0000759944 us-gaap:CommercialPortfolioSegmentMember us-gaap:CommercialRealEstateMember cfg:DebtModificationOtherMember 2019-04-01 2019-06-30
     
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
image1-logo.jpg
(Exact name of the registrant as specified in its charter)
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:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, $0.01 par value per shareCFGNew York Stock Exchange
Depositary Shares, representing 6.350% Non-Cumulative Perpetual Preferred Stock, Series D
CFG PrDNew 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:
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.




     
 
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  Table of Contents  
     
    
 
Glossary of Acronyms and Terms
3
 
    
 
Part I. Financial Information
5
 
    
 
Item 1. Financial Statements
5551
 
    
 
Consolidated Balance Sheets as of June 30, 20182019 (unaudited) and December 31, 20172018 (unaudited)
5652
 
 
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 20182019 and 20172018
5753
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 20182019 and 20172018
5854
 
 
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 20182019 and 20172018
5955
 
 
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 20182019 and 20172018
6057
 
 
Notes to the Consolidated Financial Statements (unaudited)
6158
 
    
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
5
 
    
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
10997
 
    
 
Item 4. Controls and Procedures
10997
 
    
    
 
Part II. Other Information
11097
 
    
 
Item 1. Legal Proceedings
11097
 
 
Item 1A. Risk Factors
11097
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
11097
 
 
Item 6. Exhibits
11098
 
    
    
 
Signature
11299
 
    
    
    


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:
ACLAllowance for Credit Losses
AcquisitionsRefers 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
ALMAsset and Liability Management
AOCI Accumulated Other Comprehensive Income (Loss)
ASUAccounting Standards Update
ATM Automated Teller Machine
Board of Directors The Board of Directors of Citizens Financial Group, Inc.
bps Basis Points
Capital Plan RuleFederal Reserve’s Regulation Y Capital Plan Rule
CBNA Citizens Bank, National Association
CBPACitizens Bank of Pennsylvania
CCAR Comprehensive Capital Analysis and Review
CCB Capital Conservation Buffer
CCMICitizens Capital Markets, Inc.
CET1 Common Equity Tier 1
CET1 capital ratioCommon 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
CMOCollateralized Mortgage Obligation
DFASTDodd-Frank Act Stress Test
Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EGRRCPAEconomic Growth, Regulatory Relief and Consumer Protection Act
EPS Earnings Per Share
Exchange Act The Securities Exchange Act of 1934
FAMCFranklin American Mortgage Company
FAMC acquisitionThe August 1, 2018 acquisition of Franklin American Mortgage Company
Fannie Mae (FNMA) Federal National Mortgage Association
FDIAFederal 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)

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
LHFSLoans 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.


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.


NSFRNet 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 ratioTier 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 ratioTier 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 ratioTotal 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


  Page
Forward-Looking Statements 
6
Introduction
 
7
Financial Performance
 
98
Selected Consolidated Financial Data 
1211
Results of Operations 
1413
Net Interest Income
 
1413
Net InterestNoninterest Income
 
1417
Noninterest IncomeExpense
 
18
Provision for Credit Losses
 
19
Noninterest Expense
19
Income Tax Expense
19
Business Operating Segments
 
20
Business Operating Segments
21
Analysis of Financial Condition 
2728
Securities
27
Loans and Leases
 
28
Loans and Leases
29
Allowance for Credit Losses and Nonperforming Assets
 
2829
Deposits
32
Borrowed Funds
33
Capital and Regulatory Matters
 
34
Borrowed FundsLiquidity
 
3438
Capital and Regulatory MattersOff-Balance Sheet Arrangements
 
3641
LiquidityCritical Accounting Estimates
 
4041
Off-Balance Sheet ArrangementsRisk Governance
 
4442
Critical Accounting EstimatesMarket Risk
 
4442
Risk Governance
45
Market Risk
45
Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations
 
5147


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:
•
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.
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.
Three Months Ended June 30,Three Months Ended June 30,
2018 20172019 2018
(in millions)Noninterest income Noninterest expense Credit-related costs Net Income Noninterest income Noninterest expense Credit-related costs Net IncomeNoninterest expense Income tax expense Net Income Noninterest expense Income tax expense Net Income
Reported results (GAAP)
$388
 
$875
 
$85
 
$425
 
$370
 
$864
 
$70
 
$318
Less Notable items: Lease impairment credit-related costs—
 —
 —
 —
 (11) 15
 (26) —
Reported results (GAAP):
$951
 
$127
 
$453
 
$875
 
$124
 
$425
Less notable items:           
Total integration costs7
 (2) (5) —
 —
 —
Underlying results* (non-GAAP)
$388
 
$875
 
$85
 
$425
 
$381
 
$849
 
$96
 
$318

$944
 
$129
 
$458
 
$875
 
$124
 
$425

* 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.

◦•
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.
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%.
◦
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.
◦
On an Underlying basis,* net income available to common stockholders of $440 millionincreased $15 million, or 4%, from second quarter2018.
•
Total revenue of $1.6 billionincreased $119 million, or 8%, from second quarter2018, reflecting strength in noninterest income and increased net interest income.
◦
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.
◦
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.
–
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.
–
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.
◦
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.
–
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.
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


–
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.
–
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.
◦
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.
•
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.
◦
On an Underlying basis,* noninterest expense increased 3%$69 million, or 8%, from second quarter2018.
•
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.
◦
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.
◦
On an Underlying basis,* includingoperating leverage was stable despite a 68 basis point drag related to Acquisitions.
•
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.
•
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.
◦
On an Underlying basis,* ROTCE of 12.9% was stable with second quarter 2017 aircraft lease impairments2018.
•
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 costs12
 (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 income388
 370
 759
 749
462
 388
 890
 759
Total revenue1,509
 1,396
 2,971
 2,780
1,628
 1,509
 3,216
 2,971
Provision for credit losses85
 70
 163
 166
97
 85
 182
 163
Noninterest expense875
 864
 1,758
 1,718
951
 875
 1,888
 1,758
Income before income tax expense549
 462
 1,050
 896
580
 549
 1,146
 1,050
Income tax expense124
 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 equity8.65% 6.48% 8.24% 6.50%8.54 % 8.65% 8.58% 8.24%
Return on average tangible common equity12.93
 9.57
 12.32
 9.62
12.75
 12.93
 12.87
 12.32
Return on average total assets1.11
 0.85
 1.08
 0.86
1.13
 1.11
 1.12
 1.08
Return on average total tangible assets1.16
 0.89
 1.12
 0.90
1.17
 1.16
 1.17
 1.12
Efficiency ratio57.95
 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 rate22.58
 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 value521
 497
1,750
 1,219
Other loans held for sale189
 221
455
 101
Loans and leases113,407
 110,617
116,838
 116,660
Allowance for loan and lease losses(1,253) (1,236)(1,227) (1,242)
Total securities25,513
 25,733
25,898
 25,075
Goodwill6,887
 6,887
7,040
 6,923
Total liabilities134,964
 132,066
140,732
 139,701
Total deposits117,073
 115,089
124,004
 119,575
Federal funds purchased and securities sold under agreements to repurchase326
 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’ equity20,467
 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 leases1.10% 1.12%
Allowance for loan and lease losses as a percentage of loans and leases1.05% 1.06%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases148.20
 141.96
159.43
 155.99
Nonperforming loans and leases as a percentage of total loans and leases0.75
 0.79
Nonperforming loans and leases as a percentage of loans and leases0.66
 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 income388
 370
 18
 5
 759
 749
 10
 1
Total revenue1,509
 1,396
 113
 8
 2,971
 2,780
 191
 7
Provision for credit losses85
 70
 15
 21
 163
 166
 (3) (2)
Noninterest expense875
 864
 11
 1
 1,758
 1,718
 40
 2
Income before income tax expense549
 462
 87
 19
 1,050
 896
 154
 17
Income tax expense124
 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 equity8.65% 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.
chart-5.jpg

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 Change2019 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 securities25,197
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 securities6
—
2.60
 7
—
2.60
 (1)—
5
—
2.60
 6
—
2.60
 (1)—
Total investment securities25,203
165
2.62
 25,739
154
2.39
 (536)23
25,625
164
2.56
 25,203
165
2.62
 422
(6)
Commercial39,399
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 estate12,071
134
4.39
 11,086
97
3.47
 985
92
13,379
166
4.91
 12,071
134
4.39
 1,308
52
Leases3,073
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 leases54,543
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 mortgages17,488
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 loans1,252
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 credit13,112
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 others480
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 others130
1
3.62
 188
2
4.24
 (58)(62)92
1
5.27
 130
1
3.62
 (38)165
Automobile12,657
113
3.60
 13,574
110
3.23
 (917)37
11,984
125
4.19
 12,657
113
3.60
 (673)59
Education8,374
119
5.71
 7,490
98
5.26
 884
45
9,235
137
5.97
 8,374
119
5.71
 861
26
Credit cards1,854
50
10.74
 1,693
45
10.71
 161
3
2,041
52
10.26
 1,854
50
10.74
 187
(48)
Other retail2,966
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 loans58,313
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 leases112,856
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 value470
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 sale195
3
6.38
 162
2
5.51
 33
87
158
2
5.67
 195
3
6.38
 (37)(71)
Interest-earning assets140,525
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) 
Goodwill6,887
   6,882
   5
 7,040
   6,887
   153
 
Other noninterest-earning assets7,087
   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 accounts36,396
79
0.87
 36,912
45
0.49
 (516)3835,228
114
1.30
 36,396
79
0.87
 (1,168)43
Regular savings9,889
1
0.05
 9,458
1
0.04
 431
113,324
21
0.62
 9,889
1
0.05
 3,435
57
Term deposits17,838
67
1.50
 15,148
36
0.97
 2,690
5322,292
116
2.09
 17,838
67
1.50
 4,454
59
Total interest-bearing deposits86,308
181
0.84
 83,269
102
0.49
 3,039
3594,763
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)36818
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)22545
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)7212,386
102
3.30
 14,880
107
2.86
 (2,494)44
Total borrowed funds15,575
109
2.78
 16,730
77
1.86
 (1,155)9213,249
106
3.20
 15,575
109
2.78
 (2,326)42
Total interest-bearing liabilities101,883
290
1.14
 99,999
179
0.72
 1,884
42108,012
414
1.54
 101,883
290
1.14
 6,129
40
Demand deposits28,834
   27,521
   1,313
 28,389
   28,834
   (445) 
Other liabilities2,433
   2,452
   (19) 3,536
   2,433
   1,103
 
Total liabilities133,150
   129,972
   3,178
 139,937
   133,150
   6,787
 
Stockholders’ equity20,103
   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 Change2019 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 securities25,315
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 securities6
—
2.60
 8
—
2.60
 (2)—
5
—
2.60
 6
—
2.60
 (1)—
Total investment securities25,321
333
2.63
 25,768
314
2.44
 (447)19
25,384
330
2.60
 25,321
333
2.63
 63
(3)
Commercial38,683
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 estate11,812
253
4.25
 10,955
184
3.34
 857
91
13,325
331
4.94
 11,812
253
4.25
 1,513
69
Leases3,093
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 leases53,588
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 mortgages17,326
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 loans1,297
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 credit13,232
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 others500
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 others136
2
3.81
 198
4
3.98
 (62)(17)95
2
5.11
 136
2
3.81
 (41)130
Automobile12,835
225
3.53
 13,672
217
3.20
 (837)33
12,026
245
4.12
 12,835
225
3.53
 (809)59
Education8,329
233
5.65
 7,165
186
5.25
 1,164
40
9,153
271
5.98
 8,329
233
5.65
 824
33
Credit cards1,841
98
10.72
 1,679
91
10.93
 162
(21)2,020
105
10.51
 1,841
98
10.72
 179
(21)
Other retail2,906
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 loans58,402
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 leases111,990
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 value445
9
4.01
 487
8
3.45
 (42)56
1,283
26
4.09
 445
9
4.01
 838
8
Other loans held for sale225
7
6.29
 118
3
5.86
 107
43
175
6
6.41
 225
7
6.29
 (50)12
Interest-earning assets139,603
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) 
Goodwill6,887
   6,879
   8
 7,029
   6,887
   142
 
