Companies: 10,652     total market cap: $140.524 T
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Citizens Financial Group
CFG
#897
Rank
$27.72 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$64.56
Share price
-0.33%
Change (1 day)
42.69%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
Citizens Financial Group, Inc. is an American bank operating more than 1,200 branches and approximately 3,200 ATMs.
  1. Citizens Financial Group
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q3

Citizens Financial Group - 10-Q quarterly report FY2019 Q3


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
September 30, 2019
☐ 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, RI 02903
(Address of principal executive offices, including zip code)
(401) 456-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
CFG
New York Stock Exchange
Depositary Shares, representing 6.350% Non-Cumulative Perpetual Preferred Stock, Series D
CFG PrD
New York Stock Exchange
Depositary Shares, representing 5.000% Non-Cumulative Perpetual Preferred Stock, Series E
CFG PrE
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
☑ 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
☑
Accelerated filer
☐
Non-accelerated filer
☐
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 ☑ No
There were 434,718,941 shares of Registrant’s common stock ($0.01 par value) outstanding on October 30, 2019.


 
 
 
 
 
 
image1-logo.jpg
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
Glossary of Acronyms and Terms
 3
 
 
 
 
 
 
Part I. Financial Information
 5
 
 
 
 
 
 
Item 1. Financial Statements
49
 
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (unaudited)
50
 
 
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
51
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
52
 
 
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
53
 
 
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2019 and 2018
55
 
 
Notes to the Consolidated Financial Statements (unaudited)
56
 
 
 
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 5
 
 
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
96
 
 
 
 
 
 
Item 4. Controls and Procedures
96
 
 
 
 
 
 
 
 
 
 
Part II. Other Information
96
 
 
 
 
 
 
Item 1. Legal Proceedings
96
 
 
Item 1A. Risk Factors
96
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
96
 
 
Item 6. Exhibits
97
 
 
 
 
 
 
 
 
 
 
Signature
98
 
 
 
 
 
 
 
 
 
 
 
 
 


2
CITIZENS FINANCIAL GROUP, INC.

 

GLOSSARY OF ACRONYMS AND TERMS
The following is a list of common acronyms and terms we regularly use in our financial reporting:
ACL
 
Allowance for Credit Losses
Acquisitions
 
Refers to acquisitions after second quarter 2018, including Franklin American Mortgage Company, Clarfeld Financial Advisors, LLC and Bowstring Advisors LLC
AFS
 
Available for Sale
ALLL
 
Allowance for Loan and Lease Losses
ALM
 
Asset and Liability Management
AOCI
 
Accumulated Other Comprehensive Income (Loss)
ATM
 
Automated Teller Machine
Board or Board of Directors
 
The Board of Directors of Citizens Financial Group, Inc.
bps
 
Basis Points
CBNA
 
Citizens Bank, National Association
CCAR
 
Comprehensive Capital Analysis and Review
CCB
 
Capital Conservation Buffer
CCMI
 
Citizens Capital Markets, Inc.
CET1
 
Common Equity Tier 1
CET1 capital ratio
 
Common Equity Tier 1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
Citizens, CFG, the Company, we, us, or our
 
Citizens Financial Group, Inc. and its Subsidiaries
CLTV
 
Combined Loan to Value
Dodd-Frank Act
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EGRRCPA
 
Economic Growth, Regulatory Relief and Consumer Protection Act
EPS
 
Earnings Per Share
Exchange Act
 
The Securities Exchange Act of 1934
FAMC
 
Franklin American Mortgage Company
FAMC acquisition
 
The August 1, 2018 acquisition of Franklin American Mortgage Company
Fannie Mae (FNMA)
 
Federal National Mortgage Association
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
FTE
 
Fully Taxable Equivalent
FTP
 
Funds Transfer Pricing
GAAP
 
Accounting Principles Generally Accepted in the United States of America
Ginnie Mae (GNMA)
 
Government National Mortgage Association
GSE
 
Government Sponsored Entity
HTM
 
Held To Maturity
Last-of-Layer
 
Last-of-layer is a fair value hedge of the interest rate risk of a portfolio of similar assets by using the last dollar amount within that portfolio of prepayable assets as the hedged item
LCR
 
Liquidity Coverage Ratio
LHFS
 
Loans Held for Sale
LIBOR
 
London Interbank Offered Rate
LIHTC
 
Low Income Housing Tax Credit
LTV
 
Loan to Value
MBS
 
Mortgage-Backed Securities

3
CITIZENS FINANCIAL GROUP, INC.

 

Mid-Atlantic
 
District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia
Midwest
 
Illinois, Indiana, Michigan, and Ohio
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
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, National Association and other subsidiaries)
ROTCE
 
Return on Average Tangible Common Equity
RPA
 
Risk Participation Agreement
SBA
 
Small Business Administration
SEC
 
United States Securities and Exchange Commission
SVaR
 
Stressed Value at Risk
TDR
 
Troubled Debt Restructuring
Tier 1 capital ratio
 
Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
Tier 1 leverage ratio
 
Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by quarterly adjusted average assets as defined under the U.S. Basel III Standardized approach
Total capital ratio
 
Total capital, which includes Common Equity Tier 1 capital, tier 1 capital and allowance for credit losses and qualifying subordinated debt that qualifies as tier 2 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
VaR
 
Value at Risk
VIE
 
Variable Interest Entities




4
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
 
 8
Selected Consolidated Financial Data
 
12
Results of Operations
 
14
Net Interest Income
 
14
Noninterest Income
 
18
Noninterest Expense
 
19
Provision for Credit Losses
 
20
Income Tax Expense
 
21
Business Operating Segments
 
22
Analysis of Financial Condition
 
27
Securities
 
27
Loans and Leases
 
28
Allowance for Credit Losses and Nonperforming Assets
 
28
Deposits
 
31
Borrowed Funds
 
32
Capital and Regulatory Matters
 
33
Liquidity
 
37
Off-Balance Sheet Arrangements
 
40
Critical Accounting Estimates
 
40
Risk Governance
 
41
Market Risk
 
41
Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations
 
45


5
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.
In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory 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, 2018.

6
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 $164.4 billion in assets as of September 30, 2019. Our mission is to help our customers, colleagues and communities reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. 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. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center as well as the convenience of approximately 2,900 ATMs and approximately 1,100 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, 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
•
CET1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach.


7
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 they are used by our Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and accordingly, are useful to consider in addition to our GAAP financial 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 such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.
Non-GAAP measures are denoted throughout the MD&A by the use of the term 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”.
FINANCIAL PERFORMANCE
Third Quarter 2019 compared with Third Quarter 2018 - Key Highlights
Third quarter 2019 net income of $449 million increased 1% from $443 million in third quarter 2018, with earnings per diluted common share of $0.97, up 7% from $0.91 per diluted common share in third quarter 2018. Third quarter 2019 ROTCE of 12.4% compared to 13.3% in third quarter 2018.
There were $4 million after-tax, or $0.01 per diluted common share, of notable items recorded in third quarter 2019 tied to integration costs associated with Acquisitions as well as costs related to strategic initiatives. In third quarter 2018 there were $7 million after-tax, or $0.02 per diluted common share, of notable items tied to integration costs associated with the FAMC acquisition.
 
Three Months Ended September 30,
 
2019
 
2018
(in millions)
Noninterest expense
 
Income tax expense
 
Net Income
 
Noninterest expense
 
Income tax expense
 
Net Income
Reported results (GAAP):

$973

 

$115

 

$449

 

$910

 

$133

 

$443

Less notable items:
 
 
 
 
 
 
 
 
 
 
 
Total integration costs
4

 
(1
)
 
(3
)
 
9

 
(2
)
 
(7
)
Other notable items(1)
15

 
(14
)
 
(1
)
 
—

 
—

 
—

Total notable items
19

 
(15
)
 
(4
)
 
9

 
(2
)
 
(7
)
Underlying results* (non-GAAP)

$954

 

$130

 

$453

 

$901

 

$135

 

$450

(1) Other notable items include noninterest expense of $15 million related to our TOP programs and other efficiency initiatives and an income tax benefit of $10 million related to an operational restructure.
* 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 $432 million decreased $4 million, or 1%, compared to $436 million in third quarter 2018.
◦
On an Underlying basis,* net income available to common stockholders of $436 million decreased $7 million, or 2%, from third quarter 2018.
•
Total revenue of $1.6 billion increased $74 million, or 5%, from third quarter 2018, reflecting strength in noninterest income and relatively stable net interest income.
◦
Net interest income of $1.1 billion was relatively stable compared to third quarter 2018, driven by growth in interest earning assets of 3%.
◦
Net interest margin of 3.10% decreased 10 basis points compared to 3.20% in third quarter 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were only partially offset

8
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates.
–
Net interest margin on a fully taxable-equivalent basis of 3.12% decreased by 10 basis points, compared to 3.22% in third quarter 2018.
–
Average loans and leases of $117.3 billion increased $3.3 billion, or 3%, from $114.0 billion in third quarter 2018, reflecting a $1.7 billion increase in commercial loans and leases and a $1.6 billion increase in retail loans.
–
Average deposits of $123.9 billion increased $6.9 billion, or 6%, from $117.0 billion in third quarter 2018, reflecting growth in savings, term deposits, checking with interest and money market accounts, partially offset by a decline in demand deposits.
◦
Noninterest income of $493 million increased $77 million, or 19%, from third quarter 2018, driven by strong results in mortgage banking and card fees and growth in trust and investment services fees and foreign exchange and interest rate products. Noninterest income in third quarter 2019 also included $7 million associated with a lease restructuring transaction.
•
Noninterest expense of $973 million increased $63 million, or 7%, compared to $910 million in third quarter 2018, driven by higher salaries and employee benefits, which included the impact of annual merit increases, investments in growth initiatives and higher revenue-based incentives, outside services, and equipment and software expense.
◦
On an Underlying basis,* noninterest expense increased $53 million, or 6%, from third quarter 2018, reflecting continued investments in growth initiatives as well as $10 million associated with a lease restructuring transaction.
•
The efficiency ratio of 59.4% compared to 58.2% in third quarter 2018.
◦
On an Underlying basis,* the efficiency ratio of 58.2% compared to 57.6% in third quarter 2018.
•
Provision for credit losses of $101 million increased $23 million, or 29%, from $78 million in third quarter 2018, reflecting a small number of uncorrelated losses in commercial and continued seasoning in retail growth portfolios. Key credit metrics continued to reflect overall strong credit quality. Provision for credit losses in third quarter 2019 also included $5 million associated with a lease restructuring transaction.
•
ROTCE of 12.4% compared to 13.3% in third quarter 2018.
◦
On an Underlying basis,* ROTCE of 12.6% compared to 13.5% in third quarter 2018 and reflected an approximately 75 basis point drag from higher tangible equity value, given the positive impact of lower long-term rates on securities valuations.
•
Tangible book value per common share of $31.48 increased 14% from third quarter 2018. Fully diluted average common shares outstanding decreased 30.5 million shares, or 6%, over the same period.

9
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

First Nine Months 2019 compared with First Nine Months 2018 - Key Highlights
Net income of $1.3 billion increased 7% from the first nine months of 2018, with earnings per diluted common share of $2.83, up 10% from $2.57 per diluted common share over the first nine months of 2018. ROTCE of 12.7% improved from 12.6% in the first nine months of 2018.
There were $13 million after-tax, or $0.03 per diluted common share, of notable items in the first nine months of 2019 tied to integration costs related to Acquisitions as well as costs related to strategic initiatives. In the first nine months of 2018 there were $7 million after-tax, or $0.01 per diluted common share, of notable items tied to integration costs associated with the FAMC acquisition.
 
Nine Months Ended September 30,
 
2019
 
2018
(in millions)
Noninterest expense
 
Income tax expense
 
Net Income
 
Noninterest expense
 
Income tax expense
 
Net Income
Reported results (GAAP)

$2,861

 

$369

 

$1,341

 

$2,668

 

$370

 

$1,256

Less notable items:
 
 
 
 
 
 
 
 
 
 
 
Total integration costs
16

 
(4
)
 
(12
)
 
9

 
(2
)
 
(7
)
Other notable items(1)
15

 
(14
)
 
(1
)
 
—

 
—

 
—

Total notable items
31

 
(18
)
 
(13
)
 
9

 
(2
)
 

($7
)
Underlying results* (non-GAAP)

$2,830

 

$387

 

$1,354

 

$2,659

 

$372

 

$1,263

(1) Other notable items include noninterest expense of $15 million related to our TOP programs and other efficiency initiatives and an income tax benefit of $10 million related to an operational restructure.
* 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 $1.3 billion increased $49 million, or 4%, compared to $1.2 billion in the first nine months of 2018. Earnings per diluted common share increased $0.26, or 10%, from the first nine months of 2018.
◦
On an Underlying basis,* net income available to common stockholders of $1.3 billion increased by 4%, led by 7% revenue growth with 3% growth in net interest income.
◦
On an Underlying basis,* earnings per diluted common share of $2.86 increased $0.28, or 11%, from $2.58 for the first nine months of 2018.
•
Total revenue of $4.9 billion increased $319 million, or 7%, from the first nine months of 2018, driven by strong net interest and noninterest income growth.
◦
Net interest income of $3.5 billion increased $111 million, or 3%, compared to $3.4 billion in the first nine months of 2018, given 4% growth in average interest-earning assets, which offset the impacts of lower net interest margin, reflecting the impacts of a challenging rate and yield-curve environment.
◦
Net interest margin of 3.18% decreased 2 basis points from 3.20% in the first nine months of 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates.
–
Net interest margin on a fully taxable-equivalent basis of 3.19% decreased by 2 basis points, compared to 3.21% in the first nine months of 2018.
–
Average loans and leases of $117.6 billion increased $4.9 billion, or 4%, from $112.7 billion in the first nine months of 2018, reflecting a $3.4 billion increase in commercial loans and leases and a $1.5 billion increase in retail loans.
–
Average deposits of $122.5 billion increased $7.3 billion, or 6%, from $115.2 billion in the first nine months of 2018, reflecting growth in term deposits, savings and checking with interest, partially offset by declines in money market accounts and demand deposits.
◦
Noninterest income of $1.4 billion increased $208 million, or 18%, from the first nine months of 2018, driven by strength in capital markets fees, foreign exchange and interest rate products, card fees and leasing income, as well as higher mortgage banking fees and higher trust and investment services fees driven by Acquisitions.

10
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

•
Noninterest expense of $2.9 billion increased $193 million, or 7%, from $2.7 billion in the first nine months of 2018, reflecting higher salaries and employee benefits, outside services, and equipment and software expense, driven by the impact of Acquisitions, partially offset by lower other operating expense largely tied to a reduction in FDIC insurance.
◦
On an Underlying basis,* noninterest expense increased 6% from the first nine months of 2018.
•
The efficiency ratio of 58.9% compared to 58.8% for the first nine months of 2018, and ROTCE of 12.7% compared to 12.6%.
◦
On an Underlying basis,* operating leverage was 1%, the efficiency ratio of 58.3% compared to 58.6% for the first nine months of 2018 and ROTCE of 12.9% compared to 12.7%.
•
Provision for credit losses of $283 million increased $42 million, or 17%, from $241 million for the first nine months of 2018, reflecting 4% average loan growth as well as a small number of uncorrelated losses in commercial and continued seasoning in retail growth portfolios and $5 million associated with a lease restructuring transaction, partially offset by stable credit quality.
•
Tangible book value per common share of $31.48 increased 14% from the first nine months of 2018. Fully diluted average common shares outstanding decreased 28.0 million shares, or 6%, over the same period.

11
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

SELECTED CONSOLIDATED FINANCIAL DATA
The summary Consolidated Operating Data for the three and nine months ended September 30, 2019 and 2018 and the summary Consolidated Balance Sheet data as of September 30, 2019 and December 31, 2018 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1 — Financial Statements of this Report. Our historical results are not necessarily indicative of the results expected for any future period.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in millions, except per share amounts)
  2019

 
  2018

 
2019
 
2018
OPERATING DATA:
 
 
 
 
 
 
 
Net interest income

$1,145

 

$1,148

 

$3,471

 

$3,360

Noninterest income
493

 
416

 
1,383

 
1,175

Total revenue
1,638

 
1,564

 
4,854

 
4,535

Provision for credit losses
101

 
78

 
283

 
241

Noninterest expense
973

 
910

 
2,861

 
2,668

Income before income tax expense
564

 
576

 
1,710

 
1,626

Income tax expense
115

 
133

 
369

 
370

Net income

$449

 

$443

 

$1,341

 

$1,256

Net income available to common stockholders

$432

 

$436

 

$1,291

 

$1,242

Net income per common share - basic

$0.97

 

$0.92

 

$2.84

 

$2.57

Net income per common share - diluted

$0.97

 

$0.91

 

$2.83

 

$2.57

OTHER OPERATING DATA(1):
 
 
 
 
 
 
 
Return on average common equity
8.35
 %
 
8.82
%
 
8.50
 %
 
8.44
%
Return on average tangible common equity
12.44

 
13.29

 
12.72

 
12.64

Return on average total assets
1.10

 
1.13

 
1.11

 
1.09

Return on average total tangible assets
1.15

 
1.18

 
1.16

 
1.14

Efficiency ratio
59.40

 
58.20

 
58.94

 
58.84

Operating leverage(2)
(2.16
)
 
2.21

 
(0.18
)
 
3.79

Net interest margin, FTE(3)
3.12

 
3.22

 
3.19

 
3.21

Effective income tax rate
20.46

 
23.16

 
21.58

 
22.77

(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) Net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%.




12
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

(dollars in millions)
September 30,
2019
 
December 31,
2018
BALANCE SHEET DATA:
 
 
 
Total assets

$164,362

 

$160,518

Loans held for sale, at fair value
1,993

 
1,219

Other loans held for sale
22

 
101

Loans and leases
117,880

 
116,660

Allowance for loan and lease losses
(1,263
)
 
(1,242
)
Total securities
25,602

 
25,075

Goodwill
7,044

 
6,923

Total liabilities
142,511

 
139,701

Total deposits
124,714

 
119,575

Federal funds purchased and securities sold under agreements to repurchase
867

 
1,156

Other short-term borrowed funds
210

 
161

Long-term borrowed funds
12,806

 
15,925

Total stockholders’ equity
21,851

 
20,817

OTHER BALANCE SHEET DATA:
 
 
 
Asset Quality Ratios:
 
 
 
Allowance for loan and lease losses as a percentage of loans and leases
1.07
%
 
1.06
%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases
159.32

 
155.99

Nonperforming loans and leases as a percentage of loans and leases
0.67

 
0.68

Capital Ratios:
 
 
 
CET1 capital ratio(1)
10.3
%
 
10.6
%
Tier 1 capital ratio
11.1

 
11.3

Total capital ratio
13.0

 
13.3

Tier 1 leverage ratio
9.9

 
10.0

(1) See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.





13
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS
 
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our 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 Report and “—Risk Governance” as described in our 2018 Form 10-K.
chart-0997fd863e4f5587a23.jpg


14
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 September 30,
 
 
2019
 
2018
 
Change
(dollars in millions)
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Yields/
Rates (bps)
Assets
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and due from banks and deposits in banks

$1,474


$8

2.09
%
 

$1,604


$7

1.85
%
 

($130
)
24 bps
Taxable investment securities
25,635

153

2.38

 
25,225

167

2.65

 
410

(27
)
Non-taxable investment securities
5

—

2.60

 
6

—

2.60

 
(1
)
—

Total investment securities
25,640

153

2.38

 
25,231

167

2.65

 
409

(27
)
Commercial
41,476

442

4.17

 
39,592

419

4.14

 
1,884

3

Commercial real estate
12,892

155

4.70

 
12,656

147

4.56

 
236

14

Leases
2,615

19

2.85

 
3,028

21

2.74

 
(413
)
11

Total commercial loans and leases
56,983

616

4.23

 
55,276

587

4.16

 
1,707

7

Residential mortgages
19,405

171

3.53

 
18,147

164

3.62

 
1,258

(9
)
Home equity loans
906

14

6.21

 
1,168

18

5.93

 
(262
)
28

Home equity lines of credit
12,182

156

5.08

 
12,925

152

4.66

 
(743
)
42

Home equity loans serviced by others
330

7

8.48

 
444

8

7.45

 
(114
)
103

Home equity lines of credit serviced by others
83

1

4.56

 
118

2

4.89

 
(35
)
(33
)
Automobile
12,036

129

4.25

 
12,379

117

3.74

 
(343
)
51

Education
9,459

141

5.89

 
8,481

124

5.78

 
978

11

Credit cards
2,103

53

9.93

 
1,909

52

10.77

 
194

(84
)
Other retail
3,770

68

7.25

 
3,124

63

8.10

 
646

(85
)
Total retail loans
60,274

740

4.88

 
58,695

700

4.73

 
1,579

15

Total loans and leases
117,257

1,356

4.56

 
113,971

1,287

4.46

 
3,286

10

Loans held for sale, at fair value
1,970

19

3.71

 
1,228

14

4.49

 
742

(78
)
Other loans held for sale
134

2

6.42

 
129

2

6.44

 
5

(2
)
Interest-earning assets
146,475

1,538

4.15

 
142,163

1,477

4.11

 
4,312

4

Allowance for loan and lease losses
(1,226
)
 
 
 
(1,255
)
 
 
 
29

 
Goodwill
7,044

 
 
 
6,926

 
 
 
118

 
Other noninterest-earning assets
9,817

 
 
 
7,790

 
 
 
2,027

 
Total assets

$162,110

 
 
 

$155,624

 
 
 

$6,486

 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Checking with interest

$23,422


$52

0.88
%
 

$21,780


$36

0.67
%
 

$1,642

21
Money market accounts
37,161

116

1.24

 
36,593

95

1.03

 
568

21
Regular savings
13,442

20

0.59

 
10,198

3

0.12

 
3,244

47
Term deposits
20,951

109

2.05

 
18,764

80

1.68

 
2,187

37
Total interest-bearing deposits
94,976

297

1.24

 
87,335

214

0.98

 
7,641

26
Federal funds purchased and securities sold under agreements to repurchase (1)
487

2

1.19

 
643

2

0.93

 
(156
)
26
Other short-term borrowed funds
113

—

2.46

 
748

4

2.27

 
(635
)
19
Long-term borrowed funds
12,134

94

3.07

 
14,284

109

3.01

 
(2,150
)
6
Total borrowed funds
12,734

96

3.00

 
15,675

115

2.90

 
(2,941
)
10
Total interest-bearing liabilities
107,710

393

1.45

 
103,010

329

1.27

 
4,700

18
Demand deposits
28,945

 
 
 
29,703

 
 
 
(758
)
 
Other liabilities
3,789

 
 
 
2,769

 
 
 
1,020

 
Total liabilities
140,444

 
 
 
135,482

 
 
 
4,962

 
Stockholders’ equity
21,666

 
 
 
20,142

 
 
 
1,524

 
Total liabilities and stockholders’ equity

$162,110

 
 
 

$155,624

 
 
 

$6,486

 
Interest rate spread
 
 
2.70
%
 
 
 
2.84
%
 
 
(14)
Net interest income and net interest margin
 

$1,145

3.10
%
 
 

$1,148

3.20
%
 
 
(10)
Net interest income and net interest margin, FTE(2)
 

$1,150

3.12
%
 
 

$1,154

3.22
%
 
 
(10)
Memo: Total deposits (interest-bearing and demand)

$123,921


$297

0.95
%
 

$117,038


$214

0.73
%
 

$6,883

22 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.
(2) Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. The FTE impact is predominantly attributable to commercial loans for the periods presented.
    

