 88 |
| 88 |
|
Trust and investment services fees | 100 |
| — |
| 100 |
| | 83 |
| — |
| 83 |
|
Other banking fees | — |
| 5 |
| 5 |
| | — |
| 5 |
| 5 |
|
Total revenue from contracts with customers |
| $401 |
|
| $177 |
|
| $578 |
| |
| $384 |
|
| $164 |
|
| $548 |
|
(1) There is no revenue from contracts with customers included in Other non-segment operations.
The Company does not have any material contract assets, liabilities, or other receivables recorded on its Consolidated Balance Sheets related to revenues from contracts with customers asrecognized trailing commissions of $3 million and $4 million for the three months ended June 30, 2018. A description of2019 and 2018, respectively, and $7 million and $8 million for the above components of revenue from contracts with customers is presented below:
Service Charges and Fees
Service charges and fees include fees earned from deposit products in lieu of compensating balances, service charges for transactions performed upon depositors’ request, as well as fees earned from performing cash management activities. Service charges on deposit products are recognized over the period in which the related
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
service is provided, typically monthly. Service fees are recognized at a point in time upon completion of the requested service transaction. Fees on cash management products are recognized over time (typically monthly) as services are provided.
Card Fees
Card fees include interchange income from credit and debit card transactions and are recognized at a point in time upon settlement by the association network. Interchange rates are generally set by the association network based on purchase volume and other factors. Other card-related fees are recognized at a point in time upon completion of the transaction. Costs related to card rewards programs are recognized in current earnings as the rewards are earned by the customer and are presented as a reduction to card fees on the Consolidated Statements of Operations.
Capital Markets Fees
Capital markets fees include fees received from leading or participating in loan syndications, underwriting services and advisory fees. Loan syndication and underwriting fees are recognized as revenue at a point in time when the Company has rendered all services to, and is entitled to collect the fee from, the borrower or the issuer, and there are no other contingencies associated with the fee. Underwriting expenses passed through from the lead underwriter are recognized within other operating expense on the Consolidated Statements of Operations. Advisory fees for merger and acquisitions are recognized over time, while valuation services and fairness opinions are recognized at a point in time upon completion of the advisory service.
Trust and Investment Services Fees
Trust and investment services fees include fees from investment management services and brokerage services. Fees from investment management services are based on asset market values and are recognized over the period in which the related service is provided. Brokerage services include custody fees, commission income, trailing commissions and other investment securities. Custody fees are recognized on a monthly basis for customers that are assessed custody fees. Commission income is recognized at a point in time on trade date. Trailing commissions such as 12b-1 fees, insurance renewal income, and income based on asset or investment levels in future periods are recognized at a point in time when the asset balance is known, or the renewal occurs and the income is no longer constrained. For the three and six months ended June 30, 2018, the Company recognized trailing commissions of $4 million2019 and $8 million,2018, respectively, related to services provided in previous reporting periods. Fees from other investment services are recognized at a point in time upon completion of the service.
Other Banking Fees
Other banking fees include fees for various transactional banking activities such as letter of credit fees, foreign wire transfers and other transactional services. These fees are recognized in a manner that reflects the timing of when transactions occur and as services are provided.
Revenue from Other Sources
Letter of Credit and Loan Fees |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Bank-owned life insurance |
| $13 |
| |
| $14 |
| |
| $27 |
| |
| $28 |
|
Letter of credit and loan fees primarily includes fees received related to letter of credit agreements as well as loan fees received from lending activities that are not deferrable. These fees are generally recognized upon execution of the contract.
Foreign Exchange and Interest Rate Products
Foreign exchange and interest rate products primarily includes the fees received from foreign exchange and interest rate derivative contracts executed with customers to meet their hedging and financing needs. These fees are generally recognized upon execution of the contracts. Foreign exchange and interest rate products also include the mark-to-market gains and losses recognized on (i) these customer contracts and (ii) offsetting derivative contracts that are executed with external counterparties to hedge the foreign exchange and interest rate risk associated with the customer contracts.
Mortgage Banking Fees
Mortgage banking fees primarily include gains on sales of residential mortgages originated with the intent to sell and servicing fees on mortgages where the Company is the servicer. Mortgage banking fees also include valuation adjustments for mortgage loans held-for-sale that are measured at the lower of cost or fair value, as well as mortgage loans originated with the intent to sell that are measured at fair value under the fair value option.CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Changes in the value of MSRs are reported in mortgage fees and related income. For a further discussion of MSRs, see Note 5 “Mortgage Banking.” Net interest income from mortgage loans is recorded in interest income.