Other noninterest-earning assets7,144
   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 accounts36,738
144
0.79
 37,390
86
0.46
 (652)3335,218
224
1.28
 36,738
144
0.79
 (1,520)49
Regular savings9,759
2
0.05
 9,285
2
0.04
 474
112,977
38
0.59
 9,759
2
0.05
 3,218
54
Term deposits17,174
120
1.41
 14,663
67
0.93
 2,511
4821,713
224
2.08
 17,174
120
1.41
 4,539
67
Total interest-bearing deposits85,598
326
0.77
 82,566
188
0.46
 3,032
3193,364
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)40729
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)18652
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
6013,555
223
3.28
 14,662
196
2.66
 (1,107)62
Total borrowed funds15,624
201
2.57
 16,495
146
1.77
 (871)8014,336
229
3.19
 15,624
201
2.57
 (1,288)62
Total interest-bearing liabilities101,222
527
1.05
 99,061
334
0.68
 2,161
37107,700
824
1.54
 101,222
527
1.05
 6,478
49
Demand deposits28,690
   27,808
   882

28,426
   28,690
   (264)
Other liabilities2,440
   2,659
   (219)
3,560
   2,440
   1,120

Total liabilities132,352
   129,528
   2,824

139,686
   132,352
   7,334

Stockholders’ equity20,041
   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
chart-f7.jpg
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 fees60
 59
 1
 2
 121
 119
 2
 2
64
 60
 4
 7
 123
 121
 2
 2
Capital markets fees48
 51
 (3) (6) 87
 99
 (12) (12)57
 48
 9
 19
 111
 87
 24
 28
Trust and investment services fees43
 39
 4
 10
 83
 78
 5
 6
53
 43
 10
 23
 100
 83
 17
 20
Mortgage banking fees62
 27
 35
 130
 105
 52
 53
 102
Letter of credit and loan fees32
 31
 1
 3
 62
 60
 2
 3
33
 32
 1
 3
 66
 62
 4
 6
Foreign exchange and interest rate products34
 26
 8
 31
 61
 53
 8
 15
35
 34
 1
 3
 71
 61
 10
 16
Mortgage banking fees27
 30
 (3) (10) 52
 53
 (1) (2)
Securities gains, net2
 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
chart-ae.jpg
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 services106
 96
 10
 10
 205
 187
 18
 10
118
 106
 12
 11
 228
 205
 23
 11
Occupancy79
 79
 —
 —
 160
 161
 (1) (1)82
 79
 3
 4
 165
 160
 5
 3
Equipment expense64
 64
 —
 —
 131
 131
 —
 —
Amortization of software46
 45
 1
 2
 92
 89
 3
 3
Other operating expense(1)(2)
127
 148
 (21) (14) 247
 272
 (25) (9)
Other operating expense118
 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
chart-02.jpg
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
chart-da.jpg
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, 2018As 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 income228
 140
 20
 388
277
 149
 36
 462
Total revenue987
 516
 6
 1,509
1,076
 520
 32
 1,628
Noninterest expense658
 200
 17
 875
715
 217
 19
 951
Profit (loss) before provision for credit losses329
 316
 (11) 634
Profit before provision for credit losses361
 303
 13
 677
Provision for credit losses66
 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
Deposits77,402
 30,214
 7,526
 115,142
85,660
 30,273
 7,219
 123,152
Interest-earning assets59,880
 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 ratio66.68
 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, 2017As 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 income229
 130
 11
 370
228
 140
 20
 388
Total revenue886
 474
 36
 1,396
987
 516
 6
 1,509
Noninterest expense644
 192
 28
 864
658
 200
 17
 875
Profit before provision for credit losses242
 282
 8
 532
Profit (loss) before provision for credit losses329
 316
 (11) 634
Provision for credit losses60
 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
Deposits75,107
 28,744
 6,939
 110,790
77,402
 30,214
 7,526
 115,142
Interest-earning assets57,973
 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 ratio72.64
 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, 2018As 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 income450
 265
 44
 759
524
 299
 67
 890
Total revenue1,942
 998
 31
 2,971
2,111
 1,042
 63
 3,216
Noninterest expense1,314
 408
 36
 1,758
1,415
 426
 47
 1,888
Profit (loss) before provision for credit losses628
 590
 (5) 1,213
Profit before provision for credit losses696
 616
 16
 1,328
Provision for credit losses138
 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
Deposits76,414
 30,488
 7,386
 114,288
84,123
 30,050
 7,617
 121,790
Interest-earning assets59,937
 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 ratio67.68
 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, 2017As of and for the Six Months Ended June 30, 2018
(dollars in millions)Consumer Banking Commercial Banking 
Other(3)

 ConsolidatedConsumer Banking Commercial Banking 
Other(5)

 Consolidated
Net interest income
$1,295
 
$690
 
$46
 
$2,031

$1,492
 
$733
 
($13) 
$2,212
Noninterest income449
 264
 36
 749
450
 265
 44
 759
Total revenue1,744
 954
 82
 2,780
1,942
 998
 31
 2,971
Noninterest expense1,291
 382
 45
 1,718
1,314
 408
 36
 1,758
Profit before provision for credit losses453
 572
 37
 1,062
Profit (loss) before provision for credit losses628
 590
 (5) 1,213
Provision for credit losses124
 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
Deposits74,623
 28,858
 6,893
 110,374
76,414
 30,488
 7,386
 114,288
Interest-earning assets57,668
 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 ratio74.00
 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 income228
 229
 (1) —
 450

449

1

—
277
 228
 49
 21
 524

450

74

16
Total revenue987
 886
 101
 11
 1,942

1,744

198

11
1,076
 987
 89
 9
 2,111

1,942

169

9
Noninterest expense658
 644
 14
 2
 1,314

1,291

23

2
715
 658
 57
 9
 1,415

1,314

101

8
Profit before provision for credit losses329
 242
 87
 36
 628

453

175

39
361
 329
 32
 10
 696

628

68

11
Provision for credit losses66
 60
 6
 10
 138

124

14

11
78
 66
 12
 18
 145

138

7

5
Income before income tax expense263
 182
 81
 45
 490

329

161

49
283
 263
 20
 8
 551

490

61

12
Income tax expense66
 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
Deposits77,402
 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 assets59,880
 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 ratio66.68
 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 income140
 130
 10
 8
 265
 264
 1
 —
149
 140
 9
 6
 299
 265
 34
 13
Total revenue516
 474
 42
 9
 998
 954
 44
 5
520
 516
 4
 1
 1,042
 998
 44
 4
Noninterest expense200
 192
 8
 4
 408
 382
 26
 7
217
 200
 17
 9
 426
 408
 18
 4
Profit before provision for credit losses316
 282
 34
 12
 590
 572
 18
 3
303
 316
 (13) (4) 616
 590
 26
 4
Provision for credit losses9
 1
 8
 NM
 5
 20
 (15) (75)25
 9
 16
 178
 46
 5
 41
 NM
Income before income tax expense307
 281
 26
 9
 585
 552
 33
 6
278
 307
 (29) (9) 570
 585
 (15) (3)
Income tax expense70
 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
Deposits30,214
 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 assets51,404
 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 ratio38.80
 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 income20
 11
 9
 82
 44
 36
 8
 22
36
 20
 16
 80
 67
 44
 23
 52
Total revenue6
 36
 (30) (83) 31
 82
 (51) (62)32
 6
 26
 NM
 63
 31
 32
 103
Noninterest expense17
 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 losses13
 (11) 24
 NM
 16
 (5) 21
 NM
Provision for credit losses10
 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 benefit19
 (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)
Deposits7,526
 6,939
 587
 8
 7,386
 6,893
 493
 7
7,219
 7,526
 (307) (4) 7,617
 7,386
 231
 3
Interest-earning assets29,241
 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 subdivisions6
 6
 6
 6
 —
 —
5
 5
 5
 5
 —
 —
Mortgage-backed securities:           
Mortgage-backed securities, at fair value:           
Federal agencies and U.S. government sponsored entities20,559
 19,871
 20,065
 19,828
 43
 —
20,688
 20,708
 20,211
 19,634
 1,074
 5
Other/non-agency269
 268
 311
 311
 (43) (14)871
 895
 236
 232
 663
 286
Total mortgage-backed securities20,828
 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-agency785
 787
 832
 854
 (67) (8)—
 —
 740
 748
 (748) (100)
Total mortgage-backed securities4,417
 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 cost769
 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  PercentJune 30, 2019 December 31, 2018 Change  Percent
Commercial(1)
$39,278
 
$37,562
 
$1,716
 5 %
$41,156
 
$40,857
 
$299
 1 %
Commercial real estate12,528
 11,308
 1,220
 11
13,123
 13,023
 100
 1
Leases3,082
 3,161
 (79) (2)2,684
 2,903
 (219) (8)
Total commercial loans and leases54,888
 52,031
 2,857
 5
56,963
 56,783
 180
 —
Residential mortgages17,814
 17,045
 769
 5
19,192
 18,978
 214
 1
Home equity loans1,211
 1,392
 (181) (13)938
 1,073
 (135) (13)
Home equity lines of credit13,014
 13,483
 (469) (3)12,266
 12,710
 (444) (3)
Home equity loans serviced by others465
 542
 (77) (14)348
 399
 (51) (13)
Home equity lines of credit serviced by others124
 149
 (25) (17)88
 104
 (16) (15)
Automobile12,517
 13,204
 (687) (5)12,000
 12,106
 (106) (1)
Education8,450
 8,134
 316
 4
9,305
 8,900
 405
 5
Credit cards1,877
 1,848
 29
 2
2,046
 1,991
 55
 3
Other retail3,047
 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, 2018June 30, 2019
 Criticized  Criticized 
(in millions)Pass
Special MentionSubstandard
Doubtful
Total
Pass
Special MentionSubstandard
Doubtful
Total
Commercial
$36,576

$1,694

$754

$254

$39,278

$39,011

$1,174

$770

$201

$41,156
Commercial real estate12,044
336
119
29
12,528
12,705
377
38
3
13,123
Leases2,955
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, 2017December 31, 2018
 Criticized  Criticized 
(in millions)Pass
Special MentionSubstandard
Doubtful
Total
Pass
Special MentionSubstandard
Doubtful
Total
Commercial
$35,430

$1,143

$785

$204

$37,562

$38,600

$1,231

$828

$198

$40,857
Commercial real estate10,706
500
74
28
11,308
12,523
412
82
6
13,023
Leases3,069
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 portfolio765
 763
CLTV ratio for secured real estate(1)
59% 58%
Nonperforming retail loans as a percentage of total retail0.92
 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 rate0.49% 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, 2018June 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 loans94
 1
 2
 14
 111
75
 0.5
 —
 21
 96
Home equity lines of credit170
 5
 3
 24
 202
141
 0.7
 —
 60
 201
Home equity loans serviced by others41
 2
 1
 2
 46
27
 0.3
 —
 9
 36
Home equity lines of credit serviced by others8
 —
 —
 1
 9
3
 —
 —
 4
 7
Automobile21
 2
 1
 —
 24
14
 0.2
 —
 8
 22
Education153
 4
 2
 4
 163
123
 0.8
 0.5
 21
 144
Credit cards21
 1
 1
 1
 24
25
 0.5
 —
 2
 27
Other retail7
 —
 —
 —
 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, 2017December 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 loans95
 7
 2
 17
 121
85
 0.7
 —
 25
 110
Home equity lines of credit158
 11
 3
 25
 197
138
 0.9
 —
 64
 202
Home equity loans serviced by others45
 3
 1
 2
 51
31
 0.3
 —
 10
 41
Home equity lines of credit serviced by others8
 —
 —
 1
 9
3
 —
 —
 5
 8
Automobile19
 2
 1
 1
 23
13
 0.2
 —
 10
 23
Education163
 5
 3
 4
 175
131
 0.9
 0.3
 22
 153
Credit cards22
 1
 1
 1
 25
24
 0.4
 —
 1
 25
Other retail9
 —
 —
 —
 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 loans83
 28
 111
Home equity lines of credit142
 60
 202
Home equity loans serviced by others35
 11
 46
Home equity lines of credit serviced by others4
 5
 9
Automobile13
 11
 24
Education142
 21
 163
Credit cards23
 1
 24
Other retail7
 —
 7
Total
$556
 
$186
 
$742

 December 31, 2017
(in millions)Accruing Nonaccruing Total
Recorded Investment:     
Residential mortgages
$98
 
$53
 
$151
Home equity loans86
 35
 121
Home equity lines of credit128
 69
 197
Home equity loans serviced by others38
 13
 51
Home equity lines of credit serviced by others4
 5
 9
Automobile12
 11
 23
Education152
 23
 175
Credit cards24
 1
 25
Other retail8
 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 PercentJune 30, 2019 December 31, 2018 Change Percent
Commercial
$63
 