15
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Quarterly Results: Net interest income of $1.1 billion was stable with third quarter 2018, given 3% growth in interest-earning assets and a 10 basis point decrease in net interest margin.
Net interest margin of 3.10% decreased 10 basis points compared to 3.20% in third quarter 2018, as an increase in funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates was partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and higher short-term rates. Net interest margin on an FTE basis of 3.12% declined 10 basis points from 3.22% in third quarter 2018. Average interest-earning asset yields of 4.15% increased 4 basis points from 4.11% in third quarter 2018, and average interest-bearing liability costs of 1.45% increased 18 basis points from 1.27% in third quarter 2018.
Average interest-earning assets of $146.5 billion in third quarter 2019 increased $4.3 billion, or 3%, from third quarter 2018, driven by a $3.3 billion increase in loans and leases and a $742 million increase in loans held for sale, primarily driven by the impact of the FAMC acquisition. Commercial loans and leases increased $1.7 billion, or 3%, while retail loans increased $1.6 billion, or 3%. Total commercial loan and leases results reflected strength in commercial loans, driven by geographic, product and client-focused expansion strategies as well as strength in commercial real estate, partially offset by planned reductions in commercial leases. Retail loan growth was driven by mortgage, unsecured and education finance, partially offset by a planned reduction in auto and lower home equity.
Third quarter 2019 average deposits of $123.9 billion increased $6.9 billion, or 6%, from third quarter 2018, reflecting growth in term, savings, money market accounts and checking with interest. These results were partially offset by a decline in demand deposits.
Average borrowed funds of $12.7 billion decreased $2.9 billion, or 19%, from third quarter 2018, driven by a $2.2 billion decrease in long-term borrowings, a $635 million decrease in other short-term borrowed funds and a $156 million decrease in federal funds purchased and repurchase agreements, reflecting improved funding mix from deposit growth, partially offset by an increase in senior debt. Total borrowed funds costs of $96 million decreased $19 million from third quarter 2018. The total borrowed funds cost of 3.00% increased 10 basis points from 2.90% in third quarter 2018 due to an increase in short-term rates and a mix shift to long-term senior debt.

16
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the major components of net interest income and net interest margin:
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
Change
(dollars in millions)
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Yields/
Rates (bps)
Assets:
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and due from banks and deposits in banks

$1,400


$23

2.15
%
 

$1,616


$21

1.75
%
 

($216
)
40 bps
Taxable investment securities
25,466

483

2.53

 
25,284

500

2.64

 
182

(11
)
Non-taxable investment securities
5

—

2.60

 
6

—

2.60

 
(1
)
—

Total investment securities
25,471

483

2.53

 
25,290

500

2.64

 
181

(11
)
Commercial
41,597

1,373

4.35

 
38,990

1,181

3.99

 
2,607

36

Commercial real estate
13,179

486

4.86

 
12,096

400

4.36

 
1,083

50

Leases
2,744

59

2.86

 
3,071

62

2.68

 
(327
)
18

Total commercial loans and leases
57,520

1,918

4.40

 
54,157

1,643

4.00

 
3,363

40

Residential mortgages
19,245

522

3.61

 
17,603

473

3.58

 
1,642

3

Home equity loans
971

44

6.09

 
1,253

55

5.86

 
(282
)
23

Home equity lines of credit
12,354

473

5.12

 
13,129

434

4.42

 
(775
)
70

Home equity loans serviced by others
358

21

7.95

 
481

26

7.33

 
(123
)
62

Home equity lines of credit serviced by others
91

3

4.94

 
130

4

4.14

 
(39
)
80

Automobile
12,030

374

4.16

 
12,681

342

3.60

 
(651
)
56

Education
9,256

412

5.94

 
8,380

357

5.69

 
876

25

Credit cards
2,048

158

10.31

 
1,864

150

10.74

 
184

(43
)
Other retail
3,688

204

7.39

 
2,980

179

8.06

 
708

(67
)
Total retail loans
60,041

2,211

4.92

 
58,501

2,020

4.61

 
1,540

31

Total loans and leases
117,561

4,129

4.67

 
112,658

3,663

4.32

 
4,903

35

Loans held for sale, at fair value
1,514

45

3.92

 
709

23

4.27

 
805

(35
)
Other loans held for sale
161

8

6.41

 
193

9

6.32

 
(32
)
9

Interest-earning assets
146,107

4,688

4.26

 
140,466

4,216

3.99

 
5,641

27

Allowance for loan and lease losses
(1,239
)
 
 
 
(1,246
)
 
 
 
7

 
Goodwill
7,034

 
 
 
6,900

 
 
 
134

 
Other noninterest-earning assets
9,442

 
 
 
7,362

 
 
 
2,080

 
Total assets

$161,344

 
 
 

$153,482



 
 

$7,862

 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
Checking with interest

$23,444


$161

0.92
%
 

$21,877


$96

0.59
%
 

$1,567

33
Money market accounts
35,873

340

1.27

 
36,689

239

0.87

 
(816
)
40
Regular savings
13,134

58

0.59

 
9,907

5

0.07

 
3,227

52
Term deposits
21,456

333

2.07

 
17,710

200

1.51

 
3,746

56
Total interest-bearing deposits
93,907

892

1.27

 
86,183

540

0.84

 
7,724

43
Federal funds purchased and securities sold under agreements to repurchase (1)
648

7

1.45

 
598

4

0.78

 
50

67
Other short-term borrowed funds
72

1

2.58

 
509

7

2.00

 
(437
)
58
Long-term borrowed funds
13,076

317

3.22

 
14,535

305

2.78

 
(1,459
)
44
Total borrowed funds
13,796

325

3.13

 
15,642

316

2.68

 
(1,846
)
45
Total interest-bearing liabilities
107,703

1,217

1.51

 
101,825

856

1.12

 
5,878

39
Demand deposits
28,601

 
 
 
29,031

 
 
 
(430
)

Other liabilities
3,637

 
 
 
2,551

 
 
 
1,086


Total liabilities
139,941

 
 
 
133,407

 
 
 
6,534


Stockholders’ equity
21,403

 
 
 
20,075

 
 
 
1,328


Total liabilities and stockholders’ equity

$161,344

 
 
 

$153,482

 
 
 

$7,862


Interest rate spread
 
 
2.75
%
 
 
 
2.87
%
 
 
(12)
Net interest income and net interest margin
 

$3,471

3.18
%
 
 

$3,360

3.20
%
 
 
(2)
Net interest income and net interest margin, FTE(2)
 

$3,488

3.19
%
 
 

$3,377

3.21
%
 
 
(2)
Memo: Total deposits (interest-bearing and demand)

$122,508


$892

0.97
%
 

$115,214


$540

0.63
%
 

$7,294

34 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.
(2) Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. The FTE impact is predominantly attributable to commercial loans for the periods presented.
    

17
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Year-To-Date Results: Net interest income of $3.5 billion increased $111 million, reflecting 4% average interest-earning asset growth partially offset by a 2 basis point decrease in net interest margin.
Net interest margin of 3.18% decreased 2 basis points compared to 3.20% in the first nine months of 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates. Net interest margin on an FTE basis of 3.19% also decreased 2 basis points compared to 3.21% in the first nine months of 2018. Average interest-earning asset yields of 4.26% increased 27 basis points from 3.99% in the first nine months of 2018, while average interest-bearing liability costs of 1.51% increased 39 basis points from 1.12% in the first nine months of 2018.
Average interest-earning assets of $146.1 billion increased $5.6 billion, or 4%, from the first nine months of 2018, driven by a $3.4 billion increase in average commercial loans and leases and a $1.5 billion increase in average retail loans, partially offset by a $35 million decrease in average total investment securities and interest-bearing cash and due from banks and deposits in banks. Total commercial loan and lease 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 $122.5 billion increased $7.3 billion from the first nine months of 2018, reflecting growth in term deposits, checking with interest, and savings, partially offset by a decline in money market accounts and demand deposits. Total interest-bearing deposit costs of $892 million increased $352 million, or 65%, from $540 million in the first nine months of 2018, primarily due to rising short-term rates and average deposit growth.
Average total borrowed funds of $13.8 billion decreased $1.8 billion from the first nine months of 2018, reflecting a decrease in other short-term borrowed funds and a decrease in long-term borrowed funds, partially offset by an increase in federal funds purchased and repurchase agreements. Total borrowed funds costs of $325 million increased $9 million from the first nine months of 2018. The total borrowed funds cost of 3.13% increased 45 basis points from 2.68% in the first nine months of 2018 due to an increase in short-term rates and a mix shift to long-term senior debt.
Noninterest Income
chart-ee710c04a0f759b39bd.jpg

18
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the significant components of our noninterest income:
 
Three Months Ended September 30,
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
(in millions)
2019

 
2018

 
Change

 
Percent

 
2019

 
2018

 
Change

 
Percent

Service charges and fees

$128

 

$131

 

($3
)
 
(2
%)
 

$377

 

$382

 

($5
)
 
(1
%)
Card fees
67

 
61

 
6

 
10

 
190

 
182

 
8

 
4

Capital markets fees
39

 
47

 
(8
)
 
(17
)
 
150

 
134

 
16

 
12

Trust and investment services fees
50

 
45

 
5

 
11

 
150

 
128

 
22

 
17

Mortgage banking fees
117

 
49

 
68

 
139

 
222

 
101

 
121

 
120

Letter of credit and loan fees
34

 
32

 
2

 
6

 
100

 
94

 
6

 
6

Foreign exchange and interest rate products
35

 
31

 
4

 
13

 
106

 
92

 
14

 
15

Securities gains, net
3

 
3

 
—

 
—

 
15

 
13

 
2

 
15

Other income (1)
20

 
17

 
3

 
18

 
73

 
49

 
24

 
49

Noninterest income

$493

 

$416

 

$77

 
19
%
 

$1,383

 

$1,175

 

$208

 
18
%
(1) Includes net impairment losses recognized in earnings on available for sale debt securities, bank-owned life insurance income and other income.

Quarterly Results: Noninterest income increased $77 million from third quarter 2018, driven by higher mortgage banking fees, reflecting higher origination volumes that drove an increase in production revenue, card fees, driven by the benefit of higher purchase volumes, trust and investment services fees and foreign exchange and interest rate products. Other income included $7 million associated with a lease restructuring transaction.
Year-To-Date Results: Noninterest income increased $208 million from the first nine months of 2018, driven by higher mortgage banking fees and higher trust and investment services fees driven by Acquisitions. Strength in capital market fees, and foreign exchange and interest rate products reflected the benefit of investments to broaden and enhance our capabilities. Results also reflected increased higher other income due to increased leasing income, including $7 million associated with a lease restructuring transaction, and asset dispositions tied to balance sheet optimization and efficiency initiatives.
Noninterest Expense
chart-b9e578e43f015166b29.jpg
The following table presents the significant components of our noninterest expense:
 
Three Months Ended September 30,
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
(in millions)
2019

 
2018

 
Change

 
Percent

 
2019

 
2018

 
Change

 
Percent

Salaries and employee benefits

$508

 

$474

 

$34

 
7
%
 

$1,524

 

$1,397

 

$127

 
9
%
Equipment and software expense
130

 
117

 
13

 
11

 
381

 
340

 
41

 
12

Outside services
128

 
107

 
21

 
20

 
356

 
312

 
44

 
14

Occupancy
80

 
81

 
(1
)
 
(1
)
 
245

 
241

 
4

 
2

Other operating expense
127

 
131

 
(4
)
 
(3
)
 
355

 
378

 
(23
)
 
(6
)
Noninterest expense

$973

 

$910

 

$63

 
7
%
 

$2,861

 

$2,668

 

$193

 
7
%



19
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Quarterly Results: Noninterest expense increased $63 million from third quarter 2018, driven by higher salaries and employee benefits, which included the impact of annual merit increases, investments in growth initiatives and higher revenue-based incentives, outside services, and equipment and software expense. Other operating expense included $10 million associated with a lease restructuring transaction. Underlying noninterest expense* increased $53 million, or 6%, reflecting continued investments in growth initiatives.
Year-To-Date Results: Noninterest expense increased $193 million, or 7%, from the first nine months of 2018, reflecting higher salaries and employee benefits, outside services, and equipment and software expense, driven by the impact of Acquisitions, partially offset by lower other operating expense largely tied to a reduction in FDIC insurance. Underlying noninterest expense* increased $171 million, or 6%, reflecting continued investments in growth initiatives.
Provision for Credit Losses
chart-33999bbf9e815002991.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.
Quarterly Results: The provision for credit losses increased $23 million from third quarter 2018, due to a small number of uncorrelated losses in commercial and continued seasoning in retail growth portfolios. Third quarter 2019 net charge-offs of $113 million were $27 million higher than third quarter 2018 due to a small number of uncorrelated losses in commercial and expected seasoning in the retail growth portfolios and $5 million associated with a lease restructuring transaction.
Year-To-Date Results: The provision for credit losses increased $42 million from the first nine months of 2018, due to the factors described above. For the first nine months of 2019, results reflected a $25 million ACL release, compared to a $9 million ACL build in the first nine months of 2018. Net charge-offs for the first nine months of 2019 of $308 million were $76 million higher than the first nine months of 2018.    

20
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Income Tax Expense
chart-fcc149a7ae825dbfa58.jpg
Quarterly Results: Income tax expense decreased $18 million from third quarter 2018. The effective income tax rate in third quarter 2019 decreased 270 basis points to 20.5% from third quarter 2018, largely driven by the benefit of an operational restructuring, resulting in the release of a valuation allowance on state net operating losses, and a reduction in non-deductible expenses. The Underlying effective income tax rate* decreased 91 basis points to 22.3% from third quarter 2018.
Year-To-Date Results: Income tax expense decreased $1 million from the first nine months of 2018. The effective income tax rate in the first nine months of 2019 decreased to 21.6% from 22.8% in the first nine months of 2018, largely driven by the benefit of an operational restructuring and a reduction in non-deductible expenses. The Underlying effective income tax rate* decreased 58 basis points to 22.2% from the first nine months of 2018.

21
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Business Operating Segments
We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and 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, expenses and income tax expense. 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 and/or Commercial Banking reporting units. There have been no significant changes in our methodologies used to allocate items to our business operating segments as described in “—Results of Operations — Business Operating Segments” in our 2018 Form 10-K.
The following tables present certain financial data of our business operating segments, Other and consolidated:
 
As of and for the Three Months Ended September 30, 2019
(dollars in millions)
Consumer Banking
 
Commercial Banking
 
Other(3)

 
Consolidated

Net interest income

$799

 

$360

 

($14
)
 

$1,145

Noninterest income
336

 
133

 
24

 
493

Total revenue
1,135

 
493

 
10

 
1,638

Noninterest expense
718

 
213

 
42

 
973

Profit (loss) before provision for credit losses
417

 
280

 
(32
)
 
665

Provision for credit losses
83

 
27

 
(9
)
 
101

Income (loss) before income tax expense (benefit)
334

 
253

 
(23
)
 
564

Income tax expense (benefit)
83

 
57

 
(25
)
 
115

Net income

$251

 

$196

 

$2

 

$449

Average Balances:
 
 
 
 
 
 
 
Total assets

$66,365

 

$55,614

 

$40,131

 

$162,110

Total loans and leases(1)
63,553

 
53,814

 
1,994

 
119,361

Deposits
85,595

 
31,491

 
6,835

 
123,921

Interest-earning assets
63,605

 
54,087

 
28,783

 
146,475

Key Performance Metrics:
 
 
 
 
 
 
 
Net interest margin(2)
4.99
%
 
2.64
%
 
NM

 
3.10
%
Efficiency ratio
63.28

 
43.35

 
NM

 
59.40

Loans-to-deposits ratio (average balances)
72.11

 
170.01

 
NM

 
94.62

Return on average total tangible assets(2)
1.50

 
1.40

 
NM

 
1.15

(1) Includes LHFS.
(2) Ratios for the three months ended September 30, 2019 and 2018 are presented on an annualized basis.
(3) Includes the financial impact not attributed to our Consumer Banking or Commercial Banking segments.


22
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

 
As of and for the Three Months Ended September 30, 2018
(dollars in millions)
Consumer Banking
 
Commercial Banking
 
Other(3)

 
Consolidated

Net interest income

$776

 

$380

 

($8
)
 

$1,148

Noninterest income
258

 
140

 
18

 
416

Total revenue
1,034

 
520

 
10

 
1,564

Noninterest expense
686

 
202

 
22

 
910

Profit (loss) before provision for credit losses
348

 
318

 
(12
)
 
654

Provision for credit losses
71

 
14

 
(7
)
 
78

Income (loss) before income tax expense (benefit)
277

 
304

 
(5
)
 
576

Income tax expense (benefit)
70

 
70

 
(7
)
 
133

Net income

$207

 

$234

 

$2

 

$443

Average Balances:
 
 
 
 
 
 
 
Total assets

$62,974

 

$52,871

 

$39,779

 

$155,624

Total loans and leases(1)
61,045

 
51,881

 
2,402

 
115,328

Deposits
78,128

 
31,224

 
7,686

 
117,038

Interest-earning assets
61,097

 
52,137

 
28,929

 
142,163

Key Performance Metrics:
 
 
 
 
 
 
 
Net interest margin(2)
5.04
%
 
2.89
%
 
NM

 
3.20
%
Efficiency ratio
66.29

 
38.83

 
NM

 
58.20

Loans-to-deposits ratio (average balances)
76.79

 
165.17

 
NM

 
97.38

Return on average total tangible assets(2)
1.31

 
1.75

 
NM

 
1.18

(1) Includes LHFS.
(2) Ratios for the three months ended September 30, 2019 and 2018 are presented on an annualized basis.
(3) Includes the financial impact not attributed to our Consumer Banking or Commercial Banking segments.

 
As of and for the Nine Months Ended September 30, 2019
(dollars in millions)
Consumer Banking
 
Commercial Banking
 
Other(3)

 
Consolidated

Net interest income

$2,386

 

$1,103

 

($18
)
 

$3,471

Noninterest income
860

 
432

 
91

 
1,383

Total revenue
3,246

 
1,535

 
73

 
4,854

Noninterest expense
2,133

 
639

 
89

 
2,861

Profit (loss) before provision for credit losses
1,113

 
896

 
(16
)
 
1,993

Provision for credit losses
228

 
73

 
(18
)
 
283

Income before income tax expense (benefit)
885

 
823

 
2

 
1,710

Income tax expense (benefit)
219

 
184

 
(34
)
 
369

Net income

$666

 

$639

 

$36

 

$1,341

Average Balances:
 
 
 
 
 
 
 
Total assets

$65,624

 

$55,793

 

$39,927

 

$161,344

Total loans and leases(1)
62,803

 
54,299

 
2,134

 
119,236

Deposits
84,619

 
30,535

 
7,354

 
122,508

Interest-earning assets
62,856

 
54,585

 
28,666

 
146,107

Key Performance Metrics:
 
 
 
 
 
 
 
Net interest margin(2)
5.08
%
 
2.70
%
 
NM

 
3.18
%
Efficiency ratio
65.71

 
41.65

 
NM

 
58.94

Loans-to-deposits ratio (average balances)
72.62

 
176.75

 
NM

 
95.96

Return on average total tangible assets(2)
1.36

 
1.53

 
NM

 
1.16

(1) Includes LHFS.
(2) Ratios for the nine months ended September 30, 2019 and 2018 are presented on an annualized basis.
(3) Includes the financial impact not attributed to our Consumer Banking or Commercial Banking segments.




23
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

 
As of and for the Nine Months Ended September 30, 2018
(dollars in millions)
Consumer Banking
 
Commercial Banking
 
Other(3)

 
Consolidated
Net interest income

$2,268

 

$1,113

 

($21
)
 

$3,360

Noninterest income
708

 
405

 
62

 
1,175

Total revenue
2,976

 
1,518

 
41

 
4,535

Noninterest expense
2,000

 
610

 
58

 
2,668

Profit (loss) before provision for credit losses
976

 
908

 
(17
)
 
1,867

Provision for credit losses
209

 
19

 
13

 
241

Income (loss) before income tax expense (benefit)
767

 
889

 
(30
)
 
1,626

Income tax expense (benefit)
193

 
203

 
(26
)
 
370

Net income (loss)

$574

 

$686

 

($4
)
 

$1,256

Average Balances:
 
 
 
 
 
 
 
Total assets

$61,857

 

$51,820

 

$39,805

 

$153,482

Total loans and leases(1)
60,277

 
50,799

 
2,484

 
113,560

Deposits
76,992

 
30,736

 
7,486

 
115,214

Interest-earning assets
60,328

 
51,016

 
29,122

 
140,466

Key Performance Metrics
 
 
 
 
 
 
 
Net interest margin(2)
5.03
%
 
2.92
%
 
NM

 
3.20
%
Efficiency ratio
67.20

 
40.16

 
NM

 
58.84

Loans-to-deposits ratio (average balances)
77.59

 
164.08

 
NM

 
97.78

Return on average total tangible assets(2)
1.24

 
1.77

 
NM

 
1.14

(1) Includes LHFS.
(2) Ratios for the nine months ended September 30, 2019 and 2018 are presented on an annualized basis.
(3) Includes the financial impact not attributed to our Consumer Banking or Commercial Banking segments.