Other Income
Bank-owned life insurance is stated at its cash surrender value. The Company is the beneficiary of the life insurance policies on current and former officers and selected employees of the Company. Net changes in the carrying amount of the cash surrender value are an adjustment of premiums paid in determining the expense or income to be recognized under the life insurance policy for the period.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Bank-owned life insurance |
| $14 |
| |
| $14 |
| |
| $28 |
| |
| $26 |
|
NOTE 1415 - OTHER OPERATING EXPENSE
The following table presents the details of other operating expense:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Deposit insurance |
| $16 |
| |
| $28 |
| |
| $32 |
| |
| $59 |
|
Promotional expense | 28 |
| | 34 |
| | 55 |
| | 59 |
|
Settlements and operating losses | 9 |
| | 12 |
| | 20 |
| | 24 |
|
Other | 65 |
| | 53 |
| | 121 |
| | 105 |
|
Other operating expense |
| $118 |
| |
| $127 |
| |
| $228 |
| |
| $247 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Deposit insurance |
| $28 |
| |
| $36 |
| |
| $59 |
| |
| $68 |
|
Promotional expense | 34 |
| | 29 |
| | 59 |
| | 55 |
|
Settlements and operating losses | 12 |
| | 12 |
| | 24 |
| | 25 |
|
Other | 53 |
| | 71 |
| | 105 |
| | 124 |
|
Other operating expense |
| $127 |
| |
| $148 |
| |
| $247 |
| |
| $272 |
|
NOTE 15 - INCOME TAXES
Income Tax Expense
Income tax expense was $124 million and $144 million for the three months ended June 30, 2018 and 2017, respectively, resulting in effective tax rates of 22.6% and 31.1%, respectively. Income tax expense was $237 million and $258 million for the six months ended June 30, 2018 and 2017, respectively, resulting in effective tax rates of 22.6% and 28.8%, respectively.
For the six months ended June 30, 2018, the effective tax rate of 22.6% was higher than the statutory rate of 21% primarily as a result of state taxes, partially offset by permanent benefits from tax credits and tax-exempt income. For the six months ended June 30, 2017, the effective tax rate of 28.8% compared favorably to the statutory rate of 35% primarily as a result of the impact of the settlement of certain state tax matters and the permanent benefits from tax credits and tax-exempt income.
Deferred Tax Liability
At June 30, 2018, the Company reported a net deferred tax liability of $456 million, compared to $571 million as of December 31, 2017. The decrease in the net deferred tax liability was primarily attributable to the tax effect of net unrealized losses on securities and derivatives.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16 - EARNINGS PER SHARE
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except share and per share data) | 2019 |
| | 2018 |
| | 2019 |
| | 2018 |
|
Numerator (basic and diluted): | | | | | | | |
Net income |
| $453 |
| |
| $425 |
| |
| $892 |
| |
| $813 |
|
Less: Preferred stock dividends | 18 |
| | — |
| | 33 |
| | 7 |
|
Net income available to common stockholders |
| $435 |
| |
| $425 |
| |
| $859 |
| |
| $806 |
|
Denominator: | | | | | | | |
Weighted-average common shares outstanding - basic | 458,154,335 |
| | 484,744,354 |
| | 459,426,685 |
| | 486,114,872 |
|
Dilutive common shares: share-based awards | 1,149,889 |
| | 1,397,341 |
| | 1,430,850 |
| | 1,568,344 |
|
Weighted-average common shares outstanding - diluted | 459,304,224 |
| | 486,141,695 |
| | 460,857,535 |
| | 487,683,216 |
|
Earnings per common share: | | | | | | | |
Basic |
| $0.95 |
| |
| $0.88 |
| |
| $1.87 |
| |
| $1.66 |
|
Diluted (1) | 0.95 |
| | 0.88 |
| | 1.86 |
| | 1.65 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except share and per-share data) | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
|
Numerator (basic and diluted): | | | | | | | |
Net income |
| $425 |
| |
| $318 |
| |
| $813 |
| |
| $638 |
|
Less: Preferred stock dividends | — |
| | — |
| | 7 |
| | 7 |
|
Net income available to common stockholders |
| $425 |
| |
| $318 |
| |
| $806 |
| |
| $631 |
|
Denominator: | | | | | | | |
Weighted-average common shares outstanding - basic | 484,744,354 |
| | 506,371,846 |
| | 486,114,872 |
| | 507,903,141 |
|
Dilutive common shares: share-based awards | 1,397,341 |
| | 1,042,276 |
| | 1,568,344 |
| | 1,458,914 |
|
Weighted-average common shares outstanding - diluted | 486,141,695 |
| | 507,414,122 |
| | 487,683,216 |
| | 509,362,055 |
|
Earnings per common share: | | | | | | | |
Basic |
| $0.88 |
| |
| $0.63 |
| |
| $1.66 |
| |
| $1.24 |
|
Diluted | 0.88 |
| | 0.63 |
| | 1.65 |
| | 1.24 |
|
(1)Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. TheExcluded from the computation of diluted EPS computationwere weighted average antidilutive shares totaling 371,627 and 1,073,431 for the three and six months ended June 30, 2018did not have any2019, respectively. There were no weighted average antidilutive shares. The diluted EPS computationshares for the three andor six months ended June 30, 2017 excluded 530,781 and 343,692 average share-based awards, respectively, because their inclusion would have been antidilutive.