$56
 
$7
 13%
$8
 
$72
 
($64) (89%)
Commercial real estate17
 19
 (2) (11)12
 14
 (2) (14)
Leases758
 752
 6
 1
533
 670
 (137) (20)
Total commercial loans and leases838
 827
 11
 1
553
 756
 (203) (27)
Residential mortgages123
 136
 (13) (10)101
 110
 (9) (8)
Home equity loans34
 40
 (6) (15)27
 31
 (4) (13)
Home equity lines of credit25
 30
 (5) (17)17
 21
 (4) (19)
Home equity loans serviced by others465
 542
 (77) (14)348
 399
 (51) (13)
Home equity lines of credit serviced by others124
 149
 (25) (17)88
 104
 (16) (15)
Education231
 254
 (23) (9)192
 210
 (18) (9)
Total retail loans1,002
 1,151
 (149) (13)773
 875
 (102) (12)
Total non-core loans and leases1,840
 1,978
 (138) (7)1,326
 1,631
 (305) (19)
Other assets100
 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 interest22,775
 22,229
 546
 2
25,021
 23,067
 1,954
 8
Regular savings9,902
 9,518
 384
 4
13,495
 12,007
 1,488
 12
Money market accounts36,139
 37,454
 (1,315) (4)35,329
 35,701
 (372) (1)
Term deposits18,818
 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 repurchase326
 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
 20172019
 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 funds2.41
 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 funds2,247
 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 funds1,677
 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 repurchase0.71% 0.36% 0.68% 0.28% 0.36%1.76% 0.71% 1.54% 0.68% 0.92%
Other short-term borrowed funds2.49
 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 2022348
 348
5.158% fixed-to-floating rate callable subordinated debt, due 2023(1)
—
 333
3.750% fixed-rate subordinated debt, due 2024250
 250
4.023% fixed-rate subordinated debt, due 202442
 42
4.350% fixed-rate subordinated debt, due 2025249
 249
4.300% fixed-rate subordinated debt, due 2025749
 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 20386,010
 3,761
Other12
 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 2022348
 348
3.750% fixed-rate subordinated debt, due July 2024250
 250
4.023% fixed-rate subordinated debt, due October 202442
 42
4.350% fixed-rate subordinated debt, due August 2025249
 249
4.300% fixed-rate subordinated debt, due December 2025750
 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 20382,258
 7,508
Other17
 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)AmountRatioAmountRatio
June 30, 2018
Common equity tier 1 capital(1)

$14,604
11.2%6.4%6.5%
June 30, 2019June 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 assets130,621
 138,879
 
Quarterly adjusted average assets148,341
 155,956
 
December 31, 2017
Common equity tier 1 capital(1)

$14,309
11.2%5.8%6.5%
December 31, 2018December 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 assets127,692
 136,202
 
Quarterly adjusted average assets145,601
 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, 2017June 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 securities575
 236
25
 490
Derivatives200
 143
6
 143
Unamortized net periodic benefit costs435
 441
457
 463
Deductions:      
Goodwill(6,887) (6,887)(7,040) (6,923)
Deferred tax liability associated with goodwill359
 355
371
 366
Other intangible assets(2) (2)(74) (31)
Total common equity tier 114,604
 14,309
14,629
 14,485
Qualifying preferred stock543
 247
1,133
 840
Total tier 1 capital15,147
 14,556
15,762
 15,325
Qualifying subordinated debt(2)
1,568
 1,901
1,500
 1,499
Allowance for loan and lease losses1,253
 1,236
1,227
 1,242
Allowance for credit losses for off-balance sheet exposure88
 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 assets107,829
  104,767
 
Quarterly adjusted average assets117,457
  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 assets23,388
  23,659
 
Quarterly adjusted average assets35,044
  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 capital15,166
10.9
 11,994
10.6
Total capital17,611
12.7
 14,252
12.5
Tier 1 leverage15,166
9.7
 11,994
9.9
Risk-weighted assets138,569
  113,610
 
Quarterly adjusted average assets155,590
  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 issuerNR BBB+ BBB+
 Short-term issuerNR A-2 F2
 Subordinated debtNR BBB BBB
 Preferred StockNR BB+ BB-
 Citizens Bank, National Association:     
 Long-term issuerBaa1 A- BBB+
 Short-term issuerNR A-2 F2
 Long-term depositsA1 NR A-
 Short-term depositsP-1 NR F2
 Citizens Bank of Pennsylvania:
Long-term issuerBaa1A-BBB+
Short-term issuerNRA-2F2
Long-term depositsA1NRA-
Short-term depositsP-1NRF2
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 credit1,974
 2,036
 (62) (3)
Performance letters of credit120
 47
 73
 155
Commercial letters of credit56
 53
 3
 6
Marketing rights39
 41
 (2) (5)
Risk participation agreements14
 16
 (2) (13)
Residential mortgage loans sold with recourse6
 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 credit2,252
 2,125
 127
 6
Marketing rights35
 37
 (2) (5)
Risk participation agreements41
 19
 22
 116
Loans sold with recourse23
 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 MonthsEstimated % Change in Net Interest Income over 12 Months
Basis pointsJune 30, 2018 December 31, 2017
June 30,
 2019
 December 31, 2018
Instantaneous Change in Interest Rates      
+2008.7 % 9.6 %8.5 % 9.5 %
+1004.4
 4.9
4.2
 4.8
-100(5.1) (5.9)(5.4) (4.5)
Gradual Change in Interest Rates      
+2004.6
 5.1
2.9
 4.9
+1002.4
 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 ValueAvg Maturity (Yrs)Float IndexRate Range Fixed Leg Notional ValueAvg Maturity (Yrs)Float IndexRate Range Fixed Leg
Receive-fixed:         
Cash flow - floating-rate commercial loans(1)

$7,600
2.51mL0.92% - 1.87% 
$7,600
3.01mL0.92% - 1.87%
Cash flow - floating-rate commercial loans(1)
775
11.43mL2.95% - 3.18% —
—
—
—
Fair value - senior debt issuance(2)
3,450
2.93mL1.17% - 2.80% 5,200
2.43mL1.06% - 1.92%
Total receive-fixed11,825
    12,800
   
Pay-fixed:         
Cash flow - floating-rate wholesale funding(3)
500
0.51mL1.32% 500
1.01mL1.32%
Cash flow - floating-rate wholesale funding(3)
365
2.13mL2.79% - 2.91% —
—
—
—
Total pay-fixed865
    500
   
Total
$12,690
    
$13,300
   
 June 30, 2019 December 31, 2018
   Weighted Average  Weighted Average
(dollars in millions)Notional AmountFair ValueMaturity (Years)Receive RatePay Rate Notional AmountFair ValueMaturity (Years)Receive RatePay Rate
Cash flow - receive fixed/pay variable - conventional ALM
$14,850

($3)1.91.8%2.4% 
$8,100

$3
2.2
1.7%2.5%
Fair value - receive fixed/pay variable - conventional debt4,650
(1)2.52.0
2.5
 3,450
2
2.4
1.8
2.7
Cash flow - pay fixed/receive variable - conventional ALM4,750
1
4.40
2.4
1.7
 500
—
—
2.4
1.3
Fair value - pay fixed/receive variable - conventional ALM846
—
4.60
2.5
2.3
 —
—
—
—
—
Total portfolio swaps
$25,096

($3)2.62.0%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
vargraph0618.jpgq219grapha01.jpg



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)B875
 864
 1,758
 1,718
B951
 875
 1,888
 1,758
Net income (GAAP)C425
 318
 813
 638
C453
 425
 892
 813
Net income available to common stockholders (GAAP)D425
 318
 806
 631
D435
 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 equityD/E8.65% 6.48% 8.24% 6.50%D/E8.54 % 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 equityF
$13,200
 
$13,309
 
$13,199
 
$13,213
F
$13,670
 
$13,200
 
$13,453
 
$13,199
Return on average tangible common equityD/F12.93% 9.57% 12.32% 9.62%D/F12.75 % 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 assetsC/G1.11% 0.85% 1.08% 0.86%C/G1.13 % 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 assetsH
$146,721
 
$143,528
 
$145,860
 
$142,988
H
$154,739
 
$146,721
 
$154,226
 
$145,860
Return on average total tangible assetsC/H1.16% 0.89% 1.12% 0.90%C/H1.17 % 1.16% 1.17% 1.12%
Efficiency ratio:                
Efficiency ratioB/A57.95% 61.94% 59.17% 61.81%B/A58.41 % 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 expenseI
$549
 
$462
 
$1,050
 
$896
I
$580
 
$549
 
$1,146
 
$1,050
Income tax expenseJ124
 144
 237
 258
J127
 124
 254
 237
Effective income tax rateJ/I22.58% 31.13% 22.55% 28.82%J/I21.86 % 22.58% 22.14% 22.55%
Net income per average common share - basic and diluted:                
Average common shares outstanding - basic (GAAP)K484,744,354
 506,371,846
 486,114,872
 507,903,141
K458,154,335
 484,744,354
 459,426,685
 486,114,872
Average common shares outstanding - diluted (GAAP)L486,141,695
 507,414,122
 487,683,216
 509,362,055
L459,304,224
 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/L0.88
 0.63
 1.65
 1.24
D/L0.95
 0.88
 1.86
 1.65
Dividend payout ratio:                
Cash dividends declared and paid per common shareM
$0.22
 
$0.14
 
$0.44
 
$0.28
M
$0.32
 
$0.22
 
$0.64
 
$0.44
Dividend payout ratioM/(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		OtherConsolidated Consumer
Banking		Commercial
Banking		OtherConsolidatedRef.Consumer
Banking		Commercial
Banking		OtherConsolidated Consumer
Banking		Commercial
Banking		OtherConsolidated
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 stockholdersO
$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)Q658
200
17
875
 644
192
28
864
Q715
217
19
951
 658
200
17
875
Efficiency ratioQ/P66.68%38.80%NM
57.95% 72.64%40.48%NM
61.94%Q/P66.43%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 assetsR
$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 assetsN/R1.29%1.82%NM
1.16% 0.80%1.51%NM
0.89%N/R1.31%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		OtherConsolidated Consumer
Banking		Commercial
Banking		OtherConsolidatedRef.Consumer
Banking		Commercial
Banking		OtherConsolidated Consumer
Banking		Commercial
Banking		OtherConsolidated
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 stockholdersO
$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)Q1,314
408
36
1,758
 1,291
382
45
1,718
Q1,415
426
47
1,888
 1,314
408
36
1,758
Efficiency ratioQ/P67.68%40.86%NM
59.17% 74.00%40.14%NM
61.81%Q/P67.01%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 assetsR
$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 assetsN/R1.21%1.78%NM
1.12% 0.73%1.50%NM
0.90%N/R1.29%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)A1,509
 1,396
 2,971
 2,780
A
$1,628
 
$1,509
 
$3,216
 
$2,971
Less: Noninterest expense (GAAP)B875
 864
 1,758
 1,718
B951
 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)T875
 849
 1,758
 1,703
T944
 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/I22.58% 31.13% 22.55% 28.82%J/I21.86 % 22.58% 22.14% 22.55%
Effective income tax rate, Underlying (non-GAAP)V/U22.58
 31.13
 22.55
 31.34
V/U21.89
 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 equityD/E8.65% 6.48% 8.24% 6.50%D/E8.54 % 8.65% 8.58% 8.24%
Return on average common equity, Underlying (non-GAAP)
X/E8.65
 6.48
 8.24
 6.27
X/E8.63
 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 equityF
$13,200
 
$13,309
 
$13,199
 
$13,213
F
$13,670
 
$13,200
 
$13,453
 
$13,199
Return on average tangible common equityD/F12.93% 9.57% 12.32% 9.62%D/F12.75 % 12.93% 12.87% 12.32%
Return on average tangible common equity, Underlying (non-GAAP)X/F12.93
 9.57
 12.32
 9.28
X/F12.89
 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 assetsC/G1.11% 0.85% 1.08% 0.86%C/G1.13 % 1.11% 1.12% 1.08%
Return on average total assets, Underlying (non-GAAP)W/G1.11
 0.85
 1.08
 0.83
W/G1.14
 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 assetsH
$146,721
 