Consumer Banking
 
As of and for the Three Months Ended September 30,
 
 
 
 
 
As of and for the Nine Months Ended September 30,
 
 
 
 
(dollars in millions)
2019

 
2018

 
Change
 
Percent

 
2019


2018

              
Change

Percent

Net interest income

$799

 

$776

 

$23

 
3
%
 

$2,386



$2,268



$118


5
%
Noninterest income
336

 
258

 
78

 
30

 
860


708


152


21

Total revenue
1,135

 
1,034

 
101

 
10

 
3,246


2,976


270


9

Noninterest expense
718

 
686

 
32

 
5

 
2,133


2,000


133


7

Profit before provision for credit losses
417

 
348

 
69

 
20

 
1,113


976


137


14

Provision for credit losses
83

 
71

 
12

 
17

 
228


209


19


9

Income before income tax expense
334

 
277

 
57

 
21

 
885


767


118


15

Income tax expense
83

 
70

 
13

 
19

 
219


193


26


13

Net income

$251

 

$207

 

$44

 
21

 

$666



$574



$92


16

Average Balances:
 
 
 
 
 
 


 
 
 
 

 



Total assets

$66,365

 

$62,974

 

$3,391

 
5
%
 

$65,624



$61,857



$3,767


6
%
Total loans and leases(1)
63,553

 
61,045

 
2,508

 
4

 
62,803


60,277


2,526


4

Deposits
85,595

 
78,128

 
7,467

 
10

 
84,619


76,992


7,627


10

Interest-earning assets
63,605

 
61,097

 
2,508

 
4

 
62,856


60,328


2,528


4

Key Performance Metrics:
 
 
 
 
 
 
 
 
 

 




 
Net interest margin(2)
4.99
%
 
5.04
%
 
(5
) bps
 
 
 
5.08
%

5.03
%

5
  bps

 
Efficiency ratio
63.28

 
66.29

 
(301
) bps
 
 
 
65.71


67.20


(149
) bps

 
Loans-to-deposits ratio (average balances)
72.11

 
76.79

 
(468
) bps
 
 
 
72.62


77.59


(497
) bps

 
Return on average total tangible assets(2)
1.50

 
1.31

 
19
  bps
 
 
 
1.36


1.24


12
  bps

 
(1)  Includes LHFS.
(2) Ratios for the three and nine months ended September 30, 2019 and 2018 are presented on an annualized basis.




24
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Quarterly Results: Consumer Banking net interest income increased $23 million, or 3%, from third quarter 2018, driven by the benefit of a $2.5 billion increase in average loans led by residential mortgage, unsecured personal and education loans, partially offset by run-off in home equity portfolios. Noninterest income increased $78 million from third quarter 2018, driven by higher mortgage banking fees and the impact of Acquisitions. Noninterest expense increased $32 million, or 5%, from third quarter 2018, reflecting higher salaries and benefits and outside services including the impact of Acquisitions. Provision for credit losses of $83 million increased $12 million, or 17%, reflecting higher net charge-offs due to seasoning in growth portfolios.
Year-To-Date Results: Consumer Banking net interest income increased $118 million, or 5%, from the first nine months of 2018, driven by the benefit of a $2.5 billion increase in average loans led by residential, education and unsecured personal loans. Noninterest income increased $152 million from the first nine months of 2018, driven by higher mortgage banking fees and higher trust and investment services fees, including the impact of Acquisitions and card fees. Noninterest expense increased $133 million, or 7%, from the first nine months of 2018, reflecting higher salaries and benefits and outside services including the impact of Acquisitions. Provision for credit losses of $228 million increased $19 million, or 9%, reflecting higher net charge-offs due to seasoning in growth portfolios.
Commercial Banking
 
As of and for the Three Months Ended September 30,
 
 
 
 
 
As of and for the Nine Months Ended September 30,
 
 
 
 
(dollars in millions)
2019

 
2018

 
Change
 
Percent

 
2019

 
2018

 
Change
 
Percent

Net interest income

$360

 

$380

 

($20
)
 
(5
%)
 

$1,103

 

$1,113

 

($10
)
 
(1
%)
Noninterest income
133

 
140

 
(7
)
 
(5
)
 
432

 
405

 
27

 
7

Total revenue
493

 
520

 
(27
)
 
(5
)
 
1,535

 
1,518

 
17

 
1

Noninterest expense
213

 
202

 
11

 
5

 
639

 
610

 
29

 
5

Profit before provision for credit losses
280

 
318

 
(38
)
 
(12
)
 
896

 
908

 
(12
)
 
(1
)
Provision for credit losses
27

 
14

 
13

 
93

 
73

 
19

 
54

 
NM

Income before income tax expense
253

 
304

 
(51
)
 
(17
)
 
823

 
889

 
(66
)
 
(7
)
Income tax expense
57

 
70

 
(13
)
 
(19
)
 
184

 
203

 
(19
)
 
(9
)
Net income

$196

 

$234

 

($38
)
 
(16
)
 

$639

 

$686

 

($47
)
 
(7
)
Average Balances:
 
 
 
 


 


 
 
 
 
 
 
 


Total assets

$55,614

 

$52,871

 

$2,743

 
5
%
 

$55,793

 

$51,820

 

$3,973

 
8
%
Total loans and leases(1)
53,814

 
51,881

 
1,933

 
4

 
54,299

 
50,799

 
3,500

 
7

Deposits
31,491

 
31,224

 
267

 
1

 
30,535

 
30,736

 
(201
)
 
(1
)
Interest-earning assets
54,087

 
52,137

 
1,950

 
4

 
54,585

 
51,016

 
3,569

 
7

Key Performance Metrics:
 
 
 
 


 
 
 
 
 
 
 
 
 
 
Net interest margin(2)
2.64
%
 
2.89
%
 
(25
) bps
 
 
 
2.70
%
 
2.92
%
 
(22
) bps
 
 
Efficiency ratio
43.35

 
38.83

 
452
  bps
 
 
 
41.65

 
40.16

 
149
  bps
 
 
Loans-to-deposits ratio (average balances)
170.01

 
165.17

 
484
  bps
 
 
 
176.75

 
164.08

 
1,267
  bps
 
 
Return on average total tangible assets(2)
1.40

 
1.75

 
(35
) bps
 
 
 
1.53

 
1.77

 
(24
) bps
 
 
(1)  Includes LHFS.
(2) Ratios for the three and nine months ended September 30, 2019 and 2018 are presented on an annualized basis.

Quarterly Results: Commercial Banking net interest income of $360 million decreased $20 million, or 5%, from $380 million in third quarter 2018, driven by a combination of lower loan yield and higher deposit costs and mix, partially offset by higher loan volumes. Noninterest income of $133 million decreased $7 million, or 5%, from $140 million in third quarter 2018, reflecting lower capital markets fees. Noninterest expense of $213 million increased $11 million, or 5%, from $202 million in third quarter 2018, largely driven by the impact of investment in growth initiatives, the Bowstring Advisors, LLC acquisition and higher indirect expenses. Provision for credit losses increased $13 million from third quarter 2018 due to higher net charge-offs from a small number of uncorrelated losses.     
Year-To-Date Results: Commercial Banking net interest income of $1.1 billion decreased $10 million, or 1%, from $1.1 billion in the first nine months of 2018 primarily due to net interest margin compression, partially offset by higher loan volumes. Noninterest income of $432 million increased $27 million, or 7%, from $405 million in the first nine months of 2018, reflecting higher capital market and foreign exchange fees. Noninterest expense

25
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

of $639 million increased $29 million, from $610 million in the first nine months of 2018, driven by higher salaries and employee benefit expense. Provision for credit losses of $73 million increased $54 million from the first nine months of 2018, driven by higher net charge-offs from a small number of uncorrelated losses.
Other
 
As of and for the Three Months Ended September 30,
 
 
 
 
 
As of and for the Nine Months Ended September 30,
 
 
 
 
(in millions)
2019

 
2018

 
Change

 
Percent

 
2019

 
2018

 
Change

 
Percent

Net interest income

($14
)
 

($8
)
 

($6
)
 
(75
%)
 

($18
)
 

($21
)
 

$3

 
14
%
Noninterest income
24

 
18

 
6

 
33

 
91

 
62

 
29

 
47

Total revenue
10

 
10

 
—

 
0

 
73

 
41

 
32

 
78

Noninterest expense
42

 
22

 
20

 
91

 
89

 
58

 
31

 
53

Loss before provision for credit losses
(32
)
 
(12
)
 
(20
)
 
(167
)
 
(16
)
 
(17
)
 
1

 
6

Provision for credit losses
(9
)
 
(7
)
 
(2
)
 
(29
)
 
(18
)
 
13

 
(31
)
 
NM

(Loss) income before income tax benefit
(23
)
 
(5
)
 
(18
)
 
NM

 
2

 
(30
)
 
32

 
NM

Income tax benefit
(25
)
 
(7
)
 
(18
)
 
NM

 
(34
)
 
(26
)
 
(8
)
 
(31
)
Net income (loss)

$2

 

$2

 

$—

 
0

 

$36

 

($4
)
 

$40

 
NM

Average Balances:
 
 
 
 
 
 


 
 
 
 
 


 


Total assets

$40,131

 

$39,779

 

$352

 
1
%
 

$39,927

 

$39,805

 

$122

 
—
%
Total loans and leases(1)
1,994

 
2,402

 
(408
)
 
(17
)
 
2,134

 
2,484

 
(350
)
 
(14
)
Deposits
6,835

 
7,686

 
(851
)
 
(11
)
 
7,354

 
7,486

 
(132
)
 
(2
)
Interest-earning assets
28,783

 
28,929

 
(146
)
 
(1
)
 
28,666

 
29,122

 
(456
)
 
(2
)
(1) Includes LHFS.

Quarterly Results: Other net interest income decreased $6 million from third quarter 2018 driven by lower investment income and non-core run-off, partially offset by lower funding costs. Noninterest income was up $6 million, primarily due to higher leasing income from the non-core portfolio. Noninterest expense increased $20 million due to the impact of notable items and higher expenses from the non-core leasing portfolio. The income tax benefit included a notable item related to an operational restructure, which reduced income tax expense.
Year-To-Date Results: Other net interest income increased $3 million from the first nine months of 2018 driven by FTP, partially offset by higher funding and swap costs, lower investment income and non-core run-off. Results also reflected an ACL release of $25 million in the first nine months of 2019, compared to an ACL build of $9 million in the first nine months of 2018.

26
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 returns that align with our overall portfolio management strategy. The following table presents our securities AFS and HTM:
 
September 30, 2019
 
December 31, 2018
 
 
(in millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Change in Fair Value
U.S. Treasury and other

$120

 

$120

 

$24

 

$24

 

$96

 
NM

State and political subdivisions
5

 
5

 
5

 
5

 
—

 
—

Mortgage-backed securities, at fair value:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
20,434

 
20,520

 
20,211

 
19,634

 
886

 
5

Other/non-agency
827

 
857

 
236

 
232

 
625

 
NM

Total mortgage-backed securities
21,261

 
21,377

 
20,447

 
19,866

 
1,511

 
8

   Total debt securities available for sale, at fair value

$21,386

 

$21,502

 

$20,476

 

$19,895

 

$1,607

 
8
%
Mortgage-backed securities, at cost:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities

$3,319

 

$3,362

 

$3,425

 

$3,293

 

$69

 
2
%
Other/non-agency
—

 
—

 
740

 
748

 
(748
)
 
(100
)
Total mortgage-backed securities
3,319

 
3,362

 
4,165

 
4,041

 
(679
)
 
(17
)
   Total debt securities held to maturity

$3,319

 

$3,362

 

$4,165

 

$4,041

 

($679
)
 
(17
%)
   Total debt securities available for sale and held to maturity

$24,705

 

$24,864

 

$24,641

 

$23,936

 

$928

 
4
%
Equity securities, at fair value

$47

 

$47

 

$181

 

$181

 

($134
)
 
(74
%)
Equity securities, at cost
734

 
734

 
834

 
834

 
(100
)
 
(12
)
   Total equity securities

$781

 

$781

 

$1,015

 

$1,015

 

($234
)
 
(23
%)
 
The fair value of the AFS debt portfolio of $21.5 billion at September 30, 2019 increased $1.6 billion from $19.9 billion at December 31, 2018 due to lower long-term rates 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 $679 million was primarily attributable to non-agency securities transferred from HTM to AFS upon the adoption of ASU 2017–12, partially offset by transfer of $192 million of agency securities from AFS to HTM. For further information, see Note 1.

As of September 30, 2019, the portfolio’s average effective duration was 3.2 years compared with 4.4 years as of December 31, 2018, as lower long-term rates drove an increase in both actual and projected securities prepayment speeds. We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within risk appetite in the context of the broader interest rate risk in the banking 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 GSE-issued mortgage-backed securities represent 97% of the fair value of the debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge them to the FHLB for collateral purposes. For further discussion of the liquidity coverage ratios, see “Regulation and Supervision — Liquidity Standards” in our 2018 Form 10-K.

27
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Loans and Leases
Our loans and leases are disclosed in portfolio segments and classes as reflected below.
(in millions)
September 30, 2019
 
December 31, 2018
 
Change
 
 Percent
Commercial

$41,356

 

$40,857

 

$499

 
1
 %
Commercial real estate
12,820

 
13,023

 
(203
)
 
(2
)
Leases
2,557

 
2,903

 
(346
)
 
(12
)
Total commercial loans and leases
56,733

 
56,783

 
(50
)
 
—

Residential mortgages
19,699

 
18,978

 
721

 
4

Home equity loans
876

 
1,073

 
(197
)
 
(18
)
Home equity lines of credit
12,148

 
12,710

 
(562
)
 
(4
)
Home equity loans serviced by others
318

 
399

 
(81
)
 
(20
)
Home equity lines of credit serviced by others
81

 
104

 
(23
)
 
(22
)
Automobile
12,070

 
12,106

 
(36
)
 
—

Education
9,729

 
8,900

 
829

 
9

Credit cards
2,133

 
1,991

 
142

 
7

Other retail
4,093

 
3,616

 
477

 
13

Total retail loans
61,147

 
59,877

 
1,270

 
2

Total loans and leases(1)

$117,880

 

$116,660

 

$1,220

 
1
%
(1) LHFS totaling $2.0 billion and $1.3 billion at September 30, 2019 and December 31, 2018, respectively, are not included above.
Total loans and leases increased $1.2 billion from $116.7 billion as of December 31, 2018, driven by strength in retail loans. Growth in education, residential mortgages, other retail and credit cards were partially offset by planned reductions in auto and run-off in the home equity portfolio. Total commercial loans and leases were relatively stable, as growth in commercial loans was offset by a decrease in commercial real estate and planned reduction in leases.
Allowance for Credit Losses and Nonperforming Assets
The 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 ACL, see “—Critical Accounting Estimates — Allowance for Credit Losses” as well as Note 5 and Note 4 in our 2018 Form 10-K.
The ACL totaled $1.3 billion at September 30, 2019 and December 31, 2018. While the overall ACL decreased by $25 million from December 31, 2018, the ALLL increased by $21 million. The change in ACL was primarily driven by a decline in reserves on unfunded commitments attributable to a draw on an unfunded commitment and a reduction in qualitative reserves on commercial loans reflecting improved credit quality. The increase in ALLL was driven by a $329 million provision, partially offset by $308 million in net charge-offs. For further information, see Note 4.
The ALLL represented 1.07% of loans and leases and 159% of nonperforming loans and leases as of September 30, 2019, compared with 1.06% and 156%, as of December 31, 2018, respectively. As of September 30, 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.
Overall credit quality has remained strong in the first nine months of 2019. Nonperforming loans and leases of $793 million as of September 30, 2019 decreased $4 million from December 31, 2018, reflecting an $84 million decrease in retail nonperforming loans, driven by real estate secured loans, partially offset by an $80 million increase in commercial nonperforming loans. Third quarter 2019 net charge-offs of $113 million increased $27 million, or 31%, from $86 million in third quarter 2018. Third quarter 2019 annualized net charge-offs of 38 basis points of average loans and leases were up 8 basis points from third quarter 2018. First nine months of 2019 net charge-offs of $308 million increased $76 million, or 33%, from $232 million in the first nine months of 2018. First nine months of 2019 annualized net charge-offs of 35 basis points of average loans and leases was up 8 basis points from the first nine months of 2018.

28
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Commercial Loan Asset Quality
Our commercial loan and lease portfolio consists of traditional commercial loans, commercial leases and commercial real estate loans. The portfolio is predominantly focused on customers in our footprint and adjacent 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. For more information on regulatory classification ratings, see “—Allowance for Credit Losses and Nonperforming Assets — Commercial Loan Asset Quality” and Note 5 in our 2018 Form 10-K .
As of September 30, 2019, nonperforming commercial loans and leases of $281 million increased $80 million from $201 million as of December 31, 2018. Total commercial nonperforming loans and leases were 0.5% and 0.4% of the total commercial loan and lease portfolio as of September 30, 2019 and December 31, 2018, respectively. Total commercial loan and lease net charge-offs of $32 million and $89 million for third quarter and the first nine months of 2019, respectively, compared to net charge-offs of $16 million and $25 million for the third quarter and first nine months of 2018, respectively. Due to a small number of uncorrelated losses in commercial, the commercial loan and lease portfolio’s annualized net charge-off rate of 22 and 21 basis points for the third quarter and the first nine months of 2019, respectively, compared to a net charge-off rate of 12 and 6 basis points for the third quarter and the first nine months of 2018, respectively.
The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:
 
September 30, 2019
 
 
Criticized
 
(in millions)
Pass

Special Mention
Substandard

Doubtful

Total

Commercial

$38,997


$1,369


$761


$229


$41,356

Commercial real estate
12,437

297

36

50

12,820

Leases
2,466

39

49

3

2,557

Total commercial loans and leases

$53,900


$1,705


$846


$282


$56,733


 
December 31, 2018
 
 
Criticized
 
(in millions)
Pass

Special Mention
Substandard

Doubtful

Total

Commercial

$38,600


$1,231


$828


$198


$40,857

Commercial real estate
12,523

412

82

6

13,023

Leases
2,823

39

41

—

2,903

Total commercial loans and leases

$53,946


$1,682


$951


$204


$56,783


Total commercial criticized loans and leases of $2.8 billion, or 5.0% of total commercial loans and leases, at September 30, 2019 were stable compared to December 31, 2018. Commercial real estate criticized balances of $383 million, or 3.0%, of the commercial real estate portfolio, decreased from $500 million, or 3.8%, as of December 31, 2018. Commercial real estate accounted for 13.5% of total criticized loans as of September 30, 2019, compared to 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 lend selectively in areas outside the footprint primarily in the auto finance, education lending and unsecured portfolios.

29
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following tables present asset quality metrics for the retail loan portfolio:
 
September 30, 2019
 
December 31, 2018
Average refreshed FICO for total portfolio
764

 
763

CLTV ratio for secured real estate(1)
59
%
 
58
%
Nonperforming retail loans as a percentage of total retail
0.84

 
1.00

(1) The real estate secured portfolio CLTV is calculated as the mortgage and second lien loan balance divided by the most recently available value of the property.
 