CITIZENS FINANCIAL GROUP, INC.2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 - REGULATORY MATTERS
As a bank holding company, the Company is subject to regulation and supervision by the FRB. The primary subsidiaries of the Company are its two insured depository institutions CBNA, a national banking association whose primary federal regulator is the OCC, and CBPA, a Pennsylvania-chartered savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the FDIC, its primary federal regulator. Under the U.S. Basel III capital framework, the Company and its banking subsidiaries must meet specific minimum requirements for the following ratios: common equity tier 1 capital, tier 1 capital, total capital, and tier 1 leverage. In addition, the Company must not be subject to a written agreement, order or capital directive with any of its regulators. Failure to meet minimum capital requirements can result in the initiation of certain actions that, if undertaken, could have a material effect on the Company’s Consolidated Financial Statements.
The following table presents the Company’s capital and capital ratios under U.S. Basel III Standardized rules. The Company has declared itself as an “AOCI opt-out” institution, which means the Company is not required to recognize in regulatory capital the impacts of net unrealized gains and losses included within AOCI for securities that are available for sale or held to maturity, accumulated net gains and losses on cash-flow hedges, and certain defined benefit pension plan assets.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | FDIA Requirements |
| Actual | | Minimum Capital Adequacy | | Classification as Well-capitalized(6) |
(in millions, except ratio data) | Amount |
| Ratio |
| | Amount |
| Ratio(5) |
| | Amount |
| Ratio |
|
June 30, 2018 | | | | | | | | |
Common equity tier 1 capital(1) |
| $14,604 |
| 11.2 | % | |
| $8,327 |
| 6.375 | % | |
| $8,490 |
| 6.5 | % |
Tier 1 capital(2) | 15,147 |
| 11.6 |
| | 10,286 |
| 7.875 |
| | 10,450 |
| 8.0 |
|
Total capital(3) | 18,056 |
| 13.8 |
| | 12,899 |
| 9.875 |
| | 13,062 |
| 10.0 |
|
Tier 1 leverage(4) | 15,147 |
| 10.2 |
| | 5,934 |
| 4.000 |
| | 7,417 |
| 5.0 |
|
December 31, 2017 | | | | | | | | |
Common equity tier 1 capital(1) |
| $14,309 |
| 11.2 | % | |
| $7,342 |
| 5.750 | % | |
| $8,300 |
| 6.5 | % |
Tier 1 capital(2) | 14,556 |
| 11.4 |
| | 9,258 |
| 7.250 |
| | 10,215 |
| 8.0 |
|
Total capital(3) | 17,781 |
| 13.9 |
| | 11,812 |
| 9.250 |
| | 12,769 |
| 10.0 |
|
Tier 1 leverage(4) | 14,556 |
| 10.0 |
| | 5,824 |
| 4.000 |
| | 7,280 |
| 5.0 |
|
(1) “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(2) “Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(3) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(4) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.
(5) “Minimum Capital ratio” includes capital conservation buffer of 1.875% for 2018 and 1.250% for 2017; N/A to Tier 1 leverage.
(6) Presented for informational purposes. Prompt corrective action provisions apply only to the Company’s insured depository institutions - CBNA and CBPA.