$143,528
 
$145,860
 
$142,988
H
$154,739
 
$146,721
 
$154,226
 
$145,860
Return on average total tangible assetsC/H1.16% 0.89% 1.12% 0.90%C/H1.17 % 1.16% 1.17% 1.12%
Return on average total tangible assets, Underlying (non-GAAP)W/H1.16
 0.89
 1.12
 0.87
W/H1.19
 1.16
 1.18
 1.12
Efficiency ratio and efficiency ratio, Underlying:                
Efficiency ratioB/A57.95% 61.94% 59.17% 61.81%B/A58.41 % 57.95% 58.70% 59.17%
Efficiency ratio, Underlying (non-GAAP)T/S57.95
 60.36
 59.17
 61.02
T/S58.02
 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)K484,744,354
 506,371,846
 486,114,872
 507,903,141
K458,154,335
 484,744,354
 459,426,685
 486,114,872
Average common shares outstanding - diluted (GAAP)L486,141,695
 507,414,122
 487,683,216
 509,362,055
L459,304,224
 486,141,695
 460,857,535
 487,683,216
Net income per average common share - basic (GAAP)D/K0.88
 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/L0.88
 0.63
 1.65
 1.24
D/L0.95
 0.88
 1.86
 1.65
Net income per average common share - basic, Underlying (non-GAAP)X/K0.88
 0.63
 1.66
 1.20
X/K0.96
 0.88
 1.89
 1.66
Net income per average common share - diluted, Underlying (non-GAAP)X/L0.88
 0.63
 1.65
 1.19
X/L0.96
 0.88
 1.88
 1.65












CITIZENS FINANCIAL GROUP, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




ITEM 1. FINANCIAL STATEMENTS


  Page
Consolidated Balance Sheets as of June 30, 20182019 (unaudited) and December 31, 20172018 (unaudited)
 
5652
Consolidated Statements of Operations (unaudited) for the Three Months and Six Months Ended June 30, 20182019 and 20172018
 
5753
Consolidated Statements of Comprehensive Income (unaudited) for the Three Months and Six Months Ended June 30, 20182019 and 20172018
 
5854
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 20182019 and 20172018
 
5955
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 20182019 and 20172018
 
6057
Notes to Consolidated Financial Statements (unaudited)
58
Note 1 - Basis of Presentation
58
Note 2 - Securities
 
61
Note 1 - Basis of Presentation
61
Note 2 - Securities
65
Note 3 - Loans and Leases
 
6964
Note 4 - Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk
 
6966
Note 5 - Mortgage Banking
75
Note 6 - Leases
77
Note 7 - Variable Interest Entities
79
Note 8 - Borrowed Funds
80
Note 9 - Derivatives
 
82
Note 610 - Variable Interest Entities
84
Note 7 - Borrowed FundsReclassifications Out of Accumulated Other Comprehensive Income (Loss)
 
85
Note 811 - DerivativesStockholders’ Equity
 
87
Note 912 - Reclassifications Out of Accumulated Other Comprehensive Income (Loss)Commitments and Contingencies
88
Note 13 - Fair Value Measurements
 
90
Note 1014 - Stockholders’ Equity
91
Note 11 - Commitments and Contingencies
92
Note 12 - Fair Value MeasurementsNoninterest Income
 
94
Note 1315 - Noninterest IncomeOther Operating Expense
 
10195
Note 14 - Other Operating Expense
103
Note 15 - Income Taxes
103
Note 16 - Earnings Per Share
 
10495
Note 17 - Regulatory MattersBusiness Operating Segments
 
105
Note 18 - Business Operating Segments
10695


CITIZENS FINANCIAL GROUP, INC.


 


CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)June 30, 2018 December 31, 2017June 30, 2019 December 31, 2018
ASSETS:      
Cash and due from banks
$997
 
$987

$996
 
$1,081
Interest-bearing cash and due from banks2,868
 2,045
2,039
 2,993
Interest-bearing deposits in banks114
 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 value170
 169
47
 181
Equity securities, at cost769
 722
706
 834
Loans held for sale, at fair value521
 497
1,750
 1,219
Other loans held for sale189
 221
455
 101
Loans and leases113,407
 110,617
116,838
 116,660
Less: Allowance for loan and lease losses(1,253) (1,236)(1,227) (1,242)
Net loans and leases112,154
 109,381
115,611
 115,418
Derivative assets224
 617
833
 317
Premises and equipment, net720
 685
740
 791
Bank-owned life insurance1,677
 1,656
1,711
 1,698
Goodwill6,887
 6,887
7,040
 6,923
Due from broker—
 6
249
 —
Other assets3,567
 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-bearing87,634
 85,810
95,812
 90,117
Total deposits117,073
 115,089
124,004
 119,575
Federal funds purchased and securities sold under agreements to repurchase326
 815
1,132
 1,156
Other short-term borrowed funds1,499
 1,856
309
 161
Derivative liabilities425
 310
106
 292
Deferred taxes, net456
 571
767
 573
Long-term borrowed funds
13,641
 11,765
11,538
 15,925
Due to broker257
 —
Other liabilities1,544
 1,660
2,619
 2,019
TOTAL LIABILITIES134,964
 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 authorized543
 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, 20176
 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, 20186
 6
Additional paid-in capital18,806
 18,781
18,860
 18,815
Retained earnings4,755
 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 value5
4
 9
8
15
5
 26
 9
Interest and fees on other loans held for sale3
2
 7
3
2
3
 6
 7
Investment securities165
154
 333
314
164
165
 330
 333
Interest-bearing deposits in banks8
5
 14
8
7
8
 15
 14
Total interest income1,411
1,205
 2,739
2,365
1,580
1,411
 3,150
 2,739
INTEREST EXPENSE:        
Deposits181
102
 326
188
308
181
 595
 326
Federal funds purchased and securities sold under agreements to repurchase1
—
 2
1
3
1
 5
 2
Other short-term borrowed funds14
7
 23
15
1
1
 1
 3
Long-term borrowed funds94
70
 176
130
102
107
 223
 196
Total interest expense290
179
 527
334
414
290
 824
 527
Net interest income1,121
1,026
 2,212
2,031
1,166
1,121
 2,326
 2,212
Provision for credit losses85
70
 163
166
97
85
 182
 163
Net interest income after provision for credit losses1,036
956
 2,049
1,865
1,069
1,036
 2,144
 2,049
NONINTEREST INCOME:        
Service charges and fees127
129
 251
254
126
127
 249
 251
Card fees60
59
 121
119
64
60
 123
 121
Capital markets fees48
51
 87
99
57
48
 111
 87
Trust and investment services fees43
39
 83
78
53
43
 100
 83
Mortgage banking fees62
27
 105
 52
Letter of credit and loan fees32
31
 62
60
33
32
 66
 62
Foreign exchange and interest rate products34
26
 61
53
35
34
 71
 61
Mortgage banking fees27
30
 52
53
Securities gains, net2
3
 10
7
4
2
 12
 10
Net impairment losses recognized in earnings on debt securities(1)(4) (2)(5)—
(1) (1) (2)
Other income16
6
 34
31
28
16
 54
 34
Total noninterest income388
370
 759
749
462
388
 890
 759
NONINTEREST EXPENSE:        
Salaries and employee benefits453
432
 923
878
507
453
 1,016
 923
Equipment and software expense126
110
 251
 223
Outside services106
96
 205
187
118
106
 228
 205
Occupancy79
79
 160
161
82
79
 165
 160
Equipment expense64
64
 131
131
Amortization of software46
45
 92
89
Other operating expense127
148
 247
272
118
127
 228
 247
Total noninterest expense875
864
 1,758
1,718
951
875
 1,888
 1,758
Income before income tax expense549
462
 1,050
896
580
549
 1,146
 1,050
Income tax expense124
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:        
Basic484,744,354
506,371,846
 486,114,872
507,903,141
458,154,335
484,744,354
 459,426,685
 486,114,872
Diluted486,141,695
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 earnings0.88
0.63
 1.65
1.24
0.95
0.88
 1.86
 1.65
Dividends declared and paid0.22
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), respectively6
(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, respectively3
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), respectively68
(13) 107
 (65)
Reclassification adjustment for net derivative losses included in net income, net of income taxes of $4, $3, $9 and $3, respectively15
6
 30
 8
Net unrealized debt securities gains (losses) arising during the periods, net of income taxes of $72, ($19), $152 and ($105), respectively221
(60) 467
 (332)
Other-than-temporary impairment not recognized in earnings on debt securities, net of income taxes of $0, $1, $0 and $0, respectively1
—
 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, respectively3
3
 6
 6
Total other comprehensive income (loss), net of income taxes305
(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 CapitalRetained EarningsTreasury Stock, at CostAccumulated Other Comprehensive LossTotal
Preferred
 Stock
 
Common
 Stock
Additional Paid-in CapitalRetained EarningsTreasury Stock, at CostAccumulated Other Comprehensive LossTotal
(in millions)SharesAmount SharesAmountSharesAmount SharesAmount
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 issued1
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, 20181

$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, 20191

$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, 20191

$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 CapitalRetained EarningsTreasury Stock, at CostAccumulated Other Comprehensive LossTotal
(in millions)SharesAmount SharesAmount
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 issued1
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, 20181

$543
 484

$6

$18,806

$4,755

($2,433)
($1,210)
$20,467
Balance at January 1, 20191

$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, 20191

$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 losses182
 163
Originations of mortgage loans held for sale(7,741) (1,345)
Proceeds from sales of mortgage loans held for sale7,148
 1,325
Purchases of commercial loans held for sale(1,076) (1,024)
Proceeds from sales of commercial loans held for sale1,198
 1,039
Depreciation, amortization and accretion275
 243
Mortgage servicing rights valuation charge-off (recovery)14
 (3)
Debt securities impairment1
 2
Deferred income taxes(10) 10
Share-based compensation32
 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 activities577
 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 sale1,625
 1,636
Proceeds from sales of debt securities available for sale1,250
 273
Proceeds from maturities and paydowns of debt securities held to maturity171
 271
Purchases of equity securities, at fair value(549) (80)
Proceeds from sales of equity securities, at fair value683
 78
Purchases of equity securities, at cost(258) (334)
Proceeds from sales of equity securities, at cost386
 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 sales31
 —
Capitalization of software(98) (116)
Net cash used in investing activities(1,288) (3,373)
FINANCING ACTIVITIES   
Net increase in deposits4,429
 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 funds147
 (2,356)
Proceeds from issuance of long-term borrowed funds4,500
 11,500
Repayments of long-term borrowed funds(9,005) (7,584)
Treasury stock purchased(320) (325)
Net proceeds from issuance of preferred stock293
 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 losses163
166
Originations of mortgage loans held for sale(1,345)(1,394)
Proceeds from sales of mortgage loans held for sale1,325
1,544
Purchases of commercial loans held for sale(1,024)(1,001)
Proceeds from sales of commercial loans held for sale1,039
946
Depreciation, amortization and accretion243
258
Mortgage servicing rights valuation recovery(3)(1)
Debt securities impairment2
5
Deferred income taxes10
(20)
Share-based compensation28
27
Net gain on sales of:  
Debt securities(10)(7)
Equity securities—
(1)
Decrease in other assets283
32
Decrease in other liabilities(109)(655)
Net cash provided by operating activities1,415
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 sale1,636
1,670
Proceeds from sales of debt securities available for sale273
407
Purchases of debt securities held to maturity—
(171)
Proceeds from maturities and paydowns of debt securities held to maturity271
277
Purchases of equity securities, at fair value(80)(174)
Proceeds from sales of equity securities, at fair value78
172
Purchases of equity securities, at cost(334)(243)
Proceeds from sales of equity securities, at cost287
409
Net decrease in interest-bearing deposits in banks78
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 deposits1,984
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 funds11,500
10,109
Repayments of long-term borrowed funds(7,584)(9,751)
Treasury stock purchased(325)(260)
Net proceeds from issuance of preferred stock296
—
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 activities2,791
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
PronouncementSummary of GuidanceEffects 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
2019
PronouncementSummary of GuidanceEffects 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)


PronouncementSummary of GuidanceEffects 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
PronouncementSummary of GuidanceEffects 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 CostGross Unrealized GainsGross Unrealized LossesFair Value Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
U.S. Treasury and other
$90

$—

$—

$90
 
$24

$—

$—

$24
State and political subdivisions5
—
—
5
 5
—
—
5
Mortgage-backed securities:         
Federal agencies and U.S. government sponsored entities20,688
163
(143)20,708
 20,211
28
(605)19,634
Other/non-agency871
28
(4)895
 236
3
(7)232
Total mortgage-backed securities, at fair value21,559
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 cost3,447
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 stock121
—
—
121
 364
—
—
364
Other equity securities8
—
—
8
 7
—
—
7
Total equity securities, at cost
$706