Three Months Ended September 30,
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
(dollars in millions)
2019

 
2018

 
Change

 
Percent

 
2019

 
2018

 
Change
 
Percent

Net charge-offs

$81

 

$70

 

$11

 
16
%
 

$219

 

$207

 

$12

 
6
%
Annualized net charge-off rate
0.53
%
 
0.47
%
 
6
 bps
 
 
0.49
%
 
0.47
%
 
2
 bps
 
The retail annualized net charge-off rate increased to 0.53% for third quarter 2019, an increase of 6 basis points from third quarter 2018, and 2 basis points for the nine months ended September 30, 2019 from the nine months ended September 30, 2018, both driven by continued seasoning from growth in the unsecured portfolios.
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 September 30, 2019, $675 million of retail loans were classified as TDRs, compared with $723 million as of December 31, 2018. As of September 30, 2019, $145 million of retail TDRs were in nonaccrual status with 43% current with payments compared to $181 million in nonaccrual status with 49% current on payments at December 31, 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,” as well as Note 5 in our 2018 Form 10-K.
The following tables present retail TDRs by loan class, including delinquency status for accruing TDRs and TDRs in nonaccrual:
 
September 30, 2019
 
 
 
As a % of Accruing Retail TDRs
 
 
 
 
(dollars in millions)
Accruing
 
30-89 Days
Past Due
 
90+ Days Past Due
 
Nonaccruing
 
Total
Residential mortgages

$104

 
0.8
%
 
1.8
%
 

$43

 

$147

Home equity loans
72

 
0.3

 
—

 
20

 
92

Home equity lines of credit
149

 
0.5

 
—

 
53

 
202

Home equity loans serviced by others
26

 
0.2

 
—

 
8

 
34

Home equity lines of credit serviced by others
4

 
—

 
—

 
3

 
7

Automobile
12

 
0.1

 
—

 
9

 
21

Education
132

 
0.7

 
0.4

 
7

 
139

Credit cards
26

 
0.6

 
—

 
2

 
28

Other retail
5

 
0.1

 
—

 
—

 
5

Total

$530

 
3.3
%
 
2.2
%
 

$145

 

$675


30
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

 
December 31, 2018
 
 
 
As a % of Accruing Retail TDRs
 
 
 
 
(dollars in millions)
Accruing
 
30-89 Days
Past Due
 
90+ Days Past Due
 
Nonaccruing
 
Total
Residential mortgages

$111

 
3.0
%
 
1.6
%
 

$44

 

$155

Home equity loans
85

 
0.7

 
—

 
25

 
110

Home equity lines of credit
138

 
0.9

 
—

 
64

 
202

Home equity loans serviced by others
31

 
0.3

 
—

 
10

 
41

Home equity lines of credit serviced by others
3

 
—

 
—

 
5

 
8

Automobile
13

 
0.2

 
—

 
10

 
23

Education
131

 
0.9

 
0.3

 
22

 
153

Credit cards
24

 
0.4

 
—

 
1

 
25

Other retail
6

 
—

 
—

 
—

 
6

Total

$542

 
6.4
%
 
1.9
%
 

$181

 

$723


Non-Core Assets    
(in millions)
September 30, 2019
 
December 31, 2018
 
Change
 
Percent
Commercial

$7

 

$72

 

($65
)
 
(90
%)
Commercial real estate
11

 
14

 
(3
)
 
(21
)
Leases
506

 
670

 
(164
)
 
(24
)
Total commercial loans and leases
524

 
756

 
(232
)
 
(31
)
Residential mortgages
96

 
110

 
(14
)
 
(13
)
Home equity loans
25

 
31

 
(6
)
 
(19
)
Home equity lines of credit
16

 
21

 
(5
)
 
(24
)
Home equity loans serviced by others
318

 
399

 
(81
)
 
(20
)
Home equity lines of credit serviced by others
81

 
104

 
(23
)
 
(22
)
Education
182

 
210

 
(28
)
 
(13
)
Total retail loans
718

 
875

 
(157
)
 
(18
)
Total non-core loans and leases
1,242

 
1,631

 
(389
)
 
(24
)
Other assets
66

 
96

 
(30
)
 
(31
)
Total non-core assets

$1,308

 

$1,727

 

($419
)
 
(24
%)

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.
Deposits
The table below presents the major components of our deposits:
(in millions)
September 30, 2019
 
December 31, 2018
 
Change

 
Percent

Demand

$29,939

 

$29,458

 

$481

 
2
%
Checking with interest
24,403

 
23,067

 
1,336

 
6

Regular savings
13,479

 
12,007

 
1,472

 
12

Money market accounts
36,826

 
35,701

 
1,125

 
3

Term deposits
20,067

 
19,342

 
725

 
4

Total deposits

$124,714

 

$119,575

 

$5,139

 
4
%
    
Total deposits as of September 30, 2019 increased $5.1 billion, or 4%, to $124.7 billion, from $119.6 billion as of December 31, 2018. Citizens Access®, our digital platform, attracted $5.6 billion of deposits through third quarter 2019, up from $3.0 billion as of December 31, 2018.

31
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Borrowed Funds
Total borrowed funds as of September 30, 2019 decreased $3.4 billion from December 31, 2018, reflecting a $4.5 billion decrease in long-term FHLB advances given improved funding mix, partially offset by a net $1.4 billion increase in senior debt.
Short-term borrowed funds
A summary of our short-term borrowed funds is presented below:
(in millions)
September 30, 2019
 
December 31, 2018
 
Change

 
Percent

Federal funds purchased

$600

 

$820

 

($220
)
 
(27
%)
Securities sold under agreements to repurchase
267

 
336

 
(69
)
 
(21
)
Other short-term borrowed funds
210

 
161

 
49

 
30

Total short-term borrowed funds

$1,077

 

$1,317

 

($240
)
 
(18
%)
The net increase in other short-term borrowed funds of $49 million resulted from an increase in short-term FHLB 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 $8.4 billion and $13.0 billion at September 30, 2019 and December 31, 2018, respectively. Our remaining available FHLB borrowing capacity was $9.3 billion and $4.8 billion at September 30, 2019 and December 31, 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 September 30, 2019, our unused secured borrowing capacity was approximately $42.8 billion, which included unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.
Key data related to short-term borrowed funds is presented below:
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
 
As of and for the Year Ended December 31,
(dollars in millions)
2019

 
2018

 
2019

 
2018

 
2018
Weighted-average interest rate at period-end:(1)
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
1.47
%
 
—
%
 
1.47
%
 
—
%
 
1.72
%
Other short-term borrowed funds
2.15

 
2.43

 
2.15

 
2.43

 
2.73

Maximum amount outstanding at any month-end during the period:
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase(2)

$867

 

$382

 

$1,499

 

$1,045

 

$1,282

Other short-term borrowed funds
338

 
1,010

 
511

 
1,110

 
1,110

Average amount outstanding during the period:
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase(2)

$487

 

$643

 

$648

 

$598

 

$654

Other short-term borrowed funds
113

 
748

 
72

 
509

 
467

Weighted-average interest rate during the period:(1)
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
1.19
%
 
0.91
%
 
1.45
%
 
0.76
%
 
0.92
%
Other short-term borrowed funds
2.46

 
2.27

 
2.58

 
2.00

 
2.10

(1) Rates exclude certain hedging costs.
(2) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable.

32
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Long-term borrowed funds
A summary of our long-term borrowed funds is presented below:
(in millions)
September 30, 2019
 
December 31, 2018
Parent Company:
 
 
 
2.375% fixed-rate senior unsecured debt, due July 2021

$349

 

$349

4.150% fixed-rate subordinated debt, due September 2022
348

 
348

3.750% fixed-rate subordinated debt, due July 2024
250

 
250

4.023% fixed-rate subordinated debt, due October 2024
42

 
42

4.350% fixed-rate subordinated debt, due August 2025
249

 
249

4.300% fixed-rate subordinated debt, due December 2025
750

 
749

2.850% fixed-rate senior unsecured notes, due July 2026
496

 
—

Banking and Other Subsidiaries:
 
 
 
2.500% senior unsecured notes, due March 2019 (1)
—

 
748

2.450% senior unsecured notes, due December 2019 (1)
749

 
744

2.250% senior unsecured notes, due March 2020 (1)
699

 
691

2.678% floating-rate senior unsecured notes, due March 2020 (1) (2)
300

 
300

2.714% floating-rate senior unsecured notes, due May 2020 (1) (2)
250

 
250

2.200% senior unsecured notes, due May 2020 (1)
500

 
499

2.250% senior unsecured notes, due October 2020 (1)
749

 
738

2.550% senior unsecured notes, due May 2021 (1)
990

 
964

3.250% senior unsecured notes, due February 2022 (1)
713

 
—

2.895% floating-rate senior unsecured notes, due February 2022 (1) (2)
299

 
—

2.954% floating-rate senior unsecured notes, due May 2022 (1) (2)
250

 
249

2.650% senior unsecured notes, due May 2022 (1)
502

 
487

3.700% senior unsecured notes, due March 2023 (1) 
518

 
502

3.054% floating-rate senior unsecured notes, due March 2023 (1) (2)
250

 
249

3.750% senior unsecured notes, due February 2026 (1)
529

 
—

Federal Home Loan Bank advances, 2.425% weighted average rate, due through 2038
3,007

 
7,508

Other
17

 
9

Total long-term borrowed funds

$12,806

 

$15,925

(1) Issued under CBNA’s Global Bank Note Program.
(2) Rate disclosed reflects the floating rate as of September 30, 2019.
Long-term borrowed funds as of September 30, 2019 decreased $3.1 billion from December 31, 2018, reflecting a decrease of $4.5 billion in long-term FHLB borrowings, partially offset by senior unsecured notes issued by CBNA during the first half of 2019.
The Parent Company’s long-term borrowed funds as of September 30, 2019 and December 31, 2018 included principal balances of $2.5 billion and $2.0 billion respectively, and unamortized deferred issuance costs and/or discounts of ($7) million and ($5) million, respectively. The banking and other subsidiaries’ long-term borrowed funds as of September 30, 2019 and December 31, 2018 included principal balances of $10.3 billion and $14.0 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($15) million and ($14) million, respectively, and hedging basis adjustments of $62 million and ($66) million, respectively. See Note 9 for further information about our hedging of certain long-term borrowed funds.
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 banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the 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 consumer compliance, the Bank Secrecy Act, anti-money laundering compliance, and increased internal audit activities, among other areas. For more information, see “Regulation and Supervision” in our 2018 Form 10-K.


33
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Dodd-Frank Act
The Dodd-Frank Act regulates many aspects of the financial 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 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 were not required to submit a 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 FRB has not objected to our maximum planned capital actions for the period beginning July 1, 2019 and ending June 30, 2020. For 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 CCAR, adjusted for any changes in our regulatory capital ratios since the FRB acted on our 2018 capital plan. On June 27, 2019, our Board of Directors authorized common share repurchases of up to $1.275 billion over the four-quarter period beginning July 1, 2019. The timing and exact amount of future share repurchases will depend on various factors, including capital position, financial performance and market conditions.
In October 2019, the FRB finalized rules (the “October 2019 Final Rules”) that establish a revised framework for applying prudential standards to large U.S. banking organizations based on risk, consistent with the ongoing efforts to tailor the regulatory framework in a manner consistent with the EGRRCPA. Concurrently, the FRB, jointly with the OCC and the FDIC, finalized the regulatory capital, liquidity and resolution plan requirements to firms with more than $100 billion in total assets. Category IV firms with $100 billion to $250 billion in total assets, such as us, will be subject to biennial supervisory stress-testing and will be exempt from the Dodd-Frank Act company-run stress testing and related disclosure requirements. The FRB will continue to supervise Category IV firms on an ongoing basis, including evaluation of the capital adequacy and capital planning processes during off-cycle years.
Section 165(d) of the Dodd-Frank Act and the November 2011 resolution plan rule require certain financial companies to report periodically a 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. EGRRCPA revised the resolution planning requirement, whereby it raised the $50 billion minimum asset threshold for general application of the resolution planning requirement to $250 billion in total consolidated assets, and provided the FRB with the discretion to apply the resolution planning requirement to firms with $100 billion or more and less than $250 billion in total consolidated assets. In accordance with the October 2019 Final Rules, Category IV institutions, such as us, are no longer required to submit a 165(d) Resolution Plan.
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 total assets, such as CBNA, to periodically submit a resolution plan. CBNA submitted its most recent resolution plan to the FDIC in July 2018. On April 22, 2019, the FDIC published an Advance Notice of Proposed Rulemaking concerning how to tailor and improve its rule requiring certain insured depository institutions to submit resolution plans.
For additional discussion of the Dodd-Frank Act and EGRRCPA requirements and their related application, see “Regulation and Supervision” and “—Capital and Regulatory Matters” in our 2018 Form 10-K.
Capital Framework
Under the current U.S. Basel III capital framework, we and our banking subsidiary must meet the following specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and tier 1 leverage ratio of 4.0%.
In July 2019, the FRB and the other federal banking regulators issued a final rule to simplify regulatory capital treatment for MSRs, certain deferred tax assets arising from temporary differences (“DTAs”) and investments in the capital 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 assignment of an exposure category risk weight for investments in the capital of unconsolidated financial institutions not deducted from CET1 capital.

34
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

A capital conservation buffer (“CCB”) is imposed on top of the following three minimum risk-based capital ratios: CET1 capital, tier 1 capital and total capital. As of January 1, 2019, the CCB reached its fully phased-in level of 2.5%. 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 requirement. If adopted, the proposal would change the way in which the minimum risk capital ratios are calculated by replacing the current static 2.5% CCB with a stress capital buffer requirement.
For additional discussion of the U.S. Basel III capital framework and its related application, see “Regulation and Supervision” in our 2018 Form 10-K. 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(1)(2)
(in millions, except ratio data)
Amount
Ratio
September 30, 2019
   CET1 capital

$14,416

10.3
%
7.0
%
   Tier 1 capital
15,549

11.1

8.5

   Total capital
18,237

13.0

10.5

   Tier 1 leverage
15,549

9.9

4.0

   Risk-weighted assets
140,136

 
 
   Quarterly adjusted average assets
156,355

 
 
December 31, 2018
   CET1 capital

$14,485

10.6
%
6.4
%
   Tier 1 capital
15,325

11.3

7.9

   Total capital
18,157

13.3

9.9

   Tier 1 leverage
15,325

10.0

4.0

   Risk-weighted assets
136,202

 
 
   Quarterly adjusted average assets
153,026

 
 
(1) Required “Minimum Capital ratio” for 2019 and 2018 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%.
(2) “Minimum Capital ratio” includes capital conservation buffer of 2.500% for 2019 and 1.875% for 2018; N/A to Tier 1 leverage.
At September 30, 2019, our CET1 capital, tier 1 capital and total capital ratios were 10.3%, 11.1% and 13.0%, respectively, as compared with 10.6%, 11.3%, and 13.3%, respectively, as of December 31, 2018. The CET1 capital ratio decreased as $3.9 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 nine months ended September 30, 2019. The tier 1 capital ratio decreased as the changes in the CET1 capital ratio were partially offset by the issuance of preferred stock as described further in “—Capital Transactions” below. The total capital ratio decreased due to the changes in CET1 and tier 1 capital ratios and an increase in non-qualifying subordinated debt. At September 30, 2019, our CET1 capital, tier 1 capital and total capital ratios were 330 basis points, 260 basis points and 250 basis points, respectively, above their regulatory minimums plus the 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 $14.4 billion at September 30, 2019, and decreased $69 million from $14.5 billion at December 31, 2018, due to common share repurchases, dividends and an increase in goodwill and intangibles related to Acquisitions partially offset by net income for the nine months ended September 30, 2019. Tier 1 capital at September 30, 2019 totaled $15.5 billion, reflecting a $224 million increase from $15.3 billion at December 31, 2018, driven by the changes in CET1 capital and the issuance of preferred stock. At September 30, 2019, we had $1.1 billion of fixed-to-floating non-cumulative perpetual preferred stock issued and outstanding, an increase of $293 million from $840 million at December 31, 2018, given the first quarter 2019 issuance of 300,000 shares of Series D Preferred Stock that qualified as additional tier 1 capital. Total capital of $18.2 billion at September 30, 2019, increased $80 million from December 31, 2018, driven by the changes in CET1 and tier 1 capital and an increase in non-qualifying subordinated debt.
RWA totaled $140.1 billion at September 30, 2019, based on U.S. Basel III Standardized rules, up $3.9 billion from December 31, 2018. The increase was driven by growth in retail loans, including education, residential mortgages, and loans held for sale as well as higher derivative valuations, the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842), commercial commitments, and growth in multi-family loans. The increase in RWA was also driven by market risk RWA, as we met the reporting threshold prescribed

35
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

by Market Risk Capital Guidelines. The increases were partially offset by a decrease in commercial loans and run-off in the home equity portfolio.
As of September 30, 2019, the tier 1 leverage ratio was 9.9%, reflecting a decrease of seven basis points from 10.0% at December 31, 2018. The decrease was driven by the change in tier 1 capital level noted above, which was more than offset by a $3.3 billion increase in quarterly adjusted average assets.
The following table presents our capital composition under the U.S. Basel III capital framework:
(in millions)
September 30, 2019
 
December 31, 2018
Total common stockholders’ equity

$20,718

 

$19,977

Exclusions:(1)
 
 
 
Net unrealized losses recorded in accumulated other comprehensive income, net of tax:
 
 
 
Debt and equity securities
(14
)
 
490

Derivatives
—

 
143

Unamortized net periodic benefit costs
454

 
463

Deductions:
 
 
 
Goodwill
(7,044
)
 
(6,923
)
Deferred tax liability associated with goodwill
373

 
366

Other intangible assets
(71
)
 
(31
)
Total common equity tier 1
14,416

 
14,485

Qualifying preferred stock
1,133

 
840

Total tier 1 capital
15,549

 
15,325

Qualifying subordinated debt(2)
1,380

 
1,499

Allowance for loan and lease losses
1,263

 
1,242

Allowance for credit losses for off-balance sheet exposure
45

 
91

Total capital

$18,237

 

$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 September 30, 2019 and December 31, 2018, the amount of non-qualifying subordinated debt excluded from regulatory capital was $258 million and $139 million, respectively.
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. There have been no significant changes to our capital adequacy risk appetite and risk management framework as described in “—Capital and Regulatory Matters” in our 2018 Form 10-K.
Capital Transactions
The following capital actions were completed by the Company during the nine months ended September 30, 2019:
•
Issued $300 million, or 300,000 shares, of 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock (the “Series D Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, with net proceeds of $293 million;
•
Declared quarterly common stock dividends of $0.32 per share for first and second quarters and $0.36 per share for third quarter of 2019, aggregating to $459 million;
•
Declared 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 $14 million;
•
Declared a semi-annual dividend of $30.00 per share on the 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, aggregating to $9 million;
•
Declared quarterly dividends of $15.94 per share for the first, second, and third quarters of 2019 on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $14 million;
•
Declared quarterly dividends of $11.82 per share for the first quarter of 2019 and $15.88 per share for the second and third quarters of 2019 on the 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, aggregating to $13 million; and

36
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

•
Repurchased $820 million of our outstanding common stock.

Banking Subsidiary Capital
The following table presents our banking subsidiary’s capital ratios under U.S. Basel III Standardized rules:
 
September 30, 2019
 
December 31, 2018
(dollars in millions, except ratio data)
Amount

Ratio

 
Amount

Ratio

Citizens Bank, National Association
 
 
 
 
 
CET1 capital

$15,357

11.0
%
 

$11,994

10.6
%
Tier 1 capital
15,357

11.0

 
11,994

10.6

Total capital
17,696

12.7

 
14,252

12.5

Tier 1 leverage
15,357

9.8

 
11,994

9.9

Risk-weighted assets
139,849

 
 
113,610

 
Quarterly adjusted average assets
155,988

 
 
121,686

 

CBNA’s CET1 capital totaled $15.4 billion at September 30, 2019, up $3.4 billion from $12.0 billion at December 31, 2018. The increase was primarily driven by the net impact of the merger of Citizens Bank of Pennsylvania (“CBPA”) into CBNA effective January 2, 2019, and net income for the nine months ended September 30, 2019. The increase was partially offset by dividend payments to the Parent Company and an increase in goodwill and intangibles related to Acquisitions. Total capital was $17.7 billion at September 30, 2019, an increase of $3.4 billion from $14.3 billion at December 31, 2018, driven by the change in CET1 capital, an increase in ACL, primarily attributable to the merger and slightly offset by an increase in non-qualifying subordinated debt.
CBNA’s RWA totaled $139.8 billion at September 30, 2019, an increase of $26.2 billion from December 31, 2018, driven by approximately $22 billion resulting from the merger of CBPA into CBNA. In addition, the increase in RWA was driven by growth in retail loans, including education, residential mortgages, and loans held for sale as well as higher derivative valuations, the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842), commercial commitments, and growth in multi-family loans. The increase in RWA was also driven by market risk RWA, as we met the reporting threshold prescribed by Market Risk Capital Guidelines. The increases were partially offset by a decrease in commercial loans and run-off in the home equity portfolio.
As of September 30, 2019, CBNA’s tier 1 leverage ratio decreased one basis point to 9.8% from 9.9% at December 31, 2018, primarily driven by a $34.3 billion increase in quarterly adjusted average assets that drove a 243 basis point decline in the ratio, partially offset by a $3.4 billion increase in tier 1 capital that drove a 242 basis point increase 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 level.
Parent Company Liquidity
Our Parent Company’s primary sources of cash are (i) dividends and interest received from CBNA as a result of investing in bank equity and subordinated debt and (ii) externally issued preferred stock as well as 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 CBNA, for additional equity and, as required, its 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.

37
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

On January 29, 2019, the Parent Company issued $300 million, or 12,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). For further information, see Note 11.
On July 25, 2019, the Parent Company issued $500 million in seven-year 2.850% fixed-rate senior notes.
On October 28, 2019, the Parent Company issued $450 million, or 18,000,000 depositary shares, each representing a 1/40th interest in a share of its 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). For further information, see Note 11.
During the three months ended September 30, 2019 and 2018, the Parent Company declared dividends on common stock of $162 million and $129 million, respectively, and declared dividends on preferred stock of $17 million and $7 million, respectively. During the nine months ended September 30, 2019 and 2018, the Parent Company declared dividends on common stock of $459 million and $344 million, respectively, and declared dividends on preferred stock of $50 million and $14 million, respectively.
During the three months ended September 30, 2019 and 2018, the Parent Company repurchased $500 million and $400 million of its outstanding common stock, respectively. During the nine months ended September 30, 2019 and 2018, the Parent Company repurchased $820 million and $725 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 $1.3 billion as of September 30, 2019 compared with $911 million as of December 31, 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 September 30, 2019, the Parent Company’s double-leverage ratio was 99.7%.
CBNA Liquidity
In the ordinary course of business, the liquidity of CBNA 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 CBNA 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.
As CBNA’s major businesses involve taking deposits and making 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 February 14, 2019, CBNA issued $1.5 billion in senior notes, consisting of $700 million in three-year 3.25% fixed-rate notes, $300 million in three-year floating-rate notes, and $500 million in seven-year 3.75% fixed-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.