Under the FRB’s Capital Plan Rule, the Company may only make capital distributions, including payment of dividends and share repurchases, in accordance with a capital plan that has been reviewed by the FRB with no objection. In accordance with federal and state banking regulations, dividends paid by the Company’s banking subsidiaries to the Parent Company are generally limited to the retained earnings of the respective banking subsidiaries unless specifically approved by the appropriate bank regulator.
On April 5, 2018, the Company submitted its 2018 Capital Plan, Capital Policy and annual stress test results to the FRB as part of the 2018 CCAR process. On June 28, 2018, the FRB did not object to the Company’s 2018 Capital Plan or its proposed capital actions in the period beginning July 1, 2018 and ending June 30, 2019. The Company’s 2018 Capital Plan includes an increase in quarterly common dividends from $0.22 to $0.27 per share in the third quarter of 2018, with the potential to raise quarterly common dividends to $0.32 per share beginning in 2019, and common share repurchases of up to $1.02 billion through the second quarter of 2019. All future capital distributions are subject to consideration and approval by the Board of Directors prior to execution. The timing and exact amount of future dividends and share repurchases will depend on various factors, including the Company’s capital position, financial performance and market conditions.
On June 29, 2018, the Company redeemed $333 million of its 5.158% fixed-to-floating rate callable subordinated debt due 2023. On May 24, 2018, the Company issued 300,000 shares of 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share, with net proceeds of $296 million.
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the three months ended June 30, 2018 and 2017, the Company declared and paid dividends on common stock of $107 million and $71 million, respectively, and paid semi-annual preferred dividends of $7 million for both periods. During the six months ended June 30, 2018 and 2017, the Company declared and paid dividends on common stock of $215 million and $143 million, respectively, and declared and paid semi-annual preferred dividends of $7 million for both periods.
During the three months ended June 30, 2018 and 2017, theParent Company repurchased $150 million and $130 million of its outstanding common stock, respectively. During the six months ended June 30, 2018 and 2017, the Parent Company repurchased $325 million and $260 million of its outstanding common stock, respectively.
NOTE 1817 - BUSINESS OPERATING SEGMENTS
The CompanyCitizens is managed by its Chief Executive Officer on a segment basis. The Company’s two business operating segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided, or the type of customer served. Each segment has one or morea segment headshead who reportreports directly to the Chief Executive Officer. The Chief Executive Officer has final authority over resource allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the Chief Executive Officer.
Reportable For more information on our business operating segments, as well as Other non-segment operations, see Note 25 “Business Operating Segments,
Segment results are determined based upon” to the Company’s management reporting system, which assigns balance sheet and statement of operations items to each of the business segments. The process is designed around the Company’s organizational and management structure and accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. A description of each reportable segment and table of financial results is presented below:
Consumer Banking
The Consumer Banking segment focuses on retail customers and small businesses with annual revenues of up to $25 million. It offers traditional banking products and services, including checking, savings, home loans, education loans, credit cards, business loans, and unsecured product finance and personal loans in addition to financial management services. It also operates an indirect auto financing business, providing financing for both new and used vehicles through auto dealerships. The segment’s distribution channels include a branch network, ATMs and a work force of experienced specialists ranging from financial consultants, mortgage loan officers and business banking officers to private bankers. The Company’s Consumer Banking value proposition is based on providing simple, easy to understand product offerings and a convenient banking experience with a more personalized approach.
Commercial Banking
The Commercial Banking segment primarily targets companies with annual revenues from $25 million to $2.5 billion and provides a full complement of financial products and solutions, including loans, leases, trade financing, deposits, cash management, commercial cards, foreign exchange, interest rate risk management, corporate finance and capital markets advisory capabilities. It focuses on middle-market companies, large corporations and institutions and has dedicated teams with industry expertise in government banking, not-for-profit, healthcare, technology, professionals, oil and gas, asset finance, franchise finance, asset-based lending, commercial real estate, private equity and sponsor finance. While the segment’s business development efforts are predominantly focusedaudited Consolidated Financial Statements in the Company’s footprint, some of its specialized industry businesses also operate selectivelyAnnual Report on a national basis (such as healthcare, asset finance and franchise finance). A key component of Commercial Banking’s growth strategy is to bring ideas to clients that help their businesses thrive, and in doing so, expandForm 10-K for the loan portfolio and ancillary product sales.year ended December 31, 2018.