$—

$—

$706
 
$834

$—

$—

$834

 June 30, 2018 December 31, 2017
(in millions)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Debt Securities Available for Sale, At Fair Value         
U.S. Treasury and other
$12

$—

$—

$12
 
$12

$—

$—

$12
State and political subdivisions6
—
—
6
 6
—
—
6
Mortgage-backed securities:         
Federal agencies and U.S. government sponsored entities20,559
17
(705)19,871
 20,065
40
(277)19,828
Other/non-agency269
5
(6)268
 311
7
(7)311
Total mortgage-backed securities20,828
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-agency785
5
(3)787
 832
22
—
854
Total mortgage-backed securities4,417
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 stock299
—
—
299
 252
—
—
252
Other equity securities7
—
—
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 Less1-5 Years5-10 YearsAfter 10 YearsTotal
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-agency5
2
—
864
871
Total debt securities available for sale95
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-agency5
3
—
887
895
Total debt securities available for sale95
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 Less1-5 Years5-10 YearsAfter 10 YearsTotal
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-agency2
13
—
254
269
Total debt securities available for sale14
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-agency2
13
—
253
268
Total debt securities available for sale14
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 CostFair Value
 Amortized CostFair 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 law3,632
3,613
 3,592
3,460

 June 30, 2018 December 31, 2017
(in millions)Amortized CostFair Value
 Amortized CostFair Value
Pledged against repurchase agreements
$341

$328
 
$358

$357
Pledged against FHLB borrowed funds791
792
 839
861
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law4,136
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, 2018June 30, 2019
Less than 12 Months 12 Months or Longer TotalLess than 12 Months 12 Months or Longer Total
(dollars in millions)Number of IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized LossesNumber of IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized Losses
Federal agencies and U.S. government sponsored entities434

$14,384

($434) 155

$7,358

($430) 589

$21,742

($864)19

$882

($1) 349

$11,307

($166) 368

$12,189

($167)
Other/non-agency11
285
(3) 10
76
(6) 21
361
(9)—
—
—
 7
41
(4) 7
41
(4)
Total445

$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 IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized Losses
Federal agencies and U.S. government sponsored entities166

$4,881

($89) 429

$15,124

($648) 595

$20,005

($737)
Other/non-agency10
139
(1) 11
72
(6) 21
211
(7)
Total176

$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 IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized Losses Number of IssuesFair ValueGross Unrealized Losses
Federal agencies and U.S. government sponsored entities294

$10,163

($97) 152

$8,061

($226) 446

$18,224

($323)
Other/non-agency6
55
(1) 10
84
(6) 16
139
(7)
Total300

$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 impaired1
 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 estate13,123
 13,023
Leases2,684
 2,903
Total commercial loans and leases56,963
 56,783
Residential mortgages19,192
 18,978
Home equity loans938
 1,073
Home equity lines of credit12,266
 12,710
Home equity loans serviced by others348
 399
Home equity lines of credit serviced by others88
 104
Automobile12,000
 12,106
Education9,305
 8,900
Credit cards2,046
 1,991
Other retail3,692
 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 estate12,528
 11,308
Leases3,082
 3,161
Total commercial loans and leases54,888
 52,031
Residential mortgages17,814
 17,045
Home equity loans1,211
 1,392
Home equity lines of credit13,014
 13,483
Home equity loans serviced by others465
 542
Home equity lines of credit serviced by others124
 149
Automobile12,517
 13,204
Education8,450
 8,134
Credit cards1,877
 1,848
Other retail3,047
 2,789
Total retail loans58,519
 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 costs12
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
2020458
2021345
2022266
2023191
Thereafter273
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, 2018Three 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)
Recoveries2
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 income16
67
83
 39
124
163
22
66
88
 47
133
180
Allowance for loan and lease losses, end of period715
538
1,253
 715
538
1,253
680
547
1,227
 680
547
1,227
Reserve for unfunded lending commitments, beginning of period86
—
86
 88
—
88
84
—
84
 91
—
91
Provision for unfunded lending commitments2
—
2
 —
—
—
9
—
9
 2
—
2
Reserve for unfunded lending commitments, end of period88
—
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)
Recoveries10
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 period614
605
1,219
 614
605
1,219
Reserve for unfunded lending commitments, beginning of period93
—
93
 72
—
72
Provision for unfunded lending commitments—
—
—
 21
—
21
Reserve for unfunded lending commitments, end of period93
—
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)
Recoveries2
42
44
 8
82
90
Net charge-offs(12)(64)(76) (9)(137)(146)
Provision charged to income16
67
83
 39
124
163
Allowance for loan and lease losses, end of period715
538
1,253
 715
538
1,253
Reserve for unfunded lending commitments, beginning of period86
—
86
 88
—
88
Provision for unfunded lending commitments2
—
2
 —
—
—
Reserve for unfunded lending commitments, end of period88
—
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 evaluation56,649
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 evaluation54,462
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 evaluation739
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 evaluation741
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, 2018June 30, 2019
 Criticized  Criticized 
(in millions)Pass
Special MentionSubstandard
Doubtful
Total
Pass
Special MentionSubstandard
Doubtful
Total
Commercial
$36,576

$1,694

$754

$254

$39,278

$39,011

$1,174

$770

$201

$41,156
Commercial real estate12,044
336
119
29
12,528
12,705
377
38
3
13,123
Leases2,955
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 MentionSubstandard
Doubtful
Total
Commercial
$35,430

$1,143

$785

$204

$37,562
Commercial real estate10,706
500
74
28
11,308
Leases3,069
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 MentionSubstandard
Doubtful
Total
Commercial
$38,600

$1,231

$828

$198

$40,857
Commercial real estate12,523
412
82
6
13,023
Leases2,823
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
1-2930-5960-8990 or MoreTotal
Residential mortgages
$18,882

$129

$32

$15

$134

$19,192
Home equity loans825
73
11
5
24
938
Home equity lines of credit11,652
372
58
31
153
12,266
Home equity loans serviced by others301
26
5
3
13
348
Home equity lines of credit serviced by others60
14
2
1
11
88
Automobile10,630
1,083
201
67
19
12,000
Education9,089
166
25
13
12
9,305
Credit cards1,935
67
15
9
20
2,046
Other retail3,528
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
1-2930-5960-8990 or MoreTotal
Residential mortgages
$17,557

$104

$30

$9

$114

$17,814
Home equity loans1,083
73
8
3
44
1,211
Home equity lines of credit12,397
361
51
16
189
13,014
Home equity loans serviced by others413
27
7
2
16
465
Home equity lines of credit serviced by others98
15
3
1
7
124
Automobile11,267
977
174
47
52
12,517
Education8,274
132
21
11
12
8,450
Credit cards1,795
46
11
8
17
1,877
Other retail2,936
65
20
14
12
3,047
Total retail loans
$55,820

$1,800

$325

$111

$463

$58,519


December 31, 2017December 31, 2018
 Days Past Due Days Past Due
(in millions)Current
1-2930-5960-8990 or MoreTotal
Current
1-2930-5960-8990 or MoreTotal
Residential mortgages
$16,714

$147

$46

$18

$120

$17,045

$18,664

$131

$37

$13

$133

$18,978
Home equity loans1,212
102
20
4
54
1,392
945
75
12
3
38
1,073
Home equity lines of credit12,756
438
78
23
188
13,483
12,042
386
65
22
195
12,710
Home equity loans serviced by others477
29
10
4
22
542
355
21
7
3
13
399
Home equity lines of credit serviced by others116
21
4
1
7
149
79
15
2
1
7
104
Automobile11,596
1,273
220
55
60
13,204
10,729
1,039
207
59
72
12,106
Education7,898
160
23
12
41
8,134
8,694
159
23
13
11
8,900
Credit cards1,747
63
12
9
17
1,848
1,894
53
14
10
20
1,991
Other retail2,679
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 estate4
 7
 —
 —
Leases17
 —
 1
 —
Total commercial loans and leases219
 201
 5
 1
Residential mortgages (1)(2)
141
 136
 14
 15
Home equity loans38
 50
 —
 —
Home equity lines of credit210
 231
 —
 —
Home equity loans serviced by others16
 17
 —
 —
Home equity lines of credit serviced by others14
 15
 —
 —
Automobile62
 81
 —
 —
Education40
 38
 3
 2
Credit card20
 20
 —
 —
Other retail10
 8
 9
 7
Total retail loans551
 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 estate31
 27
 —
 3
Leases—
 —
 —
 —
Total commercial loans and leases280
 265
 3
 8
Residential mortgages (1)
119
 128
 14
 16
Home equity loans59
 72
 —
 —
Home equity lines of credit225
 233
 —
 —
Home equity loans serviced by others19
 25
 —
 —
Home equity lines of credit serviced by others17
 18
 —
 —
Automobile62
 70
 —
 —
Education40
 38
 3
 3
Credit card17
 17
 —
 —
Other retail7
 5
 6
 5
Total retail loans565
 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 leases0.19% 0.17%
Nonperforming retail loans as a percentage of total loans and leases0.47
 0.51
Nonperforming loans and leases as a percentage of total loans and leases0.66% 0.68%
    
Nonperforming commercial assets as a percentage of total assets0.13% 0.13%
Nonperforming retail assets as a percentage of total assets0.36
 0.39
Nonperforming assets as a percentage of total assets0.49% 0.52%
 June 30, 2018 December 31, 2017
Nonperforming commercial loans and leases as a percentage of total loans and leases0.25% 0.24%
Nonperforming retail loans as a percentage of total loans and leases0.50
 0.55
Total nonperforming loans and leases as a percentage of total loans and leases0.75% 0.79%
    
Nonperforming commercial assets as a percentage of total assets0.18% 0.17%
Nonperforming retail assets as a percentage of total assets0.38% 0.43%
Total nonperforming assets as a percentage of total assets0.56% 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)30-5960-89 90 or More Total
 30-5960-89 90 or More Total
Commercial
$12

$17

$51

$80
 
$85

$3

$78

$166
Commercial real estate—
6
2
8
 8
32
5
45
Leases1
—
1
2
 7
—
—
7
Total commercial loans and leases13
23
54
90
 100
35
83
218
Residential mortgages32
15
134
181
 37
13
133
183
Home equity loans11
5
24
40
 12
3
38
53
Home equity lines of credit58
31
153
242
 65
22
195
282
Home equity loans serviced by others5
3
13
21
 7
3
13
23
Home equity lines of credit serviced by others2
1
11
14
 2
1
7
10
Automobile201
67
19
287
 207
59
72
338
Education25
13
12
50
 23
13
11
47
Credit cards15
9
20
44
 14
10
20
44
Other retail30
21
16
67
 26
18
15
59
Total retail loans379
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)30-5960-89 90 or More Total
 30-5960-89 90 or More Total
Commercial
$32

$50

$78

$160
 
$26

$4

$243

$273
Commercial real estate1
5
28
34
 38
20
30
88
Leases3
—
—
3
 4
1
—
5
Total commercial loans and leases36
55
106
197
 68
25
273
366
Residential mortgages30
9
114
153
 46
18
120
184
Home equity loans8
3
44
55
 20
4
54
78
Home equity lines of credit51
16
189
256
 78
23
188
289
Home equity loans serviced by others7
2
16
25
 10
4
22
36
Home equity lines of credit serviced by others3
1
7
11
 4
1
7
12
Automobile174
47
52
273
 220
55
60
335
Education21
11
12
44
 23
12
41
76
Credit cards11
8
17
36
 12
9
17
38
Other retail20
14
12
46
 20
12
10
42
Total retail loans325
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, 2018June 30, 2019
(in millions)Impaired Loans With a Related AllowanceAllowance on Impaired LoansImpaired Loans Without a Related AllowanceUnpaid Contractual BalanceTotal Recorded Investment in Impaired LoansImpaired Loans With a Related AllowanceAllowance on Impaired LoansImpaired Loans Without a Related AllowanceUnpaid Contractual BalanceTotal Recorded Investment in Impaired Loans
Commercial
$278