38
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Factors Affecting Liquidity
Given the composition of assets and borrowing sources, contingent liquidity risk at CBNA 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 its balance sheet, the funding liquidity risk of CBNA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of 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.
An additional variable affecting our access 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:
 
 
September 30, 2019
 
 
Moody’s  
 
Standard and
Poor’s
 
Fitch  
 
 
Citizens Financial Group, Inc.:
 
 
 
 
 
 
Long-term issuer
NR
 
BBB+
 
BBB+
 
Short-term issuer
NR
 
A-2
 
F1
 
Subordinated debt
NR
 
BBB
 
BBB
 
Preferred Stock
NR
 
BB+
 
BB-
 
Citizens Bank, National Association:
 
 
 
 
 
 
Long-term issuer
Baa1
 
A-
 
BBB+
 
Short-term issuer
NR
 
A-2
 
F1
 
Long-term deposits
A1
 
NR
 
A-
 
Short-term deposits
P-1
 
NR
 
F1
 
 NR = Not rated
 
 
 
 
 
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 subsidiary continues to minimize reliance on unsecured wholesale funding. At September 30, 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 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 our 2018 Form 10-K.
The LCR was developed by the U.S. federal banking regulators to ensure banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. As of September 30, 2019, we remained fully compliant with the current LCR rule as a modified LCR financial institution. In accordance with the October 2019 Final Rules, Category IV institutions, such as us, will no longer be subject to the requirements of the LCR rule as of December 31, 2019.
Liquidity Risk Management and Governance
Liquidity risk is measured and managed by the Funding and Liquidity unit within our Treasury unit in accordance with policy guidelines promulgated by our Board and the Asset Liability Committee. In managing liquidity risk, the Funding and Liquidity unit 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.
Our Funding and Liquidity unit’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

39
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

funding requirements resulting from idiosyncratic, systemic, and combination stress events, and regulatory liquidity requirements) in a timely manner from stable and cost-efficient funding sources.
We seek to accomplish this goal 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 September 30, 2019:
•
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 94.5%;
•
Our cash position (which is defined as cash balance held at the FRB) totaled $2.0 billion;
•
Contingent liquidity was $31.8 billion, consisting of unencumbered high-quality liquid securities of $20.5 billion, unused FHLB capacity of $9.3 billion, and our cash position of $2.0 billion. Asset liquidity (a component of contingent liquidity) was $22.5 billion consisting of our cash position of $2.0 billion and unencumbered high-quality liquid securities of $20.5 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 $13.0 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 nine months ended September 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 unit 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; 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 CBNA 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.
OFF-BALANCE SHEET ARRANGEMENTS
The following table presents our outstanding off-balance sheet arrangements. For further information, see Note 12.
(in millions)
September 30, 2019
 
December 31, 2018
 
Change

 
Percent

Commitments to extend credit

$70,825

 

$69,553

 

$1,272

 
2
%
Letters of credit
2,148

 
2,125

 
23

 
1

Marketing rights
33

 
37

 
(4
)
 
(11
)
Risk participation agreements
47

 
19

 
28

 
147

Loans sold with recourse
32

 
5

 
27

 
NM

Total

$73,085

 

$71,739

 

$1,346

 
2
%
CRITICAL ACCOUNTING ESTIMATES
Our unaudited interim Consolidated Financial Statements, which are included in this 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

40
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

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 estimates relate to the determination of the ACL and the fair value of MSRs. For additional information regarding these accounting estimates and their related application, see “—Critical Accounting Estimates” in our 2018 Form 10-K. No material changes were made to these critical accounting policies or estimates during the nine months ended September 30, 2019.
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 Liability Committee, Business Initiatives Review Committee, and the Conduct and Ethics Committee.
There have been no significant changes in our risk governance practices, risk framework, risk appetite, or credit risk as described in “—Risk Governance” in our 2018 Form 10-K.
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 commodity risk and de minimis direct currency and equity risk. We also have market risk related to capital markets loan originations, as well as the valuation of our MSRs. There have been no significant changes in our sources of interest rate risk, interest rate risk practices, risk framework, metrics or assumptions as described in “—Market Risk — Non-Trading Risk” in our 2018 Form 10-K.
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. As the following table illustrates, our balance sheet is asset sensitive; net interest income would benefit from an increase in interest rates, 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.

41
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The table below presents the sensitivity of net interest income to various parallel yield curve shifts from the market implied forward yield curve:
 
Estimated % Change in Net Interest Income over 12 Months
Basis points
September 30,
 2019
 
December 31, 2018
Instantaneous Change in Interest Rates
 
 
 
+200
6.8
 %
 
9.5
 %
+100
3.7

 
4.8

-100
(3.9
)
 
(4.5
)
Gradual Change in Interest Rates
 
 
 
+200
2.7

 
4.9

+100
1.3

 
2.5

-100
(1.9
)
 
(1.1
)
    
Given broad expectations that the FRB would cut interest rates, we continue to reduce asset sensitivity to mitigate the potential impact of declining rates. Asset sensitivity against a 200 basis point gradual increase in rates was 2.7% at September 30, 2019, a decrease from 4.9% at December 31, 2018. Additionally, we have reduced our short-term interest rate exposure (six months and under) to approximately 20% to 25%, with the remainder in the intermediate to long tenors of the curve. The risk position can be affected by changes in interest rates which impact the repricing sensitivity or beta of the deposit base as well as the cash flows on assets that allow for early payoff without a penalty. 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 fluctuations 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.
 
September 30, 2019
 
December 31, 2018
 
 
 
Weighted Average
 
 
Weighted Average
(dollars in millions)
Notional Amount
Fair Value
Maturity (Years)
Receive Rate
Pay Rate
 
Notional Amount
Fair Value
Maturity (Years)
Receive Rate
Pay Rate
Cash flow - receive-fixed/pay-variable - conventional ALM(1)

$19,350


($5
)
1.8
1.8
%
2.0
%
 

$8,100


$3

2.2

1.7
%
2.5
%
Fair value - receive-fixed/pay-variable - conventional debt
4,650

—

2.3
2.0

2.2

 
3,450

2

2.4

1.8

2.7

Cash flow - pay-fixed/receive-variable - conventional ALM
4,750

2

4.20

2.0

1.7

 
500

—

—

2.4

1.3

Fair value - pay-fixed/receive-variable - conventional ALM(2)
2,846

—

4.80

2.1

1.8

 
—

—

—

—

—

Total portfolio swaps

$31,596


($3
)
2.5
1.9
%
2.0
%
 

$12,050


$5

2.2

1.8
%
2.5
%
Floors - conventional ALM

$—


$—

—

—

—

 

$7,000


$—

0.5

 
 
(1) In September 2019, we reduced asset sensitivity over the December 2019 to December 2021 period with the addition of $2.0 billion of December 2019 forward starting receive-fixed interest rate swaps as part of an ongoing program to manage interest rate risk.
(2) In the third quarter of 2019, Citizens executed a last-of-layer hedge utilizing pay-fixed interest rate swap agreements to manage the interest rate exposure on mortgage-backed securities held in its available for sale debt securities portfolio. The notional and fair value of these hedges were $2.0 billion and $1 million, respectively.

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

42
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

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 the Loan Underwriting Approval Committee.
Mortgage Servicing Rights    
We have market risk associated with the value of 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 MSRs 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 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 September 30, 2019 and December 31, 2018, the fair value of these MSRs was $510 million and $600 million, respectively, and the total notional amount of related derivative contracts was $19.5 billion and $4.6 billion, respectively. 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 September 30, 2019 and December 31, 2018, our non-FAMC MSRs originated on or before December 31, 2018 had a book value of $177 million and $221 million, respectively, and were carried at the lower of cost or market. As of September 30, 2019 and December 31, 2018, these MSRs had a fair value of $178 million and $243 million, respectively, which exceeded the carrying value at those dates. Depending on the interest rate environment, economic hedges may be used to protect the market value of these MSRs.
As with our traded market risk based activities, earnings at-risk excludes the 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 CBNA and CCMI. There have been no significant changes in our market risk governance, market risk measurement, or market risk practices including VaR, stressed VaR, sensitivity analysis, stress testing, or VaR model review and validation as described in “—Market Risk — Trading Risk” in our 2018 Form 10-K.
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.” The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR.

43
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the results of our modeled and non-modeled measures for regulatory capital calculations:
(in millions)
 
For the Three Months Ended September 30, 2019
 
For the Three Months Ended September 30, 2018
Market Risk Category 
 
Period End
 
Average 
 
High
 
Low
 
Period End
 
Average
 
High
 
Low
Interest Rate
 

$1

 

$1

 

$1

 

$—

 

$2

 

$2

 

$2

 

$2

Foreign Exchange Currency Rate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Credit Spread
 
4

 
4

 
5

 
3

 
2

 
3

 
3

 
2

Commodity
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

General VaR
 
4

 
4

 
5

 
3

 
3

 
3

 
4

 
3

Specific Risk VaR
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total VaR
 

$4

 

$4

 

$5

 

$3

 

$3

 

$3

 

$4

 

$3

Stressed General VaR
 

$11

 

$9

 

$12

 

$6

 

$10

 

$12

 

$14

 

$10

Stressed Specific Risk VaR
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Stressed VaR
 

$11

 

$9

 

$12

 

$6

 

$10

 

$12

 

$14

 

$10

Market Risk Regulatory Capital
 

$39

 
 
 
 
 
 
 

$47

 
 
 
 
 
 
Specific Risk Not Modeled Add-on
 
14

 
 
 
 
 
 
 
14

 
 
 
 
 
 
de Minimis Exposure Add-on
 
—

 
 
 
 
 
 
 
—

 
 
 
 
 
 
Total Market Risk Regulatory Capital
 

$53

 
 
 
 
 
 
 

$61

 
 
 
 
 
 
Market Risk-Weighted Assets
 

$662

 
 
 
 
 
 
 
760

 
 
 
 
 
 
Market Risk-Weighted Assets (included in our FR Y-9C regulatory filing)
 

$662

 
 
 
 
 
 
 

$—

 
 
 
 
 
 
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, using models 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 September 30, 2019.
Daily VaR Backtesting
graphq319v4.jpg

44
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. 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 September 30,
 
As of and for the Nine Months Ended September 30,
(in millions, except share, per share and ratio data)
Ref.
2019

 
2018

 
2019

 
2018

Total revenue (GAAP)
A

$1,638

 

$1,564

 

$4,854

 

$4,535

Noninterest expense (GAAP)
B
973

 
910

 
2,861

 
2,668

Net income (GAAP)
C
449

 
443

 
1,341

 
1,256

Net income available to common stockholders (GAAP)
D
432

 
436

 
1,291

 
1,242

Return on average common equity:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$20,533

 

$19,599

 

$20,300

 

$19,687

Return on average common equity
D/E
8.35
 %
 
8.82
%
 
8.50
 %
 
8.44
%
Return on average tangible common equity:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$20,533

 

$19,599

 

$20,300

 

$19,687

Less: Average goodwill (GAAP)
 
7,044

 
6,926

 
7,034

 
6,900

Less: Average other intangibles (GAAP)
 
73

 
22

 
71

 
9

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
372

 
360

 
371

 
358

Average tangible common equity
F

$13,788

 

$13,011

 

$13,566

 

$13,136

Return on average tangible common equity
D/F
12.44
 %
 
13.29
%
 
12.72
 %
 
12.64
%
Return on average total assets:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$162,110

 

$155,624

 

$161,344

 

$153,482

Return on average total assets
C/G
1.10
 %
 
1.13
%
 
1.11
 %
 
1.09
%
Return on average total tangible assets:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$162,110

 

$155,624

 

$161,344

 

$153,482

Less: Average goodwill (GAAP)
 
7,044

 
6,926

 
7,034

 
6,900

Less: Average other intangibles (GAAP)
 
73

 
22

 
71

 
9

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
372

 
360

 
371

 
358

Average tangible assets
H

$155,365

 

$149,036

 

$154,610

 

$146,931

Return on average total tangible assets
C/H
1.15
 %
 
1.18
%
 
1.16
 %
 
1.14
%
Efficiency ratio:
 
 
 
 
 
 
 
 
Efficiency ratio
B/A
59.40
 %
 
58.20
%
 
58.94
 %
 
58.84
%
Operating leverage:
 
 
 
 
 
 
 
 
Increase in total revenue
 
4.72
 %
 
8.44
%
 
7.03
 %
 
7.40
%
Increase in noninterest expense
 
6.88

 
6.23

 
7.21

 
3.61

Operating leverage
 
(2.16
)%
 
2.21
%
 
(0.18
)%
 
3.79
%
Effective income tax rate:
 
 
 
 
 
 
 
 
Income before income tax expense
I

$564

 

$576

 

$1,710

 

$1,626

Income tax expense
J
115

 
133

 
369

 
370

Effective income tax rate
J/I
20.46
 %
 
23.16
%
 
21.58
 %
 
22.77
%
Net income per average common share - basic and diluted:
 
 
 
 
 
 
 
 
Average common shares outstanding - basic (GAAP)
K
445,703,987

 
475,957,526

 
454,802,186

 
482,691,884

Average common shares outstanding - diluted (GAAP)
L
447,134,595

 
477,599,917

 
456,218,755

 
484,250,843

Net income per average common share - basic (GAAP)
D/K

$0.97

 

$0.92

 

$2.84

 

$2.57

Net income per average common share - diluted (GAAP)
D/L
0.97

 
0.91

 
2.83

 
2.57

Dividend payout ratio:
 
 
 
 
 
 
 
 
Cash dividends declared and paid per common share
M

$0.36

 

$0.27

 

$1.00

 

$0.71

Dividend payout ratio
M/(D/K)
37
 %
 
29
%
 
35
 %
 
28
%


45
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS


 
 
As of and for the Three Months Ended September 30,
 
 
2019

2018
(in millions, except ratio data)
Ref.
Consumer
Banking
Commercial
Banking
Other
Consolidated

Consumer
Banking
Commercial
Banking
Other
Consolidated
Net income (loss) available to common stockholders:


















Net income (GAAP)
N

$251


$196


$2


$449



$207


$234


$2


$443

Less: Preferred stock dividends

—

—

17

17


—

—

7

7

Net income (loss) available to common stockholders
O

$251


$196


($15
)

$432



$207


$234


($5
)

$436

Efficiency ratio:
















Total revenue (GAAP)
P

$1,135


$493


$10


$1,638



$1,034


$520


$10


$1,564

Noninterest expense (GAAP)
Q
718

213

42

973


686

202

22

910

Efficiency ratio
Q/P
63.28
%
43.35
%
NM

59.40
%

66.29
%
38.83
%
NM

58.20
%
Return on average total tangible assets:










Average total assets (GAAP)


$66,365


$55,614


$40,131


$162,110



$62,974


$52,871


$39,779


$155,624

Less: Average goodwill (GAAP)

122

46

6,876

7,044


39

11

6,876

6,926

Less: Average other intangibles (GAAP)

66

7

—

73


20

2

—

22

Add: Average deferred tax liabilities related to goodwill (GAAP)

1

1

370

372


—

—

360

360

Average total tangible assets
R

$66,178


$55,562


$33,625


$155,365



$62,915


$52,858


$33,263


$149,036

Return on average total tangible assets
N/R
1.50
%
1.40
%
NM

1.15
%

1.31
%
1.75
%
NM

1.18
%

 
 
As of and for the Nine Months Ended September 30,
 
 
2019
 
2018
(in millions, except ratio data)
Ref.
Consumer
Banking
Commercial
Banking
Other
Consolidated
 
Consumer
Banking
Commercial
Banking
Other
Consolidated
Net income (loss) available to common stockholders:
 
 
 
 
 
 
 
 
 
 
Net income (loss) (GAAP)
N

$666


$639


$36


$1,341

 

$574


$686


($4
)

$1,256

Less: Preferred stock dividends
 
—

—

50

50

 
—

—

14

14

Net income (loss) available to common stockholders
O

$666


$639


($14
)

$1,291

 

$574


$686


($18
)

$1,242

Efficiency ratio:
 

 
 
 

 

 

 

Total revenue (GAAP)
P

$3,246


$1,535


$73


$4,854

 

$2,976


$1,518


$41


$4,535

Noninterest expense (GAAP)
Q
2,133

639

89

2,861

 
2,000

610

58

2,668

Efficiency ratio
Q/P
65.71
%
41.65
%
NM

58.94
%
 
67.20
%
40.16
%
NM

58.84
%
Return on average total tangible assets:
 
 
 
 
 
 
 
 
 
 
Average total assets (GAAP)
 

$65,624


$55,793


$39,927


$161,344

 

$61,857


$51,820


$39,805


$153,482

Less: Average goodwill (GAAP)
 
120

38

6,876

7,034

 
13

11

6,876

6,900

Less: Average other intangibles (GAAP)
 
65

6

—

71

 
7

2

—

9

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
1

—

370

371

 
—

—

358

358

Average total tangible assets
R

$65,440


$55,749


$33,421


$154,610

 

$61,837


$51,807


$33,287


$146,931

Return on average total tangible assets
N/R
1.36
%
1.53
%
NM

1.16
%
 
1.24
%
1.77
%
NM

1.14
%



46
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents computations of non-GAAP financial measures representing our Underlying results used throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations”:
 
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
(in millions, except share, per share and ratio data)
Ref.
2019

 
2018

 
2019

 
2018

Total revenue, Underlying:
 
 
 
 
 
 
 
 
Total revenue (GAAP)
A

$1,638

 

$1,564

 

$4,854

 

$4,535

Less: Notable items
 
—

 
—

 
—

 
—

Total revenue, Underlying (non-GAAP)
S

$1,638

 

$1,564

 

$4,854

 

$4,535

Noninterest expense, Underlying:
 
 
 
 
 
 
 
 
Noninterest expense (GAAP)
B

$973

 

$910

 

$2,861

 

$2,668

Less: Notable items
 
19

 
9

 
31

 
9

Noninterest expense, Underlying (non-GAAP)
T

$954

 

$901

 

$2,830

 

$2,659

Pre-provision profit:
 
 
 
 
 
 
 
 
Total revenue (GAAP)
A

$1,638

 

$1,564

 

$4,854

 

$4,535

Less: Noninterest expense (GAAP)
B
973

 
910

 
2,861

 
2,668

Pre-provision profit (GAAP)
 

$665

 

$654

 

$1,993

 

$1,867

Pre-provision profit, Underlying
 
 
 
 
 
 
 
 
Total revenue, Underlying (non-GAAP)
S

$1,638

 

$1,564

 

$4,854

 

$4,535

Less: Noninterest expense, Underlying (non-GAAP)
T
954

 
901

 
2,830

 
2,659

Pre-provision profit, Underlying (non-GAAP)
 

$684

 

$663

 

$2,024

 

$1,876

Income before income tax expense, Underlying:
 
 
 
 
 
 
 
 
Income before tax expense (GAAP)
I

$564

 

$576

 

$1,710

 

$1,626

Less: Notable items
 
(19
)
 
(9
)
 
(31
)
 
(9
)
Income before income tax expense, Underlying (non-GAAP)
U

$583

 

$585

 

$1,741

 

$1,635

Income tax expense and effective income tax rate, Underlying:
 
 
 
 
 
 
 
 
Income tax expense (GAAP)
J

$115

 

$133

 

$369

 

$370

Less: Notable items
 
(15
)
 
(2
)
 
(18
)
 
(2
)
Income tax expense, Underlying (non-GAAP)
V

$130

 

$135

 

$387

 

$372

Effective income tax rate (GAAP)
J/I
20.46
 %
 
23.16
%
 
21.58
 %
 
22.77
%
Effective income tax rate, Underlying (non-GAAP)
V/U
22.29

 
23.20

 
22.20

 
22.78

Net income, Underlying:
 
 
 
 
 
 
 
 
Net income (GAAP)
C

$449

 

$443

 

$1,341

 

$1,256

Add: Notable items, net of tax expense
 
4

 
7

 
13

 
7

Net income, Underlying (non-GAAP)
W

$453

 

$450

 

$1,354

 

$1,263

 
 
 
 
 
 
 
 
 

47
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

 
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
(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

$432

 

$436

 

$1,291

 

$1,242

Add: Notable items, net of tax expense
 
4

 
7

 
13

 
7

Net income available to common stockholders, Underlying (non-GAAP)
X

$436

 

$443

 

$1,304

 

$1,249

Return on average common equity and return on average common equity, Underlying:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$20,533

 

$19,599

 

$20,300

 

$19,687

Return on average common equity
D/E
8.35
 %
 
8.82
%
 
8.50
 %
 
8.44
%
Return on average common equity, Underlying (non-GAAP)
X/E
8.45

 
8.96

 
8.59

 
8.48

Return on average tangible common equity and return on average tangible common equity, Underlying:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$20,533

 

$19,599

 

$20,300

 

$19,687

Less: Average goodwill (GAAP)
 
7,044

 
6,926

 
7,034

 
6,900

Less: Average other intangibles (GAAP)
 
73

 
22

 
71

 
9

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
372

 
360

 
371

 
358

Average tangible common equity
F

$13,788

 

$13,011

 

$13,566

 

$13,136

Return on average tangible common equity
D/F
12.44
 %
 
13.29
%
 
12.72
 %
 
12.64
%
Return on average tangible common equity, Underlying (non-GAAP)
X/F
12.58

 
13.50

 
12.86

 
12.71

Return on average total assets and return on average total assets, Underlying:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$162,110

 

$155,624

 

$161,344

 

$153,482

Return on average total assets
C/G
1.10
 %
 
1.13
%
 
1.11
 %
 
1.09
%
Return on average total assets, Underlying (non-GAAP)
W/G
1.11

 
1.15

 
1.12

 
1.10

Return on average total tangible assets and return on average total tangible assets, Underlying:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$162,110

 

$155,624

 

$161,344

 

$153,482

Less: Average goodwill (GAAP)
 
7,044

 
6,926

 
7,034

 
6,900

Less: Average other intangibles (GAAP)
 
73

 
22

 
71

 
9

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
372

 
360

 
371

 
358

Average tangible assets
H

$155,365

 

$149,036

 

$154,610

 

$146,931

Return on average total tangible assets
C/H
1.15
 %
 
1.18
%
 
1.16
 %
 
1.14
%
Return on average total tangible assets, Underlying (non-GAAP)
W/H
1.16

 
1.20

 
1.17

 
1.15

Efficiency ratio and efficiency ratio, Underlying:
 
 
 
 
 
 
 
 
Efficiency ratio
B/A
59.40
 %
 
58.20
%
 
58.94
 %
 
58.84
%
Efficiency ratio, Underlying (non-GAAP)
T/S
58.22

 
57.62

 
58.30

 
58.64

Operating leverage and operating leverage, Underlying:
 
 
 
 
 
 
 
 
Increase in total revenue
 
4.72
 %
 
8.44
%
 
7.03
 %
 
7.40
%
Increase in noninterest expense
 
6.88

 
6.23

 
7.21

 
3.61

Operating leverage
 
(2.16
)%
 
2.21
%
 
(0.18
)%
 
3.79
%
Increase in total revenue, Underlying (non-GAAP)
 