Non-segment Operations |
| | | | | | | | | | | | | | | |
| As of and for the Three Months Ended June 30, 2019 |
(in millions) | Consumer Banking | | Commercial Banking | | Other | | Consolidated |
Net interest income |
| $799 |
| |
| $371 |
| |
| ($4 | ) | |
| $1,166 |
|
Noninterest income | 277 |
| | 149 |
| | 36 |
| | 462 |
|
Total revenue | 1,076 |
| | 520 |
| | 32 |
| | 1,628 |
|
Noninterest expense | 715 |
| | 217 |
| | 19 |
| | 951 |
|
Profit before provision for credit losses | 361 |
| | 303 |
| | 13 |
| | 677 |
|
Provision for credit losses | 78 |
| | 25 |
| | (6 | ) | | 97 |
|
Income before income tax expense (benefit) | 283 |
| | 278 |
| | 19 |
| | 580 |
|
Income tax expense (benefit) | 70 |
| | 62 |
| | (5 | ) | | 127 |
|
Net income |
| $213 |
| |
| $216 |
| |
| $24 |
| |
| $453 |
|
Total average assets |
| $65,485 |
| |
| $56,135 |
| |
| $39,869 |
| |
| $161,489 |
|
Other
Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets, community development, non-core assets (including legacy Royal Bank of Scotland Group plc aircraft loans and leases placed in runoff in the third quarter of 2016), and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense. In addition to non-segment operations, Other includes goodwill and any associated goodwill
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
impairment charges. For impairment testing purposes, the Company allocates goodwill to its Consumer Banking and Commercial Banking reporting units. For management reporting purposes, the Company presents the goodwill balance (and any related impairment charges) in Other.
|
| | | | | | | | | | | | | | | |
| As of and for the Three Months Ended June 30, 2018 |
(in millions) | Consumer Banking | | Commercial Banking | | Other | | Consolidated |
Net interest income |
| $759 |
| |
| $376 |
| |
| ($14 | ) | |
| $1,121 |
|
Noninterest income | 228 |
| | 140 |
| | 20 |
| | 388 |
|
Total revenue | 987 |
| | 516 |
| | 6 |
| | 1,509 |
|
Noninterest expense | 658 |
| | 200 |
| | 17 |
| | 875 |
|
Profit (loss) before provision for credit losses | 329 |
| | 316 |
| | (11 | ) | | 634 |
|
Provision for credit losses | 66 |
| | 9 |
| | 10 |
| | 85 |
|
Income (loss) before income tax expense (benefit) | 263 |
| | 307 |
| | (21 | ) | | 549 |
|
Income tax expense (benefit) | 66 |
| | 70 |
| | (12 | ) | | 124 |
|
Net income (loss) |
| $197 |
| |
| $237 |
| |
| ($9 | ) | |
| $425 |
|
Total average assets |
| $61,232 |
| |
| $52,170 |
| |
| $39,851 |
| |
| $153,253 |
|
| | | As of and for the Three Months Ended June 30, 2017 | As of and for the Six Months Ended June 30, 2019 |
(in millions) | Consumer Banking | | Commercial Banking | | Other | | Consolidated | Consumer Banking | | Commercial Banking | | Other | | Consolidated |
Net interest income |
| $657 |
| |
| $344 |
| |
| $25 |
| |
| $1,026 |
|
| $1,587 |
| |
| $743 |
| |
| ($4 | ) | |
| $2,326 |
|
Noninterest income | 229 |
| | 130 |
| | 11 |
| | 370 |
| 524 |
| | 299 |
| | 67 |
| | 890 |
|
Total revenue | 886 |
| | 474 |
| | 36 |
| | 1,396 |
| 2,111 |
| | 1,042 |
| | 63 |
| | 3,216 |
|
Noninterest expense | 644 |
| | 192 |
| | 28 |
| | 864 |
| 1,415 |
| | 426 |
| | 47 |
| | 1,888 |
|
Profit before provision for credit losses | 242 |
| | 282 |
| | 8 |
| | 532 |
| 696 |
| | 616 |
| | 16 |
| | 1,328 |
|
Provision for credit losses | 60 |
| | 1 |
| | 9 |
| | 70 |
| 145 |
| | 46 |
| | (9 | ) | | 182 |
|
Income (loss) before income tax expense (benefit) | 182 |
| | 281 |
| | (1 | ) | | 462 |
| |
Income before income tax expense (benefit) | | 551 |
| | 570 |
| | 25 |
| | 1,146 |
|
Income tax expense (benefit) | 64 |
| | 94 |
| | (14 | ) | | 144 |
| 136 |
| | 127 |
| | (9 | ) | | 254 |
|
Net income |
| $118 |
| |
| $187 |
| |
| $13 |
| |
| $318 |
|
| $415 |
| |
| $443 |
| |
| $34 |
| |
| $892 |
|
Total average assets |
| $59,244 |
| |
| $49,731 |
| |
| $40,903 |
| |
| $149,878 |
|
| $65,247 |
| |
| $55,884 |
| |
| $39,824 |
| |
| $160,955 |
|
|
| | | | | | | | | | | | | | | |