$57

$113

$451

$391

$170

$34

$118

$359

$288
Commercial real estate25
5
10
49
35
—
—
26
26
26
Leases—
—
—
—
—
Total commercial loans and leases303
62
123
500
426
Total commercial loans170
34
144
385
314
Residential mortgages29
2
127
201
156
25
2
122
192
147
Home equity loans36
3
75
150
111
26
2
70
130
96
Home equity lines of credit17
1
185
247
202
23
2
178
242
201
Home equity loans serviced by others25
2
21
60
46
19
1
17
48
36
Home equity lines of credit serviced by others2
—
7
12
9
1
—
6
10
7
Automobile2
—
22
30
24
1
—
21
31
22
Education140
12
23
164
163
121
9
23
144
144
Credit cards24
7
—
25
24
26
8
1
27
27
Other retail4
1
3
9
7
3
1
3
7
6
Total retail loans279
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 AllowanceAllowance on Impaired LoansImpaired Loans Without a Related AllowanceUnpaid Contractual BalanceTotal Recorded Investment in Impaired Loans
Commercial
$186

$31

$167

$450

$353
Commercial real estate32
7
6
38
38
Total commercial loans218
38
173
488
391
Residential mortgages28
2
127
201
155
Home equity loans34
3
76
148
110
Home equity lines of credit21
1
181
244
202
Home equity loans serviced by others22
1
19
54
41
Home equity lines of credit serviced by others1
—
7
11
8
Automobile1
—
22
31
23
Education130
11
23
153
153
Credit cards24
7
1
25
25
Other retail4
1
2
8
6
Total retail loans265
26
458
875
723
Total
$483

$64

$631

$1,363

$1,114

 December 31, 2017
(in millions)Impaired Loans With a Related AllowanceAllowance on Impaired LoansImpaired Loans Without a Related AllowanceUnpaid Contractual BalanceTotal Recorded Investment in Impaired Loans
Commercial
$183

$42

$159

$403

$342
Commercial real estate25
5
3
40
28
Leases—
—
—
—
—
Total commercial loans and leases208
47
162
443
370
Residential mortgages25
2
126
197
151
Home equity loans41
4
80
162
121
Home equity lines of credit16
1
181
241
197
Home equity loans serviced by others29
2
22
67
51
Home equity lines of credit serviced by others2
—
7
14
9
Automobile2
—
21
30
23
Education154
17
21
175
175
Credit cards24
7
1
25
25
Other retail5
1
4
10
9
Total retail loans298
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 20172019 2018
(in millions)Interest Income RecognizedAverage Recorded Investment Interest Income RecognizedAverage Recorded InvestmentInterest Income RecognizedAverage Recorded Investment Interest Income RecognizedAverage Recorded Investment
Commercial
$2

$332
 
$1

$431

$2

$310
 
$2

$332
Commercial real estate—
36
 —
38
1
27
 —
36
Leases—
—
 —
—
Total commercial loans and leases2
368
 1
469
Total commercial loans3
337
 2
368
Residential mortgages2
152
 2
182
2
145
 2
152
Home equity loans1
112
 1
141
1
97
 1
112
Home equity lines of credit2
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
Education2
165
 2
146
2
145
 2
165
Credit cards1
24
 1
25
1
25
 1
24
Other retail—
8
 —
10
—
6
 —
8
Total retail loans8
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 RecognizedAverage Recorded Investment Interest Income RecognizedAverage Recorded Investment
Commercial
$5

$304
 
$4

$311
Commercial real estate1
27
 —
32
Total commercial loans6
331
 4
343
Residential mortgages3
142
 3
149
Home equity loans3
97
 3
112
Home equity lines of credit4
193
 4
192
Home equity loans serviced by others1
37
 1
47
Home equity lines of credit serviced by others—
7
 —
9
Automobile—
21
 —
21
Education4
145
 4
165
Credit cards1
24
 1
23
Other retail—
6
 —
8
Total retail loans16
672
 16
726
Total
$22

$1,003
 
$20

$1,069
 Six Months Ended June 30,
 2018 2017
(in millions)Interest Income RecognizedAverage Recorded Investment Interest Income RecognizedAverage Recorded Investment
Commercial
$4

$311
 
$2

$414
Commercial real estate—
32
 —
41
Leases—
—
 —
—
Total commercial loans and leases4
343
 2
455
Residential mortgages3
149
 3
178
Home equity loans3
112
 3
140
Home equity lines of credit4
192
 3
197
Home equity loans serviced by others1
47
 2
54
Home equity lines of credit serviced by others—
9
 —
9
Automobile—
21
 —
18
Education4
165
 4
146
Credit cards1
23
 1
24
Other retail—
8
 —
10
Total retail loans16
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
Retail686
 723
Unfunded commitments related to TDRs70
 30
(in millions)June 30, 2018 December 31, 2017
Commercial
$244
 
$129
Retail742
 761
Unfunded commitments tied to TDRs35
 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 TypesPrimary Modification Types
Interest Rate Reduction (1)
 
Maturity Extension (2)
Interest Rate Reduction1
 
Maturity Extension2
 
Other3
(dollars in millions)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of ContractsRecorded Investment Number of ContractsRecorded Investment Number of ContractsRecorded Investment
Commercial4

$1

$1
 4

$—

$—
1

$—
 7

$—
 6

$47
Commercial real estate—
—
—
 —
—
—
—
—
 1
—
 —
—
Leases—
—
—
 —
—
—
Total commercial loans and leases4
1
1
 4
—
—
Total commercial loans1
—
 8
—
 6
47
Residential mortgages16
1
2
 23
3
3
9
2
 10
1
 32
5
Home equity loans11
1
1
 1
—
—
6
1
 —
—
 18
1
Home equity lines of credit13
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 others2
—
—
 1
—
—
—
—
 —
—
 2
—
Automobile41
1
1
 16
—
—
40
1
 7
—
 335
5
Education—
—
—
 —
—
—
—
—
 —
—
 13
1
Credit cards559
3
3
 —
—
—
941
5
 —
—
 141
—
Other retail—
—
—
 —
—
—
—
—
 —
—
 2
—
Total retail loans642
7
8
 88
9
9
1,039
13
 32
4
 623
17
Total646

$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 ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Net Change to ALLL Resulting from ModificationCharge-offs Resulting from ModificationNumber of ContractsRecorded Investment Number of ContractsRecorded Investment Number of ContractsRecorded Investment
Commercial17

$59

$59
 
$—

$—
4

$1
 4

$—
 17

$59
Commercial real estate2
31
31
 —
—
—
—
 —
—
 2
31
Leases—
—
—
 —
—
Total commercial loans and leases19
90
90
 —
—
Total commercial loans4
1
 4
—
 19
90
Residential mortgages33
4
5
 —
—
16
2
 23
3
 33
5
Home equity loans34
1
1
 —
—
11
1
 1
—
 34
1
Home equity lines of credit113
8
7
 —
—
13
1
 47
6
 113
7
Home equity loans serviced by others8
—
—
 —
—
—
—
 —
—
 8
—
Home equity lines of credit serviced by others2
—
—
 —
—
2
—
 1
—
 2
—
Automobile309
5
5
 —
1
41
1
 16
—
 309
5
Education139
3
3
 —
—
—
—
 —
—
 139
3
Credit cards—
—
—
 1
—
559
3
 —
—
 —
—
Other retail—
—
—
 —
—
—
—
 —
—
 —
—
Total retail loans638
21
21
 1
1
642
8
 88
9
 638
21
Total657

$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 ContractsRecorded Investment Number of ContractsRecorded Investment Number of ContractsRecorded Investment
Commercial1

$—
 12

$1
 18

$87
Commercial real estate—
—
 1
—
 —
—
Total commercial loans1
—
 13
1
 18
87
Residential mortgages13
4
 21
3
 62
9
Home equity loans13
1
 —
—
 45
2
Home equity lines of credit72
8
 50
9
 182
12
Home equity loans serviced by others—
—
 —
—
 7
1
Home equity lines of credit serviced by others—
—
 —
—
 4
—
Automobile65
1
 12
—
 624
9
Education—
—
 —
—
 80
3
Credit cards1,557
9
 —
—
 141
—
Other retail—
—
 —
—
 3
—
Total retail loans1,720
23
 83
12
 1,148
36
Total1,721

$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 ContractsRecorded Investment Number of ContractsRecorded Investment Number of ContractsRecorded Investment
Commercial5

$1
 10

$1
 35

$134
Commercial real estate—
—
 1
—
 2
31
Total commercial loans5
1
 11
1
 37
165
Residential mortgages23
3
 30
4
 86
11
Home equity loans22
2
 1
—
 66
3
Home equity lines of credit28
2
 89
11
 206
14
Home equity loans serviced by others1
—
 —
—
 15
—
Home equity lines of credit serviced by others4
—
 1
—
 5
—
Automobile77
2
 33
1
 578
9
Education—
—
 —
—
 251
4
Credit cards1,153
6
 —
—
 —
—
Other retail1
—
 —
—
 4
—
Total retail loans1,309
15
 154
16
 1,211
41
Total1,314

$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 ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial2

$—

$—
 11

$13

$13
Commercial real estate—
—
—
 —
—
—
Leases—
—
—
 —
—
—
Total commercial loans and leases2
—
—
 11
13
13
Residential mortgages25
4
3
 25
5
5
Home equity loans22
1
2
 —
—
—
Home equity lines of credit14
—
—
 67
9
9
Home equity loans serviced by others5
—
—
 —
—
—
Home equity lines of credit serviced by others2
—
—
 —
—
—
Automobile25
—
—
 7
—
—
Education—
—
—
 —
—
—
Credit cards624
4
4
 —
—
—
Other retail—
—
—
 —
—
—
Total retail loans717
9
9
 99
14
14
Total719

$9

$9
 110

$27

$27
 Primary Modification Types   
 
Other (3)
   
(dollars in millions)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Net Change to ALLL Resulting from ModificationCharge-offs Resulting from Modification
Commercial4

$32

$31
 
$1

$—
Commercial real estate—
—
—
 —
—
Leases—
—
—
 —
—
Total commercial loans and leases4
32
31
 1
—
Residential mortgages44
6
6
 —
—
Home equity loans42
2
2
 —
—
Home equity lines of credit112
8
7
 —
—
Home equity loans serviced by others16
—
—
 —
—
Home equity lines of credit serviced by others2
—
—
 —
—
Automobile349
6
6
 —
1
Education7
1
1
 1
—
Credit cards—
—
—
 1
—
Other retail2
—
—
 (1)—
Total retail loans574
23
22
 1
1
Total578

$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 ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial5

$1

$1
 10

$1

$1
Commercial real estate—
—
—
 1
—
—
Leases—
—
—
 —
—
—
Total commercial loans and leases5
1
1
 11
1
1
Residential mortgages23
2
3
 30
4
4
Home equity loans22
2
2
 1
—
—
Home equity lines of credit28
2
2
 89
11
11
Home equity loans serviced by others1
—
—
 —
—
—
Home equity lines of credit serviced by others4
—
—
 1
—
—
Automobile77
2
2
 33
1
1
Education—
—
—
 —
—
—
Credit cards1,153
6
6
 —
—
—
Other retail1
—
—
 —
—
—
Total retail loans1,309
14
15
 154
16
16
Total1,314

$15

$16
 165

$17

$17
 Primary Modification Types   
 
Other (3)
   
(dollars in millions)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Net Change to ALLL Resulting from ModificationCharge-offs Resulting from Modification
Commercial35

$133

$134
 
$—

$—
Commercial real estate2
31
31
 —
—
Leases—
—
—
 —
—
Total commercial loans and leases37
164
165
 —
—
Residential mortgages86
10
11
 —
—
Home equity loans66
3
3
 —
—
Home equity lines of credit206
15
14
 —
—
Home equity loans serviced by others15
—
—
 —
—
Home equity lines of credit serviced by others5
—
—
 —
—
Automobile578
10
9
 —
2
Education251
4
4
 —
—
Credit cards—
—
—
 2
—
Other retail4
—
—
 —
—
Total retail loans1,211
42
41
 2
2
Total1,248

$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 ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial4

$1

$1
 18

$14

$14
Commercial real estate—
—
—
 —
—
—
Leases—
—
—
 —
—
—
Total commercial loans and leases4
1
1
 18
14
14
Residential mortgages43
5
5
 36
8
8
Home equity loans43
2
3
 1
—
—
Home equity lines of credit30
1
1
 118
15
15
Home equity loans serviced by others11
1
1
 —
—
—
Home equity lines of credit serviced by others3
—
—
 2
—
—
Automobile65
1
1
 15
—
—
Education—
—
—
 —
—
—
Credit cards1,189
7
7
 —
—
—
Other retail1
—
—
 —
—
—
Total retail loans1,385
17
18
 172
23
23
Total1,389

$18

$19
 190

$37

$37
 Primary Modification Types   
 
Other (3)
   