4.70
 %
 
8.46
%
 
7.03
 %
 
7.12
%
Increase in noninterest expense, Underlying (non-GAAP)
 
5.78

 
5.20

 
6.41

 
3.88

Operating leverage, Underlying (non-GAAP)
 
(1.08
)%
 
3.26
%
 
0.62
 %
 
3.24
%
Net income per average common share - basic and diluted and net income per average common share - basic and diluted, Underlying:
 
 
 
 
 
 
 
 
Average common shares outstanding - basic (GAAP)
K
445,703,987

 
475,957,526

 
454,802,186

 
482,691,884

Average common shares outstanding - diluted (GAAP)
L
447,134,595

 
477,599,917

 
456,218,755

 
484,250,843

Net income per average common share - basic (GAAP)
D/K

$0.97

 

$0.92

 

$2.84

 

$2.57

Net income per average common share - diluted (GAAP)
D/L
0.97

 
0.91

 
2.83

 
2.57

Net income per average common share - basic, Underlying (non-GAAP)
X/K
0.98

 
0.93

 
2.87

 
2.59

Net income per average common share - diluted, Underlying (non-GAAP)
X/L
0.98

 
0.93

 
2.86

 
2.58




48
CITIZENS FINANCIAL GROUP, INC.
FINANCIAL STATEMENTS


ITEM 1. FINANCIAL STATEMENTS

 
 
Page
Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (unaudited)
 
50
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
 
51
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
 
52
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
 
53
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2019 and 2018
 
55
Notes to Consolidated Financial Statements (unaudited)
 
56
Note 1 - Basis of Presentation
 
56
Note 2 - Securities
 
59
Note 3 - Loans and Leases
 
62
Note 4 - Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk
 
64
Note 5 - Mortgage Banking
 
73
Note 6 - Leases
 
75
Note 7 - Variable Interest Entities
 
77
Note 8 - Borrowed Funds
 
78
Note 9 - Derivatives
 
80
Note 10 - Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
 
83
Note 11 - Stockholders’ Equity
 
85
Note 12 - Commitments and Contingencies
 
87
Note 13 - Fair Value Measurements
 
88
Note 14 - Noninterest Income
 
93
Note 15 - Other Operating Expense
 
93
Note 16 - Earnings Per Share
 
94
Note 17 - Business Operating Segments
 
94


49
CITIZENS FINANCIAL GROUP, INC.

 

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

$1,638

 

$1,081

Interest-bearing cash and due from banks
2,204

 
2,993

Interest-bearing deposits in banks
158

 
148

Debt securities available for sale, at fair value (including $233 and $363 pledged to creditors, respectively)(1)
21,502

 
19,895

Debt securities held to maturity (fair value of $3,362 and $4,041, respectively)
3,319

 
4,165

Equity securities, at fair value
47

 
181

Equity securities, at cost
734

 
834

Loans held for sale, at fair value
1,993

 
1,219

Other loans held for sale
22

 
101

Loans and leases
117,880

 
116,660

Less: Allowance for loan and lease losses
(1,263
)
 
(1,242
)
Net loans and leases
116,617

 
115,418

Derivative assets
1,027

 
317

Premises and equipment, net
747

 
791

Bank-owned life insurance
1,720

 
1,698

Goodwill
7,044

 
6,923

Due from broker
257

 
—

Other assets
5,333

 
4,754

TOTAL ASSETS

$164,362

 

$160,518

LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest-bearing

$29,939

 

$29,458

Interest-bearing
94,775

 
90,117

          Total deposits
124,714

 
119,575

Federal funds purchased and securities sold under agreements to repurchase
867

 
1,156

Other short-term borrowed funds
210

 
161

Derivative liabilities
161

 
292

Deferred taxes, net
752

 
573

Long-term borrowed funds
12,806

 
15,925

Due to broker
206

 
—

Other liabilities
2,795

 
2,019

TOTAL LIABILITIES
142,511

 
139,701

Contingencies (refer to Note 12)


 


STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, $25.00 par value, 100,000,000 shares authorized
1,133

 
840

Common stock:
 
 
 
$0.01 par value, 1,000,000,000 shares authorized; 568,125,065 shares issued and 443,913,525 shares outstanding at September 30, 2019 and 566,819,863 shares issued and 466,007,984 shares outstanding at December 31, 2018
6

 
6

Additional paid-in capital
18,876

 
18,815

Retained earnings
6,229

 
5,385

Treasury stock, at cost, 124,211,540 and 100,811,879 shares at September 30, 2019 and December 31, 2018, respectively
(3,953
)
 
(3,133
)
Accumulated other comprehensive loss
(440
)
 
(1,096
)
TOTAL STOCKHOLDERS’ EQUITY

$21,851

 

$20,817

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$164,362

 

$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.

50
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 (in millions, except share and per share data)
2019

 
2018

 
2019

 
2018

INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans and leases

$1,356

 

$1,287

 

$4,129

 

$3,663

Interest and fees on loans held for sale, at fair value
19

 
14

 
45

 
23

Interest and fees on other loans held for sale
2

 
2

 
8

 
9

Investment securities
153

 
167

 
483

 
500

Interest-bearing deposits in banks
8

 
7

 
23

 
21

Total interest income
1,538

 
1,477

 
4,688

 
4,216

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
297

 
214

 
892

 
540

Federal funds purchased and securities sold under agreements to repurchase
2

 
2

 
7

 
4

Other short-term borrowed funds
—

 
4

 
1

 
7

Long-term borrowed funds
94

 
109

 
317

 
305

Total interest expense
393

 
329

 
1,217

 
856

Net interest income
1,145

 
1,148

 
3,471

 
3,360

Provision for credit losses
101

 
78

 
283

 
241

Net interest income after provision for credit losses
1,044

 
1,070

 
3,188

 
3,119

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service charges and fees
128

 
131

 
377

 
382

Card fees
67

 
61

 
190

 
182

Capital markets fees
39

 
47

 
150

 
134

Trust and investment services fees
50

 
45

 
150

 
128

Mortgage banking fees
117

 
49

 
222

 
101

Letter of credit and loan fees
34

 
32

 
100

 
94

Foreign exchange and interest rate products
35

 
31

 
106

 
92

Securities gains, net
3

 
3

 
15

 
13

Net impairment losses recognized in earnings on debt securities
(1
)
 
(1
)
 
(2
)
 
(3
)
Other income
21

 
18

 
75

 
52

Total noninterest income
493

 
416

 
1,383

 
1,175

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
508

 
474

 
1,524

 
1,397

Equipment and software expense
130

 
117

 
381

 
340

Outside services
128

 
107

 
356

 
312

Occupancy
80

 
81

 
245

 
241

Other operating expense
127

 
131

 
355

 
378

Total noninterest expense
973

 
910

 
2,861

 
2,668

Income before income tax expense
564

 
576

 
1,710

 
1,626

Income tax expense
115

 
133

 
369

 
370

NET INCOME

$449

 

$443

 

$1,341

 

$1,256

Net income available to common stockholders

$432

 

$436

 

$1,291

 

$1,242

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
445,703,987

 
475,957,526

 
454,802,186

 
482,691,884

Diluted
447,134,595

 
477,599,917

 
456,218,755

 
484,250,843

Per common share information:
 
 
 
 
 
 
 
Basic earnings

$0.97

 

$0.92

 

$2.84

 

$2.57

Diluted earnings
0.97

 
0.91

 
2.83

 
2.57


The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

51
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Net income

$449

 

$443

 

$1,341

 

$1,256

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized derivative instruments (losses) gains arising during the periods, net of income taxes of ($1), ($9), $35 and ($31), respectively
(4
)
 
(26
)
 
103

 
(91
)
Reclassification adjustment for net derivative losses included in net income, net of income taxes of $4, $3, $13 and $6, respectively
10

 
11

 
40

 
19

Net unrealized debt securities gains (losses) arising during the periods, net of income taxes of $13, ($34), $165 and ($139), respectively
42

 
(95
)
 
509

 
(427
)
Other-than-temporary impairment not recognized in earnings on debt securities, net of income taxes of $0, ($1), $0 and ($1), respectively
(1
)
 
—

 
—

 
(1
)
Reclassification of net debt securities gains to net income, net of income taxes of $0, $0, ($3) and ($2), respectively
(2
)
 
(2
)
 
(10
)
 
(8
)
Amortization of actuarial loss, net of income taxes of $2, $1, $5 and $3, respectively
3

 
4

 
9

 
10

Total other comprehensive income (loss), net of income taxes
48

 
(108
)
 
651

 
(498
)
Total comprehensive income

$497

 

$335

 

$1,992

 

$758


The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

52
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
 
Preferred
 Stock
 
Common
 Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock, at Cost
Accumulated Other Comprehensive Loss
Total
(in millions)
Shares
Amount
 
Shares
Amount
Balance at July 1, 2018
1


$543

 
484


$6


$18,806


$4,755


($2,433
)

($1,210
)

$20,467

Dividends to common stockholders
—

—

 
—

—

—

(129
)
—

—

(129
)
Dividends to preferred stockholders
—

—

 
—

—

—

(7
)
—

—

(7
)
Treasury stock purchased
—

—

 
(10
)
—

—

—

(400
)
—

(400
)
Share-based compensation plans
—

—

 
—

—

6

—

—

—

6

Employee stock purchase plan shares purchased
—

—

 
—

—

4

—

—

—

4

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

443

—

—

443

Other comprehensive loss
—

—

 
—

—

—

—

—

(108
)
(108
)
Total comprehensive income
—

—

 
—

—

—

443

—

(108
)
335

Balance at September 30, 2018
1


$543

 
474


$6


$18,816


$5,062


($2,833
)

($1,318
)

$20,276

Balance at July 1, 2019
1


$1,133

 
458


$6


$18,860


$5,959


($3,453
)

($488
)

$22,017

Dividends to common stockholders
—

—

 
—

—

—

(162
)
—

—

(162
)
Dividends to preferred stockholders
—

—

 
—

—

—

(17
)
—

—

(17
)
Treasury stock purchased
—

—

 
(14
)
—

—

—

(500
)
—

(500
)
Share-based compensation plans
—

—

 
—

—

11

—

—

—

11

Employee stock purchase plan shares purchased
—

—

 
—

—

5

—

—

—

5

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

449

—

—

449

Other comprehensive income
—

—

 
—

—

—

—

—

48

48

Total comprehensive income
—

—

 
—

—

—

449

—

48

497

Balance at September 30, 2019
1


$1,133

 
444


$6


$18,876


$6,229


($3,953
)

($440
)

$21,851


The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.



























53
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
 
Preferred
 Stock
 
Common
 Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock, at Cost
Accumulated Other Comprehensive Loss
Total
(in millions)
Shares
Amount
 
Shares
Amount
Balance at January 1, 2018
—


$247

 
491


$6


$18,781


$4,164


($2,108
)

($820
)

$20,270

Dividends to common stockholders
—

—

 
—

—

—

(344
)
—

—

(344
)
Dividends to preferred stockholders
—

—

 
—

—

—

(14
)
—

—

(14
)
Preferred stock issued
1

296

 
—

—

—

—

—

—

296

Treasury stock purchased
—

—

 
(18
)
—

—

—

(725
)
—

(725
)
Share-based compensation plans
—

—

 
1

—

24

—

—

—

24

Employee stock purchase plan shares purchased
—

—

 
—

—

11

—

—

—

11

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

1,256

—

—

1,256

Other comprehensive loss
—

—

 
—

—

—

—

—

(498
)
(498
)
Total comprehensive income
—

—

 
—

—

—

1,256

—

(498
)
758

Balance at September 30, 2018
1


$543

 
474


$6


$18,816


$5,062


($2,833
)

($1,318
)

$20,276

Balance at January 1, 2019
1


$840

 
466


$6


$18,815


$5,385


($3,133
)

($1,096
)

$20,817

Dividends to common stockholders
—

—

 
—

—

—

(459
)
—

—

(459
)
Dividends to preferred stockholders
—

—

 
—

—

—

(50
)
—

—

(50
)
Preferred stock issued
—

293

 
—

—

—

—

—

—

293

Treasury stock purchased
—

—

 
(23
)
—

—

—

(820
)
—

(820
)
Share-based compensation plans
—

—

 
1

—

48

—



—

48

Employee stock purchase plan shares purchased
—

—

 
—

—

13

—

—

—

13

Cumulative effect of change in accounting standards
—

—

 
—

—

—

12

—

5

17

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

1,341

—

—

1,341

Other comprehensive income
—

—

 
—

—

—

—

—

651

651

Total comprehensive income
—

—

 
—

—

—

1,341

—

651

1,992

Balance at September 30, 2019
1


$1,133

 
444


$6


$18,876


$6,229


($3,953
)

($440
)

$21,851


The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.


54
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

OPERATING ACTIVITIES
 
 
 
Net income

$1,341

 

$1,256

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
283

 
241

Originations of mortgage loans held for sale
(14,047
)
 
(4,384
)
Proceeds from sales of mortgage loans held for sale
13,265

 
4,259

Purchases of commercial loans held for sale
(1,507
)
 
(1,450
)
Proceeds from sales of commercial loans held for sale
1,592

 
1,457

Depreciation, amortization and accretion
440

 
357

Mortgage servicing rights valuation charge-off (recovery)
15

 
(3
)
Debt securities impairment
2

 
3

Deferred income taxes
(41
)
 
23

Share-based compensation
44

 
40

Net gain on sales of:
 
 
 
Debt securities
(21
)
 
(13
)
Premises and equipment
(6
)
 
—

Increase in other assets
(523
)
 
(918
)
Increase in other liabilities
133

 
339

Net cash provided by operating activities
970

 
1,207

INVESTING ACTIVITIES
 
 
 
Investment securities:
 
 
 
Purchases of debt securities available for sale
(4,633
)
 
(3,084
)
Proceeds from maturities and paydowns of debt securities available for sale
2,728

 
2,512

Proceeds from sales of debt securities available for sale
1,495

 
405

Proceeds from maturities and paydowns of debt securities held to maturity
280

 
402

Other, net
136

 
(6
)
Purchases of equity securities, at cost
(328
)
 
(568
)
Proceeds from sales of equity securities, at cost
428

 
416

Net (increase) decrease in interest-bearing deposits in banks
(10
)
 
50

Purchases of mortgage servicing rights
—

 
(16
)
Acquisitions, net of cash acquired
(129
)
 
(533
)
Net increase in loans and leases
(1,534
)
 
(4,278
)
Net increase in bank-owned life insurance
(22
)
 
(31
)
Premises and equipment:
 
 
 
Purchases
(78
)
 
(157
)
Proceeds from sales
31

 
—

Capitalization of software
(150
)
 
(175
)
Net cash used in investing activities
(1,786
)
 
(5,063
)
FINANCING ACTIVITIES
 
 
 
Net increase in deposits
5,139

 
1,986

Net decrease in federal funds purchased and securities sold under agreements to repurchase
(289
)
 
(441
)
Net increase (decrease) in other short-term borrowed funds
45

 
(3,107
)
Proceeds from issuance of long-term borrowed funds
7,300

 
17,503

Repayments of long-term borrowed funds
(10,556
)
 
(10,333
)
Treasury stock purchased
(820
)
 
(725
)
Net proceeds from issuance of preferred stock
293

 
296

Dividends declared and paid to common stockholders
(459
)
 
(344
)
Dividends declared and paid to preferred stockholders
(48
)
 
(7
)
Payments of employee tax withholding for share-based compensation
(21
)
 
(13
)
Net cash provided by financing activities
584

 
4,815

(Decrease) increase in cash and cash equivalents (1)
(232
)
 
959

Cash and cash equivalents at beginning of period (1)
4,074

 
3,032

Cash and cash equivalents at end of period (1)

$3,842

 

$3,991


(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.

55
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 2018 Form 10-K. The Company’s principal business activity is banking, conducted through its banking subsidiary, Citizens Bank, National 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 ACL and the fair value of MSRs.
Significant Accounting Policies
For further information regarding the Company’s significant accounting policies, see Note 1 in the Company’s 2018 Form 10-K.
Accounting Pronouncements Adopted in 2019
Pronouncement
Summary of Guidance
Effects on Financial Statements
Derivatives and Hedging

Issued August 2017
•
Reduces the complexity and operational burdens of the current hedge accounting model and portrays more clearly the effects of hedge accounting in the financial statements.

•
Modifies current requirements to facilitate the application of hedge accounting to partial-term hedges, hedges of prepayable financial instruments, and other strategies. Adoption of these optional changes would occur on a prospective basis.

•
Requires the effects of fair value hedges to be classified in the same income statement line as the earnings effect of the hedged item. Adoption of this change will occur on a prospective basis.

•
Requires all effects of cash flow hedges to be deferred in other comprehensive income until the hedged cash flows affect earnings. Periodic hedge ineffectiveness will no longer be recognized in earnings. Adoption of this change will occur on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
•
The Company adopted the new standard on January 1, 2019 under the modified retrospective method.

•
Adoption did not have a material impact on the Company’s Consolidated Financial Statements.

•
Required disclosures are included in Note 9.

56
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Pronouncement
Summary of Guidance
Effects on Financial Statements
Leases

Issued February 2016


•
Requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with a lease term of greater than one year.

•
Requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests.

•
Requires that for finance leases, a lessee recognize interest expense on the lease liability separately from the amortization of the right-of-use asset in the Consolidated Statements of Operations, while for operating leases, such amounts should be recognized as a combined expense.

•
Requires expanded disclosures about the nature and terms of lease agreements.

•
Provides the option to adopt using either a modified cumulative-effect approach wherein the guidance is applied to all periods 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.
•
The Company adopted the new standard under the modified retrospective approach on January 1, 2019, which is applicable to both its leasing finance business as well as property and equipment leases in which Citizens is lessee.

•
Adoption resulted in a cumulative-effect adjustment of $12 million, net of taxes, to retained earnings related to leases in which Citizens is lessee.

•
Adoption resulted in the recognition of a right-of-use asset and corresponding lease liability of $734 million and $749 million, respectively in its Consolidated Balance Sheet for non-cancelable operating lease agreements.

•
Required lessor disclosures are included in Note 3 and required lessee disclosures are included in Note 6.
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 arrangement 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 beginning of the first period presented.

•
The Company prospectively adopted the new standard on January 1, 2019.

•
Adoption did not have a material impact on the Company’s Consolidated Financial Statements.

57
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Accounting Pronouncements Pending Adoption
Pronouncement
Summary of Guidance
Effects on Financial Statements
Financial Instruments - Credit Losses

Issued June 2016

•
Required effective date: January 1, 2020.

•
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, net of taxes, as of the beginning of the reporting period of adoption.

•
Requires enhanced credit quality disclosures including disaggregation of credit quality indicators by vintage.

•
The Company plans to adopt the new standard on January 1, 2020.

•
A company-wide, cross-discipline governance structure is in place to implement the new standard.

•
The Company is finalizing significant accounting policies and continues to refine and test loss forecasting models, estimation techniques, data, operational processes and financial controls which will be used to calculate the ACL under the standard.

•
The Company completed limited parallel runs and analytical testing through the nine months ended September 30, 2019. Parallel testing will continue through adoption and we will refine our interpretations, methodology, data and operational processes based upon ongoing reviews and testing results.

•
To estimate the ACL, we will use models and other estimation techniques that are sensitive to changes in forecasted economic conditions. The estimate is expected to include a two-year reasonable and supportable forecast period, and thereafter a one year reversion to long-run average macroeconomic assumptions derived from historical information. We will also apply qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be adequately reflected in quantitatively derived results, or other relevant factors to ensure the ACL reflects our best estimate of current expected credit losses.

•
The Company expects the standard will result in earlier recognition of credit losses and an overall increase in the ACL upon adoption of approximately 30% to 35%. This estimated increase in ACL is based on forecasted economic conditions and portfolio balances at August 31, 2019, and primarily related to consumer loans, such as residential mortgage, unsecured and education, due to the requirement to estimate credit losses over the full remaining expected life of the asset. Additionally, adoption of the new standard could produce higher volatility in the quarterly provision for credit losses than our current reserve process and could adversely impact the Company’s ongoing earnings. We estimate that this increase in ACL would reduce the Company’s CET1 capital ratio by approximately 22 to 25 basis points on a fully-phased in basis. This capital impact is expected to be phased in by 25% per year through January 1, 2023, which would impact 2020 by 5 to 6 basis points.

•
These current estimates of impact to the ACL at the adoption date and the CET1 capital ratio are subject to change based on continuing review and challenge of the models, assumptions, methodologies and judgments, and the final amount will depend upon the loan portfolio composition, as well as economic conditions and forecasts existing at that time.

•
Based on the credit quality of our existing debt securities portfolio, the Company does not expect the ACL for HTM and AFS debt securities to be significant.



58
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Pronouncement
Summary of Guidance
Effects on Financial Statements
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.

NOTE 2 - SECURITIES
The following table presents the major components of securities at amortized cost and fair value:
 
September 30, 2019
 
December 31, 2018
(in millions)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
U.S. Treasury and other

$120


$—


$—


$120

 

$24


$—


$—


$24

State and political subdivisions
5

—

—

5

 
5

—

—

5

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
20,434

166

(80
)
20,520

 
20,211

28

(605
)
19,634

Other/non-agency
827

34

(4
)
857

 
236

3

(7
)
232

Total mortgage-backed securities, at fair value
21,261

200

(84
)
21,377

 
20,447

31

(612
)
19,866

Total debt securities available for sale, at fair value

$21,386


$200


($84
)

$21,502

 

$20,476


$31


($612
)

$19,895

Federal agencies and U.S. government sponsored entities

$3,319


$48


($5
)

$3,362

 

$3,425


$—


($132
)

$3,293

Other/non-agency
—

—

—

—

 
740

8

—

748

Total mortgage-backed securities, at cost
3,319

48

(5
)
3,362

 
4,165

8

(132
)
4,041

Total debt securities held to maturity

$3,319


$48


($5
)

$3,362

 

$4,165


$8


($132
)

$4,041

Money market mutual fund investments

$47


$—


$—


$47

 

$181


$—


$—


$181

Total equity securities, at fair value

$47


$—


$—


$47

 

$181


$—


$—


$181

Federal Reserve Bank stock

$577


$—


$—


$577

 

$463


$—


$—


$463

Federal Home Loan Bank stock
149

—

—

149

 
364

—

—

364

Other equity securities
8

—

—

8

 
7

—

—

7

Total equity securities, at cost

$734


$—


$—


$734

 

$834


$—


$—


$834




59
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The amortized cost and fair value of debt securities by contractual maturity as of September 30, 2019 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.
 