| As of and for the Six Months Ended June 30, 2018 |
(in millions) | Consumer Banking | | Commercial Banking | | Other | | Consolidated |
Net interest income |
| $1,492 |
| |
| $733 |
| |
| ($13 | ) | |
| $2,212 |
|
Noninterest income | 450 |
| | 265 |
| | 44 |
| | 759 |
|
Total revenue | 1,942 |
| | 998 |
| | 31 |
| | 2,971 |
|
Noninterest expense | 1,314 |
| | 408 |
| | 36 |
| | 1,758 |
|
Profit (loss) before provision for credit losses | 628 |
| | 590 |
| | (5 | ) | | 1,213 |
|
Provision for credit losses | 138 |
| | 5 |
| | 20 |
| | 163 |
|
Income (loss) before income tax expense (benefit) | 490 |
| | 585 |
| | (25 | ) | | 1,050 |
|
Income tax expense (benefit) | 123 |
| | 133 |
| | (19 | ) | | 237 |
|
Net income (loss) |
| $367 |
| |
| $452 |
| |
| ($6 | ) | |
| $813 |
|
Total average assets |
| $61,290 |
| |
| $51,286 |
| |
| $39,817 |
| |
| $152,393 |
|
|
| | | | | | | | | | | | | | | |
| As of and for the Six Months Ended June 30, 2018 |
(in millions) | Consumer Banking | | Commercial Banking | | Other | | Consolidated |
Net interest income |
| $1,492 |
| |
| $733 |
| |
| ($13 | ) | |
| $2,212 |
|
Noninterest income | 450 |
| | 265 |
| | 44 |
| | 759 |
|
Total revenue | 1,942 |
| | 998 |
| | 31 |
| | 2,971 |
|
Noninterest expense | 1,314 |
| | 408 |
| | 36 |
| | 1,758 |
|
Profit (loss) before provision for credit losses | 628 |
| | 590 |
| | (5 | ) | | 1,213 |
|
Provision for credit losses | 138 |
| | 5 |
| | 20 |
| | 163 |
|
Income (loss) before income tax expense (benefit) | 490 |
| | 585 |
| | (25 | ) | | 1,050 |
|
Income tax expense (benefit) | 123 |
| | 133 |
| | (19 | ) | | 237 |
|
Net income (loss) |
| $367 |
| |
| $452 |
| |
| ($6 | ) | |
| $813 |
|
Total average assets |
| $61,290 |
| |
| $51,286 |
| |
| $39,817 |
| |
| $152,393 |
|
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| As of and for the Six Months Ended June 30, 2017 |
(in millions) | Consumer Banking | | Commercial Banking | | Other | | Consolidated |
Net interest income |
| $1,295 |
| |
| $690 |
| |
| $46 |
| |
| $2,031 |
|
Noninterest income | 449 |
| | 264 |
| | 36 |
| | 749 |
|
Total revenue | 1,744 |
| | 954 |
| | 82 |
| | 2,780 |
|
Noninterest expense | 1,291 |
| | 382 |
| | 45 |
| | 1,718 |
|
Profit before provision for credit losses | 453 |
| | 572 |
| | 37 |
| | 1,062 |
|
Provision for credit losses | 124 |
| | 20 |
| | 22 |
| | 166 |
|
Income before income tax expense (benefit) | 329 |
| | 552 |
| | 15 |
| | 896 |
|
Income tax expense (benefit) | 116 |
| | 185 |
| | (43 | ) | | 258 |
|
Net income |
| $213 |
| |
| $367 |
| |
| $58 |
| |
| $638 |
|
Total average assets |
| $58,954 |
| |
| $49,488 |
| |
| $40,893 |
| |
| $149,335 |
|
ManagementThere have been no significant changes in the management accounting practices utilized by the Company asregarding the basis of presentation for segment results includeas discussed in Note 25 “Business Operating Segments,” to the following:
FTP adjustments
The Company utilizes an FTP system to eliminateCompany’s audited Consolidated Financial Statements in the effect of interest rate risk from the segments’ net interest income because such risk is centrally managed within the Treasury function. The FTP system credits (or charges) the segments with the economic value of the funds created (or used) by the segments. The FTP system provides a funds credit for sources of funds and a funds chargeAnnual Report on Form 10-K for the use of funds by each segment. The sum of the interest income/expense and FTP charges/credits for each segment is its designated net interest income. The variance between the Company’s cumulative FTP charges and cumulative FTP credits is offset in Other. The Company periodically evaluates and refines its methodologies used to measure financial performance of its business operating segments. In the first quarter of 2018, the Company enhanced its assumptions for the liquidity and deposit component within its FTP methodology. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.year ended December 31, 2018.