(dollars in millions)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment Net Change to ALLL Resulting from ModificationCharge-offs Resulting from Modification
Commercial4

$32

$31
 
$1

$—
Commercial real estate—
—
—
 —
—
Leases1
4
4
 —
—
Total commercial loans and leases5
36
35
 1
—
Residential mortgages92
10
10
 —
—
Home equity loans144
8
8
 —
—
Home equity lines of credit187
14
13
 —
—
Home equity loans serviced by others30
1
1
 —
—
Home equity lines of credit serviced by others13
1
1
 —
—
Automobile625
11
10
 —
2
Education22
2
2
 1
—
Credit cards—
—
—
 2
—
Other retail3
—
—
 (1)—
Total retail loans1,116
47
45
 2
2
Total1,121

$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 ContractsBalance Defaulted Number of ContractsBalance Defaulted Number of ContractsBalance Defaulted Number of ContractsBalance Defaulted
Commercial3

$17
 4

$1
 6

$20
 5

$1
Commercial real estate1
—
 —
—
 1
—
 1
4
Leases—
—
 —
—
 —
—
 —
—
Total commercial loans and leases4
17
 4
1
 7
20
 6
5
Residential mortgages44
5
 41
4
 70
8
 86
10
Home equity loans7
—
 14
1
 18
1
 23
1
Home equity lines of credit40
3
 65
4
 106
8
 100
7
Home equity loans serviced by others5
—
 9
—
 10
—
 10
—
Home equity lines of credit serviced by others—
—
 1
—
 1
—
 4
—
Automobile30
1
 27
1
 76
1
 61
1
Education7
1
 9
—
 12
1
 16
—
Credit cards102
—
 102
1
 221
1
 228
2
Other retail—
—
 —
—
 —
—
 2
—
Total retail loans235
10
 268
11
 514
20
 530
21
Total239

$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, 2018June 30, 2019
(in millions)Residential MortgagesHome Equity Loans and Lines of CreditHome Equity Products Serviced by OthersCredit Cards
Education
Total
Residential MortgagesHome Equity Loans and Lines of CreditHome Equity Products Serviced by OthersCredit Cards
Total
High loan-to-value
$430

$145

$205

$—

$—

$780

$441

$78

$125

$—

$644
Interest-only/negative amortization1,770
—
—
—
—
1,770
1,765
—
—
—
1,765
Low introductory rate—
—
—
197
—
197
—
—
—
221
221
Multiple characteristics and other1
—
—
—
—
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 MortgagesHome Equity Loans and Lines of CreditHome Equity Products Serviced by OthersCredit Cards
Education
Total
High loan-to-value
$318

$87

$148

$—

$—

$553
Interest-only/negative amortization1,794
—
—
—
1
1,795
Low introductory rate—
—
—
217
—
217
Multiple characteristics and other1
—
—
—
—
1
Total
$2,113

$87

$148

$217

$1

$2,566

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 December 31, 2017
(in millions)Residential MortgagesHome Equity Loans and Lines of CreditHome Equity Products Serviced by OthersCredit Cards
Education
Total
High loan-to-value
$366

$166

$264

$—

$—

$796
Interest-only/negative amortization1,763
—
—
—
1
1,764
Low introductory rate—
—
—
197
—
197
Multiple characteristics and other1
—
—
—
—
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 related
CITIZENS 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 sales17
 19
30
 29
Mortgage servicing fees16
 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 capitalized8
 8
 15
 18
Purchases16
 —
 16
 —
Amortization(8) (8) (15) (16)
Carrying amount before valuation allowance217
 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 allowance203
 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 period14
 —
 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 capitalized57
 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$254MinMax $218MinMax
Weighted average life (in years)6.42.48.7 5.92.38.4
Weighted average constant prepayment rate9.4%6.0%20.8% 10.0%6.6%20.1%
Weighted average discount rate9.8%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 rate7.6% 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 rates47
 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 rate9
 8
 June 30, 2019 December 31, 2018
 ActualDecline in fair value due to ActualDecline in fair value due to
(dollars in millions) 
Fair value$19350 bps adverse change100 bps adverse change $24350 bps adverse change100 bps adverse change
Weighted average life (in years)5.5 6.5
Weighted average constant prepayment rate11.6%$29$54 8.5%$24$56
Weighted average discount rate9.3%47 9.3%59

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
 ActualDecline in fair value due to ActualDecline in fair value due to
(dollars in millions) 
Fair value$53150 bps adverse change100 bps adverse change $60050 bps adverse change100 bps adverse change
Weighted average life (in years)5.5 8.0
Weighted average constant prepayment rate13.8%$117$241 8.2%$68$148
Weighted average option adjusted spread434 bps1021 609 bps1326

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 cost3
 6
Variable lease cost2
 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, 2019Affected Line Item in Consolidated Balance Sheets
Operating lease right-of-use assets
$732
Other assets
Operating lease liabilities750
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 liabilities72

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 millionsOperating Leases
2019
$69
2020160
2021143
2022118
202393
Thereafter262
Total lease payments845
Less interest95
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 liabilities659
 673
Renewable energy investments included in other assets311
 319
Lending to special purpose entities included in loans and leases848
 613
(in millions)June 30, 2018 December 31, 2017
LIHTC investment included in other assets
$1,057
 
$951
LIHTC unfunded commitments included in other liabilities548
 491
Renewable energy investments included in other assets326
 335
Lending to special purpose entities included in loans and leases354
 —

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 expense35
 28
 72
 55
Other tax benefits included in income tax expense8
 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 expense28
 22
 55
 45
Other tax benefits included in income tax expense6
 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 repurchase292
 336
Other short-term borrowed funds309
 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 repurchase326
 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 repurchase1.93% —% 1.93% —% 1.72%
Other short-term borrowed funds2.47
 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 funds508
 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 funds45
 191
 52
 388
 467
Weighted-average interest rate during the period:(1)
         
Federal funds purchased and securities sold under agreements to repurchase1.76% 0.71% 1.54% 0.68% 0.92%
Other short-term borrowed funds2.66
 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 funds2.41
 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 funds2,247
 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 funds1,677
 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 repurchase0.71% 0.36% 0.68% 0.28% 0.36%
Other short-term borrowed funds2.49
 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 2022348
 348
3.750% fixed-rate subordinated debt, due July 2024250
 250
4.023% fixed-rate subordinated debt, due October 202442
 42
4.350% fixed-rate subordinated debt, due August 2025249
 249
4.300% fixed-rate subordinated debt, due December 2025750
 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 20382,258
 7,508
Other17
 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 2022348
 348
5.158% fixed-to-floating rate callable subordinated debt, due 2023(1)
—
 333
3.750% fixed-rate subordinated debt, due 2024250
 250
4.023% fixed-rate subordinated debt, due 202442
 42
4.350% fixed-rate subordinated debt, due 2025249
 249
4.300% fixed-rate subordinated debt, due 2025749
 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 20386,010
 3,761
Other12
 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 CompanyBanking and Other SubsidiariesConsolidated
Year   
2019
$—

$747

$747
2020—
4,748
4,748
2021349
992
1,341
2022348
1,766
2,114
2023—
768
768
2024 and thereafter1,291
529
1,820
Total
$1,988

$9,550

$11,538
(in millions)Parent CompanyBanking SubsidiariesConsolidated
Year   
2019
$—

$6,743

$6,743
2020—
2,471
2,471
2021349
954
1,303
2022348
734
1,082
2023—
745
745
2024 and thereafter1,290
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, 2017June 30, 2019 December 31, 2018
(in millions)
Notional Amount(1)
Derivative AssetsDerivative Liabilities 
Notional Amount(1)
Derivative AssetsDerivative Liabilities
Notional Amount(1)
Derivative AssetsDerivative Liabilities 
Notional Amount(1)
Derivative AssetsDerivative 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 contracts99,182
202
435
 80,180
538
379
133,570
808
127
 117,076
301
277
Foreign exchange contracts10,320
143
126
 9,882
148
149
13,431
132
116
 9,866
129
113
Other contracts1,343
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 2018Affected 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 hedged16
 —
 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, 2017June 30, 2019
(in millions)DerivativeHedged ItemHedge Ineffectiveness DerivativeHedged ItemHedge IneffectivenessResidential mortgagesLong-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)DerivativeHedged ItemHedge Ineffectiveness DerivativeHedged ItemHedge 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 expense1
 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 risk54
 92
 94
 75
Foreign exchange and interest rate products
Residential loan commitments11
 1
 16
 —
Mortgage banking fees
Forward sale contracts(9) (2) (5) (2)Mortgage banking fees
Interest rate derivative contracts used to hedge residential MSRs71
 —
 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, 2018Balance at April 1, 2018
($193) 
($514) 
($438) 
($1,145)
Other comprehensive loss before reclassificationsOther comprehensive loss before reclassifications(13) (60) —
 (73)
Other-than-temporary impairment not recognized in earnings on debt securitiesOther-than-temporary impairment not recognized in earnings on debt securities—
 —
 —
 —
Amounts reclassified to the Consolidated Statements of OperationsAmounts reclassified to the Consolidated Statements of Operations6
 (1) 3
 8
Net other comprehensive (loss) incomeNet other comprehensive (loss) income(7) (61) 3
 (65)
Balance at June 30, 2018Balance at June 30, 2018
($200) 
($575) 
($435) 
($1,210)
Balance at April 1, 2019Balance at April 1, 2019
($89) 
($244) 
($460) 
($793)
Other comprehensive income before reclassificationsOther comprehensive income before reclassifications26
 56
 —
 82
Other comprehensive income before reclassifications68
 221
 —
 289
Other-than-temporary impairment not recognized in earnings on debt securitiesOther-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 OperationsAmounts reclassified to the Consolidated Statements of Operations(5) 1
 2
 (2)Amounts reclassified to the Consolidated Statements of Operations15
 (3) 3
 15
Net other comprehensive incomeNet other comprehensive income21
 67
 2
 90
Net other comprehensive income83
 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 Operations6
 (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, 2019Balance 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 Operations8
 (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 reclassifications107
 467
 —
 574
Other-than-temporary impairment not recognized in earnings on debt securities—
 1
 —
 1
Amounts reclassified to the Consolidated Statements of Operations30
 (8) 6
 28
Net other comprehensive income137
 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 reclassifications23
 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 income12
 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 Operations8
 (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 losses97
 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 expense580
 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 losses85
 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 expense549
 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 B1,000
 300,000 296
 300,000
 296
Series C1,000
 300,000
 297
 300,000
 297
Series D1,000
(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 DateNumber of Shares Outstanding
Dividend Dates(2)
Annual Per Share Dividend Rate
Optional Redemption Date(3)
Series AApril 6, 2015250,000Semi-annually beginning October 6, 2015 until April 6, 20205.500% until April 6, 2020April 6, 2020
Quarterly beginning July 6, 20203 Mo. LIBOR plus 3.960% beginning April 6, 2020
Series BMay 24, 2018300,000Semi-annually beginning January 6, 2019 until July 6, 20236.000% until July 6, 2023July 6, 2023
Quarterly beginning October 6, 20233 Mo. LIBOR plus 3.003% beginning July 6, 2023
Series COctober 25, 2018300,000Quarterly beginning January 6, 2019 until April 6, 20246.375% until April 6, 2024April 6, 2024
Quarterly beginning July 6, 20243 Mo. LIBOR plus 3.157% beginning April 6, 2024
Series DJanuary 29, 2019
300,000(4)
Quarterly beginning April 6, 2019 until April 6, 20246.350% until April 6, 2024April 6, 2024
Quarterly beginning July 6, 20243 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 $1,000
CITIZENS 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 ShareDividends DeclaredDividends Paid Dividends Declared per ShareDividends DeclaredDividends 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 ShareDividends DeclaredDividends Paid Dividends Declared per ShareDividends DeclaredDividends 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 credit2,252
 2,125
Marketing rights35
 37
Risk participation agreements41
 19
Loans sold with recourse23
 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 credit1,974
 2,036
Performance letters of credit120
 47
Commercial letters of credit56
 53
Marketing rights39
 41
Risk participation agreements14
 16
Residential mortgage loans sold with recourse6
 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 2018Affected 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 value1
 (1) 4
 —
Other income