September 30, 2019
 
Distribution of Maturities
(in millions)
1 Year or Less
1-5 Years
5-10 Years
After 10 Years
Total

Amortized cost:
 
 
 
 
 
U.S. Treasury and other

$120


$—


$—


$—


$120

State and political subdivisions
—

—

—

5

5

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
—

193

1,683

18,558

20,434

Other/non-agency
4

2

—

821

827

Total debt securities available for sale
124

195

1,683

19,384

21,386

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
—

—

—

3,319

3,319

Total debt securities held to maturity
—

—

—

3,319

3,319

Total amortized cost of debt securities

$124


$195


$1,683


$22,703


$24,705

 
 
 
 
 
 
Fair value:
 
 
 
 
 
U.S. Treasury and other

$120


$—


$—


$—


$120

State and political subdivisions
—

—

—

5

5

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
—

193

1,707

18,620

20,520

Other/non-agency
4

2

—

851

857

Total debt securities available for sale
124

195

1,707

19,476

21,502

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
—

—

—

3,362

3,362

Total debt securities held to maturity
—

—

—

3,362

3,362

Total fair value of debt securities

$124


$195


$1,707


$22,838


$24,864



Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $153 million and $167 million for the three months ended September 30, 2019 and 2018, respectively, and was $483 million and $500 million for the nine months ended September 30, 2019 and 2018, respectively.
Realized gains and losses on securities are presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Gains on sale of debt securities(1)

$5

 

$3

 

$21

 

$13

Losses on sale of debt securities
—

 
—

 
—

 
—

Debt securities gains, net

$5

 

$3

 

$21

 

$13


(1) For the three and nine months ended September 30, 2019, $2 million and $6 million of gains on sale of debt securities were recognized in mortgage banking fees in the Consolidated Statement of Operations, respectively, as they related to AFS securities held as economic hedges of the value of the MSR portfolio recognized using the amortization method.    

60
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



The amortized cost and fair value of debt securities pledged are presented below:
 
September 30, 2019
 
December 31, 2018
(in millions)
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Pledged against repurchase agreements

$265


$268

 

$344


$338

Pledged against FHLB borrowed funds
670

701

 
745

752

Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law
3,281

3,282

 
3,592

3,460



Citizens regularly enters into security repurchase agreements with unrelated counterparties, 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 in nature and are accounted for as secured borrowed funds on the Company’s Consolidated Balance Sheets. Citizens recognized no offsetting of short-term receivables or payables as of September 30, 2019 or December 31, 2018. Citizens offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information, see Note 9.
Securitizations of mortgage loans retained in the investment portfolio were $28 million and $32 million for the three months ended September 30, 2019 and 2018, respectively, and $72 million and $87 million for the nine months ended September 30, 2019 and 2018, respectively. These securitizations include a substantive guarantee by a third party. In 2019 and 2018 the guarantors were FNMA, FHLMC, 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, separated by the duration the securities have been in a continuous unrealized loss position:
 
September 30, 2019
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities
156


$3,180


($16
)
 
175


$4,907


($69
)
 
331


$8,087


($85
)
Other/non-agency
—

—

—

 
5

32

(4
)
 
5

32

(4
)
Total
156


$3,180


($16
)
 
180


$4,939


($73
)
 
336


$8,119


($89
)

 
December 31, 2018
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities
166


$4,881


($89
)
 
429


$15,124


($648
)
 
595


$20,005


($737
)
Other/non-agency
10

139

(1
)
 
11

72

(6
)
 
21

211

(7
)
Total
176


$5,020


($90
)
 
440


$15,196


($654
)
 
616


$20,216


($744
)


Citizens 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 recovery of their amortized cost bases. 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 September 30, 2019. The unrealized losses on these debt securities reflect non-credit-related factors such as changing interest rates and market liquidity. Therefore, Citizens has determined that these debt securities are not other-than-temporarily impaired. Any subsequent increases in the valuation of impaired debt securities will not impact their recorded cost bases.

61
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 September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Cumulative balance at beginning of period

$57

 

$81

 

$81

 

$80

Credit impairments recognized in earnings on debt securities that have been previously impaired
1

 
1

 
2

 
3

Reductions due to increases in cash flow expectations on impaired debt securities(1)
—

 
(1
)
 
—

 
(2
)
Reductions for securities sold or matured during the period
(1
)
 
—

 
(26
)
 
—

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 September 30, 2019 and September 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 September 30, 2019 and 2018. For the three months ended September 30, 2019 and 2018, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $1 million. For the nine months ended September 30, 2019 and 2018, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $2 million and $3 million, respectively.
NOTE 3 - LOANS AND LEASES
The Company’s loans and leases are disclosed in portfolio segments and classes as reflected below.
(in millions)
September 30, 2019
 
December 31, 2018
Commercial(1)

$41,356

 

$40,857

Commercial real estate
12,820

 
13,023

Leases
2,557

 
2,903

Total commercial loans and leases
56,733

 
56,783

Residential mortgages
19,699

 
18,978

Home equity loans
876

 
1,073

Home equity lines of credit
12,148

 
12,710

Home equity loans serviced by others
318

 
399

Home equity lines of credit serviced by others
81

 
104

Automobile
12,070

 
12,106

Education
9,729

 
8,900

Credit cards
2,133

 
1,991

Other retail
4,093

 
3,616

Total retail loans(2)
61,147

 
59,877

Total loans and leases(3)

$117,880

 

$116,660


(1) SBA loans we service for others of $27 million are not included above. These loans represent the government guaranteed portion of SBA loans sold to outside investors as of September 30, 2019. There were no SBA loans serviced for others as of December 31, 2018.
(2) Mortgage loans we service for others of $74.6 billion and $69.6 billion at September 30, 2019 and December 31, 2018, respectively, are not included above.
(3)  LHFS totaling $2.0 billion and $1.3 billion at September 30, 2019 and December 31, 2018, respectively, are not included above.


62
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following table shows the composition of LHFS.
 
September 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

$1,824


$169


$1,993

 

$967


$252


$1,219

Other loans held for sale
—

22

22

 
—

101

101

(1) Originated for sale.
(2) LHFS at fair value consist of loans managed by the Company’s commercial secondary loan desk. Other LHFS generally 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 billion and $25.6 billion at September 30, 2019 and December 31, 2018, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, were primarily comprised of auto, commercial and commercial real estate loans, and totaled $18.0 billion and $16.8 billion at September 30, 2019 and December 31, 2018, respectively.
During the three months ended September 30, 2019, the Company purchased $164 million of education loans and $66 million of other retail loans. During the three months ended September 30, 2018, the Company purchased $98 million of education loans. During the nine months ended September 30, 2019, the Company purchased $464 million of education loans and $66 million of other retail loans. During the nine months ended September 30, 2018, the Company purchased $321 million of education loans.
The Company sold $109 million of commercial loans during the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Company sold $291 million of commercial loans and $628 million of retail loans, including $22 million of TDR sales. During the three months ended September 30, 2018, the Company did not have loan portfolio sales. During the nine months ended September 30, 2018 the Company had $553 million of commercial loan sales.
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)
September 30, 2019
Total future minimum lease rentals

$1,670

Estimated residual value of leased equipment (non-guaranteed)
1,072

Initial direct costs
10

Unearned income
(232
)
Total leases

$2,520


Interest income on direct financing leases for the three months and nine months ended September 30, 2019 was $18 million and $58 million, respectively, and is reported within interest and fees on loans and leases in the Consolidated Statements of Operations.

63
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


A maturity analysis of direct financing lease receivables at September 30, 2019 is presented below:
(in millions)
 
2019

$123

2020
460

2021
343

2022
265

2023
188

Thereafter
291

Total undiscounted future minimum lease rentals

$1,670


NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK
The ACL consists of the ALLL and the reserve for unfunded commitments. It is adjusted 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 in the Company’s 2018 Form 10-K for a detailed discussion of the ALLL reserve methodology and estimation techniques.
On a quarterly basis, the Company reviews and refines its estimate of the 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 September 30, 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.
A summary of changes in the ACL is presented below:
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Allowance for loan and lease losses, beginning of period

$680


$547


$1,227

 

$690


$552


$1,242

Charge-offs
(35
)
(124
)
(159
)
 
(106
)
(347
)
(453
)
Recoveries
3

43

46

 
17

128

145

Net charge-offs
(32
)
(81
)
(113
)
 
(89
)
(219
)
(308
)
Provision charged to income
64

85

149

 
111

218

329

Allowance for loan and lease losses, end of period
712

551

1,263

 
712

551

1,263

Reserve for unfunded lending commitments, beginning of period
93

—

93

 
91

—

91

Provision for unfunded lending commitments
(48
)
—

(48
)
 
(46
)
—

(46
)
Reserve for unfunded lending commitments, end of period
45

—

45

 
45

—

45

Total allowance for credit losses, end of period

$757


$551


$1,308

 

$757


$551


$1,308


    


64
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Allowance for loan and lease losses, beginning of period

$715


$538


$1,253

 

$685


$551


$1,236

Charge-offs
(18
)
(109
)
(127
)
 
(35
)
(328
)
(363
)
Recoveries
2

39

41

 
10

121

131

Net charge-offs
(16
)
(70
)
(86
)
 
(25
)
(207
)
(232
)
Provision charged to income
8

67

75

 
47

191

238

Allowance for loan and lease losses, end of period
707

535

1,242

 
707

535

1,242

Reserve for unfunded lending commitments, beginning of period
88

—

88

 
88

—

88

Provision for unfunded lending commitments
3

—

3

 
3

—

3

Reserve for unfunded lending commitments, end of period
91

—

91

 
91

—

91

Total allowance for credit losses, end of period

$798


$535


$1,333

 

$798


$535


$1,333




The recorded investment in loans and leases based on the Company’s evaluation methodology is presented below:
 
September 30, 2019
 
December 31, 2018
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$387


$675


$1,062

 

$391


$723


$1,114

Formula-based evaluation
56,346

60,472

116,818

 
56,392

59,154

115,546

Total loans and leases

$56,733


$61,147


$117,880

 

$56,783


$59,877


$116,660



A summary of the ACL by evaluation methodology is presented below:
 
September 30, 2019
 
December 31, 2018
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$74


$25


$99

 

$38


$26


$64

Formula-based evaluation
683

526

1,209

 
743

526

1,269

Allowance for credit losses

$757


$551


$1,308

 

$781


$552


$1,333



For commercial loans and leases, Citizens utilizes regulatory classification ratings to monitor credit quality. For additional information on regulatory classification ratings, see Note 5 in the Company’s 2018 Form 10-K.
The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:
 
September 30, 2019
 
 
Criticized
 
(in millions)
Pass

Special Mention
Substandard

Doubtful

Total

Commercial

$38,997


$1,369


$761


$229


$41,356

Commercial real estate
12,437

297

36

50

12,820

Leases
2,466

39

49

3

2,557

Total commercial loans and leases

$53,900


$1,705


$846


$282


$56,733



65
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
December 31, 2018
 
 
Criticized
 
(in millions)
Pass

Special Mention
Substandard

Doubtful

Total

Commercial

$38,600


$1,231


$828


$198


$40,857

Commercial real estate
12,523

412

82

6

13,023

Leases
2,823

39

41

—

2,903

Total commercial loans and leases

$53,946


$1,682


$951


$204


$56,783



The recorded investment in classes of retail loans, categorized by delinquency status is presented below:
 
September 30, 2019
 
 
Days Past Due
(in millions)
Current

1-29
30-59
60-89
90 or More
Total

Residential mortgages

$19,375


$129


$28


$78


$89


$19,699

Home equity loans
772

62

10

25

7

876

Home equity lines of credit
11,593

331

52

27

145

12,148

Home equity loans serviced by others
275

23

5

3

12

318

Home equity lines of credit serviced by others
56

11

2

1

11

81

Automobile
10,849

932

194

71

24

12,070

Education
9,513

162

27

16

11

9,729

Credit cards
2,028

53

20

11

21

2,133

Other retail
3,942

80

30

21

20

4,093

Total retail loans

$58,403


$1,783


$368


$253


$340


$61,147



 
December 31, 2018
 
 
Days Past Due
(in millions)
Current

1-29
30-59
60-89
90 or More
Total

Residential mortgages

$18,664


$131


$37


$13


$133


$18,978

Home equity loans
945

75

12

3

38

1,073

Home equity lines of credit
12,042

386

65

22

195

12,710

Home equity loans serviced by others
355

21

7

3

13

399

Home equity lines of credit serviced by others
79

15

2

1

7

104

Automobile
10,729

1,039

207

59

72

12,106

Education
8,694

159

23

13

11

8,900

Credit cards
1,894

53

14

10

20

1,991

Other retail
3,481

76

26

18

15

3,616

Total retail loans

$56,883


$1,955


$393


$142


$504


$59,877



66
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)
September 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
Commercial

$228

 

$194

 

$1

 

$1

Commercial real estate
49

 
7

 
—

 
—

Leases
4

 
—

 
1

 
—

Total commercial loans and leases
281

 
201

 
2

 
1

Residential mortgages (1)(2)
147

 
136

 
15

 
15

Home equity loans
36

 
50

 
—

 
—

Home equity lines of credit
184

 
231

 
—

 
—

Home equity loans serviced by others
14

 
17

 
—

 
—

Home equity lines of credit serviced by others
13

 
15

 
—

 
—

Automobile
69

 
81

 
—

 
—

Education
17

 
38

 
3

 
2

Credit card
21

 
20

 
—

 
—

Other retail
11

 
8

 
10

 
7

Total retail loans
512

 
596

 
28

 
24

Total

$793

 

$797

 

$30

 

$25


(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 totaled $12 million as of September 30, 2019 and December 31, 2018.
(2) Nonperforming balances exclude guaranteed residential mortgage loans sold to GNMA for which the Company has the right, but not the obligation, to repurchase. These loans totaled $195 million and $133 million as of September 30, 2019 and December 31, 2018, respectively, and are included in the Company’s Consolidated Balance Sheets.

Other nonperforming assets primarily consist of other real estate owned and are presented in other assets on the Consolidated Balance Sheets. Other real estate owned, net of valuation allowance, was $40 million and $34 million as of September 30, 2019 and December 31, 2018, respectively.
A summary of nonperforming loan and lease key performance indicators is presented below:
 
September 30, 2019
 
December 31, 2018
Nonperforming commercial loans and leases as a percentage of total loans and leases
0.24
%
 
0.17
%
Nonperforming retail loans as a percentage of total loans and leases
0.43

 
0.51

Nonperforming loans and leases as a percentage of total loans and leases
0.67
%
 
0.68
%
 
 
 
 
Nonperforming commercial assets as a percentage of total assets
0.17
%
 
0.13
%
Nonperforming retail assets as a percentage of total assets
0.34

 
0.39

Nonperforming assets as a percentage of total assets
0.51
%
 
0.52
%

The recorded investment in mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process was $164 million and $172 million as of September 30, 2019 and December 31, 2018, respectively.

67
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The aging of both accruing and nonaccruing loan and lease past due amounts is presented below:
 
September 30, 2019
 
December 31, 2018
 
Days Past Due
 
Days Past Due
(in millions)
30-59
60-89
 90 or More
 Total

 
30-59
60-89
 90 or More
 Total

Commercial

$17


$4


$76


$97

 

$85


$3


$78


$166

Commercial real estate
7

16

1

24

 
8

32

5

45

Leases
—

—

1

1

 
7

—

—

7

Total commercial loans and leases
24

20

78

122

 
100

35

83

218

Residential mortgages
28

78

89

195

 
37

13

133

183

Home equity loans
10

25

7

42

 
12

3

38

53

Home equity lines of credit
52

27

145

224

 
65

22

195

282

Home equity loans serviced by others
5

3

12

20

 
7

3

13

23

Home equity lines of credit serviced by others
2

1

11

14

 
2

1

7

10

Automobile
194

71

24

289

 
207

59

72

338

Education
27

16

11

54

 
23

13

11

47

Credit cards
20

11

21

52

 
14

10

20

44

Other retail
30

21

20

71

 
26

18

15

59

Total retail loans
368

253

340

961

 
393

142

504

1,039

Total

$392


$273


$418


$1,083

 

$493


$177


$587


$1,257



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:
 
September 30, 2019
(in millions)
Impaired Loans With a Related Allowance
Allowance on Impaired Loans
Impaired Loans Without a Related Allowance
Unpaid Contractual Balance
Total Recorded Investment in Impaired Loans
Commercial

$194


$62


$127


$376


$321

Commercial real estate
47

12

19

76

66

Total commercial loans
241

74

146

452

387

Residential mortgages
25

2

122

191

147

Home equity loans
23

1

69

126

92

Home equity lines of credit
26

2

176

243

202

Home equity loans serviced by others
18

1

16

44

34

Home equity lines of credit serviced by others
1

—

6

10

7

Automobile
1

—

20

30

21

Education
117

9

22

139

139

Credit cards
27

9

1

29

28

Other retail
3

1

2

7

5

Total retail loans
241

25

434

819

675

Total

$482


$99


$580


$1,271


$1,062




68
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
December 31, 2018
(in millions)
Impaired Loans With a Related Allowance
Allowance on Impaired Loans
Impaired Loans Without a Related Allowance
Unpaid Contractual Balance
Total Recorded Investment in Impaired Loans
Commercial

$186


$31


$167


$450


$353

Commercial real estate
32

7

6

38

38

Total commercial loans
218

38

173

488

391

Residential mortgages
28

2

127

201

155

Home equity loans
34

3

76

148

110

Home equity lines of credit
21

1

181

244

202

Home equity loans serviced by others
22

1

19

54

41

Home equity lines of credit serviced by others
1

—

7

11

8

Automobile
1

—

22

31

23

Education
130

11

23

153

153

Credit cards
24

7

1

25

25

Other retail
4

1

2

8

6

Total retail loans
265

26

458

875

723

Total

$483


$64


$631


$1,363


$1,114



Additional information on impaired loans is presented below:
 
Three Months Ended September 30,
 
2019
 
2018
(in millions)
Interest Income Recognized
Average Recorded Investment
 
Interest Income Recognized
Average Recorded Investment
Commercial

$2


$293

 

$3


$334

Commercial real estate
—

35

 
—

34

Total commercial loans
2

328

 
3

368

Residential mortgages
1

145

 
1

154

Home equity loans
1

94

 
1

107

Home equity lines of credit
2

199

 
2

202

Home equity loans serviced by others
1

34

 
1

43

Home equity lines of credit serviced by others
—

7

 
—

9

Automobile
1

21

 
—

23

Education
2

141

 
3

160

Credit cards
—

26

 
—

24

Other retail
—

5

 
—

7

Total retail loans
8

672

 
8

729

Total

$10


$1,000

 

$11


$1,097


69
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
Nine Months Ended September 30,
 
2019
 
2018
(in millions)
Interest Income Recognized
Average Recorded Investment
 
Interest Income Recognized
Average Recorded Investment
Commercial

$7


$300

 

$7


$318

Commercial real estate
1

30

 
—

33

Total commercial loans
8

330

 
7

351

Residential mortgages
4

128

 
4

148

Home equity loans
4

86

 
4

107

Home equity lines of credit
6

173

 
6

189

Home equity loans serviced by others
2

31

 
2

44

Home equity lines of credit serviced by others
—

6

 
—

9

Automobile
1

18

 
—

21

Education
6

128

 
7

159

Credit cards
1

21

 
1

22

Other retail
—

5

 
—

7

Total retail loans
24

596

 
24

706

Total

$32


$926

 

$31


$1,057


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. For additional information on regulatory classification ratings, see Note 5 in the Company’s 2018 Form 10-K.
The table below summarizes TDRs by class and total unfunded commitments:
(in millions)
September 30, 2019
 
December 31, 2018
Commercial

$235

 

$304

Retail
675

 
723

Unfunded commitments related to TDRs
35

 
30


The table below summarizes how loans were modified during the three months and nine months ended September 30, 2019 and 2018. The reported balances represent the post-modification outstanding recorded investment and can include loans that became TDRs during the period and were paid off in full, charged off, or sold prior to period end. Pre-modification balances for modified loans approximate the post-modification balances shown.
 