Provision for credit losses allocations
Provision for credit losses is allocated to each business segment based on actual net charge-offs recognized by the business segment. The difference between the consolidated provision for credit losses and the business segments’ net charge-offs is reflected in Other.
Income tax allocations
Income taxes are assessed to each line of business at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.
Expense allocations
Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services.
Substantially all revenues generated and long-lived assets held by the Company’s business segments are derived from clients that reside in the United States. Neither business segment earns revenue from a single external customer that represents ten percent or more of the Company’s total revenues.
CITIZENS FINANCIAL GROUP, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in the “Market Risk” section of Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this quarterly report on Form 10-Q that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
CITIZENS FINANCIAL GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the matters described in the Company's Annual Report on Form 10-K for the year ended December 31, 2017,The information required by this item is set forth in Note 11 “Commitments12 "Commitments and Contingencies”Contingencies" in the Notes to the unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements of this report,Report, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report,Report, you should consider the risks described under the caption “Risk Factors” in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Details of the repurchases of the Company’s common stock during the three months ended June 30, 20182019 are included in the following table:below:
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Period | Total Number of Shares Repurchased | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Dollar Amount of Shares That May Yet Be Purchased As Part of Publicly Announced Plans or Programs (1) |
April 1, 2018 - April 30, 2018 | 2,825,172 | $41.68 | 2,825,172 | $32,256,438 |
May 1, 2018 - May 31, 2018 | — | $— | — | $32,256,438 |
June 1, 2018 - June 30, 2018 | 773,970 | $41.68 | 773,970 | $— |
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Period | Total Number of Shares Repurchased | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Dollar Amount of Shares That May Yet Be Purchased As Part of Publicly Announced Plans or Programs (1) |
April 1, 2019 - April 30, 2019 | 2,802,198 | $34.64 | 2,802,198 | $22,919,251 |
May 1, 2019 - May 31, 2019 | 661,555 | 34.64 | 661,555 | $— |
June 1, 2019 - June 30, 2019 | — | $— | — | $— |
(1) On June 29, 2017,28, 2018, the Company announced that its 20172018 Capital Plan, submitted as part of the CCAR process and not objected to by the FRB, included share repurchases of CFG common stock of up to $850 million$1.02 billion for the four-quarter period ending with the second quarter of 2018.2019. This share repurchase plan, which was approved by the Company’s Board of Directors at the time of the announcement, allowed for share repurchases that may be executed in the open market or in privately negotiated transactions, including under Rule 10b5-1 plans. All shares repurchased by the Company during the second quarter were executed pursuant to an accelerated share repurchase transaction, which was completed by June 30, 2018.2019. The timing and exact amount of future share repurchases will be subject to various factors, including the Company’s capital position, financial performance and market conditions.
CITIZENS FINANCIAL GROUP, INC.
ITEM 6. EXHIBITS
CITIZENS FINANCIAL GROUP, INC.
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101 | The following materials from the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements*
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† Indicates management contract or compensatory plan or arrangement.
* Filed herewith.
CITIZENS FINANCIAL GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized on August 6, 2018.2019.
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CITIZENS FINANCIAL GROUP, INC. |
(Registrant) |
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By: | /s/ Randall J. BlackC. Jack Read |
| Name: Randall J. BlackC. Jack Read |
| Title: Executive Vice President, Chief Accounting Officer and Controller |
| (Principal Accounting Officer and Authorized Officer) |