 June 30, 2018 December 31, 2017
(in millions)Aggregate Fair ValueAggregate Unpaid PrincipalAggregate Fair Value Less Aggregate Unpaid Principal Aggregate Fair ValueAggregate Unpaid PrincipalAggregate 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 value156
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 subdivisions5
—
5
—
U.S. Treasury and other90
90
—
—
Total debt securities available for sale
21,698
90
21,608
—
Loans held for sale, at fair value:    
Residential loans held for sale1,615
—
1,615
—
Commercial loans held for sale135
—
135
—
Total loans held for sale, at fair value1,750
—
1,750
—
Mortgage servicing rights531
—
—
531
Derivative assets:    
Interest rate contracts808
—
808
—
Foreign exchange contracts132
—
132
—
Other contracts29
—
4
25
Total derivative assets969
—
944
25
Equity securities, at fair value:    
Money market mutual fund investments47
47
—
—
Total equity securities, at fair value47
47
—
—
Total assets
$24,995

$137

$24,302

$556
Derivative liabilities:    
Interest rate contracts
$130

$—

$130

$—
Foreign exchange contracts116
—
116
—
Other contracts34
—
34
—
Total derivative liabilities280
—
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 subdivisions6
—
6
—
U.S. Treasury and other12
12
—
—
Total debt securities available for sale
20,157
12
20,145
—
Loans held for sale, at fair value:    
Residential loans held for sale365
—
365
—
Commercial loans held for sale156
—
156
—
Total loans held for sale, at fair value521
—
521
—
Derivative assets:    
Interest rate swaps206
—
206
—
Foreign exchange contracts143
—
143
—
Other contracts8
—
8
—
Total derivative assets357
—
357
—
Equity securities, at fair value:    
Money market mutual fund investments170
170
—
—
Other investments—
—
—
—
Total equity securities, at fair value170
170
—
—
Total assets
$21,205

$182

$21,023

$—
Derivative liabilities:    
Interest rate swaps
$436

$—

$436

$—
Foreign exchange contracts126
—
126
—
Other contracts6
—
6
—
Total derivative liabilities568
—
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 subdivisions5
—
5
—
U.S. Treasury and other24
24
—
—
Total debt securities available for sale19,895
24
19,871
—
Loans held for sale, at fair value:    
Residential loans held for sale967
—
967
—
Commercial loans held for sale252
—
252
—
Total loans held for sale, at fair value1,219
—
1,219
—
Mortgage servicing rights600
—
—
600
Derivative assets:    
Interest rate contracts306
—
306
—
Foreign exchange contracts129
—
129
—
Other contracts14
—
14
—
Total derivative assets449
—
449
—
Equity securities, at fair value:    
Money market mutual fund investments181
181
—
—
Total equity securities, at fair value181
181
—
—
Total assets
$22,344

$205

$21,539

$600
Derivative liabilities:    
Interest rate contracts
$277

$—

$277

$—
Foreign exchange contracts113
—
113
—
Other contracts25
—
25
—
Total derivative liabilities415
—
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 subdivisions6
—
6
—
U.S. Treasury and other12
12
—
—
Total debt securities available for sale20,157
12
20,145
—
Loans held for sale, at fair value:    
Residential loans held for sale326
—
326
—
Commercial loans held for sale171
—
171
—
Total loans held for sale, at fair value497
—
497
—
Derivative assets:    
Interest rate swaps538
—
538
—
Foreign exchange contracts148
—
148
—
Other contracts7
—
7
—
Total derivative assets693
—
693
—
Equity securities, at fair value:    
Money market mutual fund investments165
165
—
—
Other investments4
—
4
—
Total equity securities, at fair value169
165
4
—
Total assets
$21,516

$177

$21,339

$—
Derivative liabilities:    
Interest rate swaps
$379

$—

$379

$—
Foreign exchange contracts149
—
149
—
Other contracts5
—
5
—
Total derivative liabilities533
—
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
 
$—
Issuances57
 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

$—
MSRs193
—
—
193
 243
—
—
243
Foreclosed assets27
—
27
—
 29
—
29
—
Leased assets61
—
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

$—
MSRs254
—
—
254
 218
—
—
218
Foreclosed assets25
—
25
—
 31
—
31
—
Leased assets108
—
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, 2018June 30, 2019
Total Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3
(in millions)Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated 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 cost769
769
 —
—
 769
769
 —
—
706
706
 —
—
 706
706
 —
—
Other loans held for sale189
189
 —
—
 —
—
 189
189
455
455
 —
—
 —
—
 455
455
Loans and leases113,407
112,637
 —
—
 408
408
 112,999
112,229
116,838
117,494
 —
—
 300
300
 116,538
117,194
Financial Liabilities:       
Financial liabilities:       
Deposits117,073
116,907
 —
—
 117,073
116,907
 —
—
124,004
124,028
 —
—
 124,004
124,028
 —
—
Federal funds purchased and securities sold under agreements to repurchase326
326
 —
—
 326
326
 —
—
1,132
1,132
 —
—
 1,132
1,132
 —
—
Other short-term borrowed funds1,499
1,499
 —
—
 1,499
1,499
 —
—
309
309
 —
—
 309
309
 —
—
Long-term borrowed funds13,641
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 ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value
Financial assets:           
Securities held to maturity
$4,165

$4,041
 
$—

$—
 
$4,165

$4,041
 
$—

$—
Equity securities, at cost834
834
 —
—
 834
834
 —
—
Other loans held for sale101
101
 —
—
 —
—
 101
101
Loans and leases116,660
116,627
 —
—
 338
338
 116,322
116,289
Financial liabilities:           
Deposits119,575
119,503
 —
—
 119,575
119,503
 —
—
Federal funds purchased and securities sold under agreements to repurchase1,156
1,156
 —
—
 1,156
1,156
 —
—
Other short-term borrowed funds161
161
 —
—
 161
161
 —
—
Long-term borrowed funds15,925
15,877
 —
—
 15,925
15,877
 —
—
 December 31, 2017
 Total Level 1 Level 2 Level 3
(in millions)Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value Carrying ValueEstimated Fair Value
Financial Assets:           
Securities held to maturity
$4,685

$4,668
 
$—

$—
 
$4,685

$4,668
 
$—

$—
Equity securities, at cost722
722
 —
—
 722
722
 —
—
Other loans held for sale221
221
 —
—
 —
—
 221
221
Loans and leases110,617
111,168
 —
—
 393
393
 110,224
110,775
Financial Liabilities:           
Deposits115,089
115,039
 —
—
 115,089
115,039
 —
—
Federal funds purchased and securities sold under agreements to repurchase815
815
 —
—
 815
815
 —
—
Other short-term borrowed funds1,856
1,856
 —
—
 1,856
1,856
 —
—
Long-term borrowed funds11,765
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, 2018Six Months Ended June 30, 2018
Revenue from contracts with customers
$283

$548
Revenue from other sources105
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, 2018Six Months Ended June 30, 2018Three Months Ended June 30, 2019 Three Months Ended June 30, 2018
(in millions)Consumer BankingCommercial Banking
Consolidated (1)
Consumer BankingCommercial Banking
Consolidated (1)
Consumer BankingCommercial Banking
Consolidated (1)
 Consumer BankingCommercial Banking
Consolidated (1)
Service charges and fees
$100

$27

$127

$198

$53

$251

$99

$26

$125
 
$100

$27

$127
Card fees51
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 fees43
—
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 BankingCommercial Banking
Consolidated (1)
 Consumer BankingCommercial Banking
Consolidated (1)
Service charges and fees
$196

$52

$248
 
$198

$53

$251
Card fees105
18
123
 103
18
121
Capital markets fees—
102
102
 —
88
88
Trust and investment services fees100
—
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 expense28
 34
 55
 59
Settlements and operating losses9
 12
 20
 24
Other65
 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 expense34
 29
 59
 55
Settlements and operating losses12
 12
 24
 25
Other53
 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 dividends18
 —
 33
 7
Net income available to common stockholders
$435
 
$425
 
$859
 
$806
Denominator:       
Weighted-average common shares outstanding - basic458,154,335
 484,744,354
 459,426,685
 486,114,872
Dilutive common shares: share-based awards1,149,889
 1,397,341
 1,430,850
 1,568,344
Weighted-average common shares outstanding - diluted459,304,224
 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 - basic484,744,354
 506,371,846
 486,114,872
 507,903,141
Dilutive common shares: share-based awards1,397,341
 1,042,276
 1,568,344
 1,458,914
Weighted-average common shares outstanding - diluted486,141,695
 507,414,122
 487,683,216
 509,362,055
Earnings per common share:       
Basic
$0.88
 
$0.63
 
$1.66
 
$1.24
Diluted0.88
 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 income277
 149
 36
 462
Total revenue1,076
 520
 32
 1,628
Noninterest expense715
 217
 19
 951
Profit before provision for credit losses361
 303
 13
 677
Provision for credit losses78
 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 income228
 140
 20
 388
Total revenue987
 516
 6
 1,509
Noninterest expense658
 200
 17
 875
Profit (loss) before provision for credit losses329
 316
 (11) 634
Provision for credit losses66
 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, 2017As of and for the Six Months Ended June 30, 2019
(in millions)Consumer Banking Commercial Banking Other ConsolidatedConsumer Banking Commercial Banking Other Consolidated
Net interest income
$657
 
$344
 
$25
 
$1,026

$1,587
 
$743
 
($4) 
$2,326
Noninterest income229
 130
 11
 370
524
 299
 67
 890
Total revenue886
 474
 36
 1,396
2,111
 1,042
 63
 3,216
Noninterest expense644
 192
 28
 864
1,415
 426
 47
 1,888
Profit before provision for credit losses242
 282
 8
 532
696
 616
 16
 1,328
Provision for credit losses60
 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 income450
 265
 44
 759
Total revenue1,942
 998
 31
 2,971
Noninterest expense1,314
 408
 36
 1,758
Profit (loss) before provision for credit losses628
 590
 (5) 1,213
Provision for credit losses138
 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 income450
 265
 44
 759
Total revenue1,942
 998
 31
 2,971
Noninterest expense1,314
 408
 36
 1,758
Profit (loss) before provision for credit losses628
 590
 (5) 1,213
Provision for credit losses138
 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 income449
 264
 36
 749
Total revenue1,744
 954
 82
 2,780
Noninterest expense1,291
 382
 45
 1,718
Profit before provision for credit losses453
 572
 37
 1,062
Provision for credit losses124
 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:
PeriodTotal Number of Shares RepurchasedWeighted 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, 20182,825,172$41.682,825,172$32,256,438
May 1, 2018 - May 31, 2018—$——$32,256,438
June 1, 2018 - June 30, 2018773,970$41.68773,970$—
PeriodTotal Number of Shares RepurchasedWeighted 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, 20192,802,198$34.642,802,198$22,919,251
May 1, 2019 - May 31, 2019661,55534.64661,555$—
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


3.1 Amended and Restated Certificate of Incorporation of the Registrant as in effect on the date hereof (incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q, filed May 8, 2015)


3.2 Certificate of Designations of the Registrant with respect to the Series B Preferred Stock, dated May 22, 2018, filed with the Secretary of State of the State of Delaware and effective May 22, 2018 (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed May 24, 2018)


3.3 BylawsCertificate of Designations of the Registrant (as amendedwith respect to the Series C Preferred Stock, dated October 24, 2018, filed with the Secretary of State of the State of Delaware and restated oneffective October 20, 2016)24, 2018 (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed October 24, 2016)25, 2018)


4.13.4 Certificate of Designations of the Registrant with respect to the Series BD Preferred Stock, dated May 22, 2018,January 23, 2019, filed with the Secretary of State of the State of Delaware and effective May 22, 2018 (filed herewith as Exhibit 3.2)

4.2 Form of certificate representing the Series B Preferred StockJanuary 23, 2019 (incorporated herein by reference to Exhibit 4.23.4 to the Registration Statement on Form 8-A, filed January 29, 2019)

3.5 Bylaws of the Registrant (as amended and restated on June 20, 2019) (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed May 24, 2018)June 21, 2019)


10.1 Executive Employment Agreement, dated June 18, 2018, between the RegistrantCitizens Financial Group, Inc. Non-Employee Directors Compensation Policy, amended and C. Jack Read†effective as of April 25, 2019†*


11.1 Statement re: computation10.2 Amended and Restated Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan, as of earnings per share (filed herewith as Note 16 “Earnings Per Share” to the unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements of this report, which is incorporated herein by reference)June 20, 2019†*


12.1 Computation of Ratio of Earnings to Fixed Charges*
CITIZENS FINANCIAL GROUP, INC.



12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends*

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*


31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*


32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

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*


† 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.


CITIZENS FINANCIAL GROUP, INC.
(Registrant)
  
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)




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