Three Months Ended September 30, 2019
 
Primary Modification Types
 
Interest Rate Reduction(1)
 
Maturity Extension(2)
 
Other(3)
(dollars in millions)
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
Commercial
2


$—

 
6


$1

 
6


$15

Commercial real estate
—

—

 
—

—

 
—

—

Total commercial loans
2

—

 
6

1

 
6

15

Residential mortgages
12

2

 
8

2

 
25

4

Home equity loans
11

—

 
—

—

 
19

1

Home equity lines of credit
51

6

 
16

1

 
95

5

Home equity loans serviced by others
1

—

 
—

—

 
4

—

Home equity lines of credit serviced by others
—

—

 
—

—

 
2

—

Automobile
46

1

 
4

—

 
309

4

Education
—

—

 
—

—

 
131

2

Credit cards
805

5

 
—

—

 
163

—

Other retail
—

—

 
—

—

 
55

—

Total retail loans
926

14

 
28

3

 
803

16

Total
928


$14

 
34


$4

 
809


$31


70
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
Three Months Ended September 30, 2018
 
Primary Modification Types
 
Interest Rate Reduction(1)
 
Maturity Extension(2)
 
Other(3)
(dollars in millions)
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
Commercial
1


$—

 
13


$1

 
1


$—

Commercial real estate
—

—

 
—

—

 
—

—

Total commercial loans
1

—

 
13

1

 
1

—

Residential mortgages
9

1

 
17

2

 
31

3

Home equity loans
10

1

 
—

—

 
40

2

Home equity lines of credit
27

3

 
58

10

 
104

7

Home equity loans serviced by others
2

—

 
—

—

 
5

1

Home equity lines of credit serviced by others
1

—

 
—

—

 
8

—

Automobile
45

—

 
9

—

 
315

4

Education
—

—

 
—

—

 
45

1

Credit cards
623

4

 
—

—

 
—

—

Other retail
—

—

 
—

—

 
—

—

Total retail loans
717

9

 
84

12

 
548

18

Total
718


$9

 
97


$13

 
549


$18

 
Nine Months Ended September 30, 2019
 
Primary Modification Types
 
Interest Rate Reduction(1)
 
Maturity Extension(2)
 
Other(3)
(dollars in millions)
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
Commercial
3


$—

 
18


$2

 
24


$102

Commercial real estate
—

—

 
1

—

 
—

—

Total commercial loans
3

—

 
19

2

 
24

102

Residential mortgages
25

6

 
29

5

 
87

13

Home equity loans
24

1

 
—

—

 
64

3

Home equity lines of credit
123

14

 
66

10

 
277

17

Home equity loans serviced by others
1

—

 
—

—

 
11

1

Home equity lines of credit serviced by others
—

—

 
—

—

 
6

—

Automobile
111

2

 
16

—

 
933

13

Education
—

—

 
—

—

 
211

5

Credit cards
2,362

14

 
—

—

 
304

—

Other retail
—

—

 
—

—

 
58

—

Total retail loans
2,646

37

 
111

15

 
1,951

52

Total
2,649


$37

 
130


$17

 
1,975


$154


71
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
Nine Months Ended September 30, 2018
 
Primary Modification Types
 
Interest Rate Reduction(1)
 
Maturity Extension(2)
 
Other(3)
(dollars in millions)
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
 
Number of Contracts
Recorded Investment
Commercial
6


$1

 
23


$2

 
40


$156

Commercial real estate
—

—

 
1

—

 
2

31

Total commercial loans
6

1

 
24

2

 
42

187

Residential mortgages
32

4

 
47

6

 
117

14

Home equity loans
32

3

 
1

—

 
106

5

Home equity lines of credit
55

5

 
147

21

 
310

21

Home equity loans serviced by others
3

—

 
—

—

 
20

1

Home equity lines of credit serviced by others
5

—

 
1

—

 
13

—

Automobile
122

2

 
42

1

 
893

13

Education
—

—

 
—

—

 
296

5

Credit cards
1,776

10

 
—

—

 
—

—

Other retail
1

—

 
—

—

 
4

—

Total retail loans
2,026

24

 
238

28

 
1,759

59

Total
2,032


$25

 
262


$30

 
1,801


$246

(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.
The net change to ALLL resulting from modifications of loans for the three months ended September 30, 2019 and 2018 was $3 million and $1 million, respectively. The net change to ALLL resulting from modifications of loans for the nine months ended September 30, 2019 and 2018 was $7 million and $3 million, respectively. Charge-offs may also be recorded on TDRs. Citizens recorded $1 million and $2 million of charge-offs resulting from the modification of loans in the three months ended September 30, 2019 and 2018, respectively, and $3 million for the nine months ended September 30, 2019 and 2018.
A payment default refers to a loan that becomes 90 days or more past due under the modified terms. Loan data includes loans meeting the criteria that were paid off in full, charged off, or sold prior to September 30, 2019 and 2018. For commercial loans, recorded investment in TDRs that defaulted within 12 months of their modification date for the three months ended September 30, 2018 was $32 million. There were none for the three months ended September 30, 2019. There were $1 million and $52 million of TDRs that defaulted within 12 months of their modification date for commercial loans during the nine months ended September 30, 2019 and 2018, respectively. For retail loans, there were $9 million and $10 million of loans which defaulted within 12 months of their restructuring date for the three months ended September 30, 2019 and 2018, respectively, and there were $28 million and $30 million of loans which defaulted within 12 months of their restructuring date for the nine months ended September 30, 2019 and 2018, respectively.
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 September 30, 2019 and December 31, 2018, 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.

72
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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:
 
September 30, 2019
(in millions)
Residential Mortgages
Home Equity Loans and Lines of Credit
Home Equity Products Serviced by Others
Credit Cards

Total

High loan-to-value

$421


$68


$107


$—


$596

Interest-only/negative amortization
1,862

—

—

—

1,862

Low introductory rate
—

—

—

224

224

Multiple characteristics and other
3

—

—

—

3

Total

$2,286


$68


$107


$224


$2,685

 
December 31, 2018
(in millions)
Residential Mortgages
Home Equity Loans and Lines of Credit
Home Equity Products Serviced by Others
Credit Cards

Education

Total

High loan-to-value

$318


$87


$148


$—


$—


$553

Interest-only/negative amortization
1,794

—

—

—

1

1,795

Low introductory rate
—

—

—

217

—

217

Multiple characteristics and other
1

—

—

—

—

1

Total

$2,113


$87


$148


$217


$1


$2,566



NOTE 5 - MORTGAGE BANKING
The Company sells residential mortgages to GSEs 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 representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud that should have been identified in a loan file review.
The Company recognizes the right to service residential mortgage loans for others, or MSRs, as separate assets, which are presented in other assets on the Consolidated Balance Sheets, 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 residential mortgage loans sold with servicing rights retained:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Residential mortgage loans sold with servicing retained

$6,117

 

$1,848

 

$13,265

 

$3,173

Gain on sales (1)
88

 
29

 
180

 
59

Contractually specified servicing, late and other ancillary fees (1)
53

 
38

 
152

 
69

(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

73
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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:
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Mortgage servicing rights:
 
 
 
 
 
 
 
Balance as of beginning of period

$203

 

$217

 

$221

 

$201

Amount capitalized
—

 
11

 
—

 
26

Purchases
—

 
—

 
—

 
16

Amortization
(11
)
 
(9
)
 
(29
)
 
(24
)
Carrying amount before valuation allowance
192

 
219

 
192

 
219

Valuation allowance for servicing assets:
 
 
 
 
 
 
 
Balance as of beginning of period
14

 
—

 
—

 
3

Valuation charge-offs (recoveries)
1

 
—

 
15

 
(3
)
Balance at end of period
15

 
—

 
15

 
—

Net carrying value of MSRs

$177

 

$219

 

$177

 

$219


The following table summarizes changes in MSRs recorded using the fair value method:
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Fair value as of beginning of the period

$531

 

$—

 

$600

 

$—

Acquired MSRs
—

 
590

 
—

 
590

Amounts capitalized
78

 
29

 
170

 
29

Changes in unpaid principal balance during the period (1)
(31
)
 
(12
)
 
(88
)
 
(12
)
Changes in fair value during the period (2)
(68
)
 
5

 
(172
)
 
5

Fair value at end of the period

$510

 

$612

 

$510

 

$612

(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.
The fair value of MSRs is estimated by using 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 interest rates. The valuation does not attempt to forecast or predict the future direction of interest rates.
The sensitivity analyses below present the impact to current fair value of an immediate 50 basis point and 100 basis point adverse change in key economic assumptions and the decline in fair value if the respective adverse change was realized. These sensitivities are hypothetical, with the effect of a variation in a particular assumption on the fair value of the MSRs 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 movements in market interest rates.

74
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For MSRs under the amortization method, key economic assumptions used to estimate the fair value are presented below:
 
September 30, 2019
 
December 31, 2018
 
Actual
Decline in fair value due to
 
Actual
Decline in fair value due to
(dollars in millions)
 
Fair value
$178
50 bps adverse change
100 bps adverse change
 
$243
50 bps adverse change
100 bps adverse change
Weighted average life (in years)
5.6
 
6.5
Weighted average constant prepayment rate
11.6%
$25
$45
 
8.5%
$24
$56
Weighted average discount rate
9.3%
3
6
 
9.3%
5
9

For MSRs under the fair value method, key economic assumptions used to estimate the fair value are presented below:
 
September 30, 2019
 
December 31, 2018
 
Actual
Decline in fair value due to
 
Actual
Decline in fair value due to
(dollars in millions)
 
Fair value
$510
50 bps adverse change
100 bps adverse change
 
$600
50 bps adverse change
100 bps adverse change
Weighted average life (in years)
4.8
 
8.0
Weighted average constant prepayment rate
17.6%
$133
$263
 
8.2%
$68
$148
Weighted average option adjusted spread
325 bps
9
19
 
609 bps
13
26

Citizens accounts for derivatives in its mortgage banking operations at fair value on the Consolidated Balance Sheets as derivative assets or derivative liabilities, depending on whether the derivative had a positive (asset) or negative (liability) fair value as of the balance sheet date. The Company’s mortgage banking derivatives include commitments to originate mortgages held for sale, certain loan sale agreements, and other financial instruments that meet the definition of a derivative. Refer to Note 9 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 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.


75
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The components of operating lease cost are presented below:
(in millions)
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease cost

$42

 

$123

Short-term lease cost
2

 
8

Variable lease cost
2

 
6

Sublease income
(1
)
 
(3
)
Total

$45

 

$134


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)
September 30, 2019
Affected Line Item in Consolidated Balance Sheets
Operating lease right-of-use assets

$712

Other assets
Operating lease liabilities
733

Other liabilities

Supplemental information related to the Company’s operating lease arrangements is presented below:
(in millions)
Nine Months Ended September 30, 2019
Cash paid for amounts included in measurement of liabilities:
 
        Operating cash flows from operating leases

$122

Right-of-use assets in exchange for new operating lease liabilities
91


The weighted average remaining lease term and weighted average discount rate for operating leases is seven years and 3.20%, respectively.
At September 30, 2019, lease liabilities maturing under non-cancelable operating leases are presented below for the years ended December 31:
(in millions)
Operating Leases
2019

$29

2020
162

2021
146

2022
121

2023
96

Thereafter
269

Total lease payments
823

Less: Interest
90

Present value of lease liabilities

$733




76
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 7 - VARIABLE INTEREST ENTITIES
Citizens 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. Citizens’ 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)
September 30, 2019
 
December 31, 2018
LIHTC investment included in other assets

$1,324

 

$1,236

LIHTC unfunded commitments included in other liabilities
664

 
673

Lending to special purpose entities included in loans and leases
1,058

 
613

Renewable energy investments included in other assets
308

 
319


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. Citizens is therefore not the primary beneficiary of any LIHTC partnerships. Accordingly, Citizens does not consolidate these VIEs and accounts for these investments in other assets on the Consolidated Balance Sheets.
Citizens 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 information related to the Company’s affordable housing tax credit investments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Tax credits included in income tax expense

$30

 

$28

 

$99

 

$79

Amortization expense included in income tax expense
33

 
31

 
105

 
86

Other tax benefits included in income tax expense
8

 
7

 
24

 
19


No LIHTC investment impairment losses were recognized during the three and nine months ended September 30, 2019 and 2018, respectively.
Lending to Special Purpose Entities
Citizens 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, Citizens is not the primary beneficiary of these entities. Accordingly, Citizens does not consolidate these VIEs on the Consolidated Balance Sheets. As of September 30, 2019 and December 31, 2018, the lending facilities had aggregate unpaid principal balances of $1.1 billion and $613 million, respectively, and undrawn commitments to extend credit of $889 million and $584 million, 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, Citizens 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, Citizens does not consolidate these VIEs and accounts for these investments in other assets on the Consolidated Balance Sheets.

77
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 8 - BORROWED FUNDS
A summary of the Company’s short-term borrowed funds is presented below:
(in millions)
September 30, 2019
 
December 31, 2018
Federal funds purchased

$600

 

$820

Securities sold under agreements to repurchase
267

 
336

Other short-term borrowed funds
210

 
161

Total short-term borrowed funds

$1,077

 

$1,317



Key data related to short-term borrowed funds is presented below:
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
 
As of and for the Year Ended December 31,
(dollars in millions)
2019

 
2018

 
2019

 
2018

 
2018
Weighted-average interest rate at period-end:(1)
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
1.47
%
 
—
%
 
1.47
%
 
—
%
 
1.72
%
Other short-term borrowed funds
2.15

 
2.43

 
2.15

 
2.43

 
2.73

Maximum amount outstanding at any month-end during the period:
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase(2)

$867

 

$382

 

$1,499

 

$1,045

 

$1,282

Other short-term borrowed funds
338

 
1,010

 
511

 
1,110

 
1,110

Average amount outstanding during the period:
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase(2)

$487

 

$643

 

$648

 

$598

 

$654

Other short-term borrowed funds
113

 
748

 
72

 
509

 
467

Weighted-average interest rate during the period:(1)
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
1.19
%
 
0.91
%
 
1.45
%
 
0.76
%
 
0.92
%
Other short-term borrowed funds
2.46

 
2.27

 
2.58

 
2.00

 
2.10


(1) Rates exclude certain hedging costs.
(2) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable.


78
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)
September 30, 2019
 
December 31, 2018
Parent Company:
 
 
 
2.375% fixed-rate senior unsecured debt, due July 2021

$349

 

$349

4.150% fixed-rate subordinated debt, due September 2022
348

 
348

3.750% fixed-rate subordinated debt, due July 2024
250

 
250

4.023% fixed-rate subordinated debt, due October 2024
42

 
42

4.350% fixed-rate subordinated debt, due August 2025
249

 
249

4.300% fixed-rate subordinated debt, due December 2025
750

 
749

2.850% fixed-rate senior unsecured notes, due July 2026
496

 
—

Banking and Other Subsidiaries:
 
 
 
2.500% senior unsecured notes, due March 2019 (1)
—

 
748

2.450% senior unsecured notes, due December 2019 (1)
749

 
744

2.250% senior unsecured notes, due March 2020 (1)
699

 
691

2.678% floating-rate senior unsecured notes, due March 2020 (1) (2)
300

 
300

2.714% floating-rate senior unsecured notes, due May 2020 (1) (2)
250

 
250

2.200% senior unsecured notes, due May 2020 (1)
500

 
499

2.250% senior unsecured notes, due October 2020 (1)
749

 
738

2.550% senior unsecured notes, due May 2021 (1)
990

 
964

3.250% senior unsecured notes, due February 2022 (1)
713

 
—

2.895% floating-rate senior unsecured notes, due February 2022 (1) (2)
299

 
—

2.954% floating-rate senior unsecured notes, due May 2022 (1) (2)
250

 
249

2.650% senior unsecured notes, due May 2022 (1)
502

 
487

3.700% senior unsecured notes, due March 2023 (1) 
518

 
502

3.054% floating-rate senior unsecured notes, due March 2023 (1) (2)
250

 
249

3.750% senior unsecured notes, due February 2026 (1)
529

 
—

Federal Home Loan Bank advances, 2.425% weighted average rate, due through 2038
3,007

 
7,508

Other
17

 
9

Total long-term borrowed funds

$12,806

 

$15,925


(1) Issued under CBNA’s Global Bank Note Program.
(2) Rate disclosed reflects the floating rate as of September 30, 2019.

The Parent Company’s long-term borrowed funds as of September 30, 2019 and December 31, 2018 included principal balances of $2.5 billion and $2.0 billion, respectively, and unamortized deferred issuance costs and/or discounts of ($7) million and ($5) million, respectively. The banking and other subsidiaries’ long-term borrowed funds as of September 30, 2019 and December 31, 2018 included principal balances of $10.3 billion and $14.0 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($15) million and ($14) million, respectively, and hedging basis adjustments of $62 million and ($66) million, respectively. See Note 9 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 $8.4 billion and $13.0 billion at September 30, 2019 and December 31, 2018, respectively. The Company’s available FHLB borrowing capacity was $9.3 billion and $4.8 billion at September 30, 2019 and December 31, 2018, respectively. Citizens 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 September 30, 2019, the Company’s unused secured borrowing capacity was approximately $42.8 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

79
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


A summary of maturities for the Company’s long-term borrowed funds at September 30, 2019 is presented below:
(in millions)
Parent Company
Banking and Other Subsidiaries
Consolidated

Year
 
 
 
2019

$—


$749


$749

2020
—

3,201

3,201

2021
349

3,295

3,644

2022
348

1,771

2,119

2023
—

769

769

2024 and thereafter
1,787

537

2,324

Total

$2,484


$10,322


$12,806


NOTE 9 - DERIVATIVES
In the normal course of business, Citizens 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. During the three months ended September 30, 2019, Citizens executed a last-of-layer hedge utilizing pay-fixed interest rate swap agreements to manage the interest rate exposure on mortgage-backed securities held in its available for sale debt securities. 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 13 in the Company’s Form 10-Q for the period ended March 31, 2019 and Note 19 in the Company’s 2018 Form 10-K.
The following table presents derivative instruments included on the Consolidated Balance Sheets in derivative assets and derivative liabilities:
 
September 30, 2019
 
December 31, 2018
(in millions)
Notional Amount(1)
Derivative Assets
Derivative Liabilities
 
Notional Amount(1)
Derivative Assets
Derivative Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts

$31,596


$—


$3

 

$12,050


$5


$—

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
140,652

993

172

 
117,076

301

277

Foreign exchange contracts
12,905

224

195

 
9,866

129

113

Other contracts
9,382

49

24

 
3,555

14

25

Total derivatives not designated as hedging instruments
 
1,266

391

 
 
444

415

Gross derivative fair values
 
1,266

394

 
 
449

415

Less: Gross amounts offset in the Consolidated Balance Sheets (2)
 
(122
)
(122
)
 
 
(87
)
(87
)
Less: Cash collateral applied (2)
 
(117
)
(111
)
 
 
(45
)
(36
)
Total net derivative fair values presented in the Consolidated Balance Sheets
 

$1,027


$161

 
 

$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.


80
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. Citizens has certain derivative transactions which are designated as fair value or cash flow hedges, described as follows:
Derivatives Designated 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 effectiveness of its hedge relationships during the duration of the hedge period. The methods utilized to assess hedge effectiveness vary based on the 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 Hedges
Citizens has outstanding interest rate swap agreements to manage the interest rate exposure on its medium-term borrowings, certain fixed rate residential mortgages and debt securities available for sale. The changes in the fair value of the derivative instrument and changes in the fair value of the hedged 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 reflects the change in fair value of interest rate contracts, designated as fair value hedges, 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 September 30,
 
Nine Months Ended September 30,
 
(in millions)
2019

 
2018

 
2019

 
2018

Affected Line Item in the Consolidated Statements of Operations
Change in fair value of interest rate swaps hedging borrowed funds

$18

 

($6
)
 

$122

 

($32
)
Interest expense - borrowed funds
Change in fair value of hedged long-term debt attributable to the risk being hedged
(18
)
 
7

 
(121
)
 
31

Interest expense - borrowed funds
Change in fair value of interest rate swaps hedging fixed rate loans
(10
)
 
—

 
(26
)
 
—

Interest and fees on loans and leases
Change in fair value of hedged fixed rate loans attributable to the risk being hedged
10

 
—

 
26

 
—

Interest and fees on loans and leases
Change in fair value of interest rate swaps hedging debt securities available for sale
(13
)
 
—

 
(13
)
 
—

Interest income - investment securities
Change in fair value of hedged debt securities available for sale attributable to risk being hedged
13

 
—

 
13

 
—

Interest income - investment securities

The following table reflects amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:    
 
September 30, 2019
(in millions)
Debt securities available for sale(2)
Residential mortgages
Long-term borrowed funds
Carrying amount of the hedged assets

$19,872


$985


$—

Carrying amount of the hedged liabilities(1)
—

—

5,450

Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items
13

26

62

(1)The balance reported for long-term borrowed funds includes ($1) million of cumulative hedging adjustments recorded on discontinued fair value hedging relationships.
(2)The Company designated $2.0 billion as the hedged amount (from a closed portfolio of prepayable financial assets with a carrying value of $20 billion as of September 30, 2019) in a last-of-layer hedging relationship, which commenced in the third quarter of 2019.
Cash Flow Hedges
Citizens has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets and liabilities. All of these swaps have been deemed as highly effective cash flow hedges. The entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is recorded in

81
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


OCI and reclassified from OCI to current period earnings (interest income or interest expense) in the same period that the hedged item affects earnings. During the next 12 months, there are $10 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. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to September 30, 2019.
During the three and nine months ended September 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 September 30,
 
Nine Months Ended September 30,
(in millions)
2019
 
2018(1)
 
2019
 
2018(1)
Amount of pre-tax net (losses) gains recognized in OCI

($5
)
 

($35
)
 

$138

 

($122
)
Amount of pre-tax net losses reclassified from OCI into interest income
(22
)
 
(17
)
 
(62
)
 
(36
)
Amount of pre-tax net gains reclassified from OCI into interest expense
8

 
3

 
9

 
11

(1) For the three and nine months ended September 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 Instruments
Economic Hedges
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. The mark-to-market gains and losses associated with the customer derivatives are mitigated by mark-to-market gains and losses on interest rate and foreign exchange derivative contracts transacted.
The Company’s residential loan derivatives (including residential loan commitments and forward sales contracts) are recorded on the Consolidated Balance Sheets at fair value. Citizens also uses derivatives to hedge the risk of changes in the fair value of its residential MSR 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, interest rate swaptions, interest rate futures and interest rate swaps.
The following table presents the effect of economic hedges on noninterest income:
 
Amounts Recognized in
Noninterest Income for the
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Affected Line Item in the Consolidated Statements of Operations
(in millions)
2019

 
2018

 
2019

 
2018

Economic hedge type:
 
 
 
 
 
 
 
 
Customer interest rate contracts

$196

 

($84
)
 

$850

 

($363
)
Foreign exchange and interest rate products
Customer foreign exchange contracts
(81
)
 
30

 
(162
)
 
(27
)
Foreign exchange and interest rate products
Derivatives transactions to hedge interest rate risk
(182
)
 
97

 
(809
)
 
403

Foreign exchange and interest rate products
Derivatives transactions to hedge foreign exchange risk
130

 
24

 
224

 
99

Foreign exchange and interest rate products
Residential loan commitments
6

 
6

 
22

 
6

Mortgage banking fees
Forward sale contracts
29

 
(13
)
 
24

 
(15
)
Mortgage banking fees
Interest rate derivative contracts used to hedge residential MSRs
92

 
(3
)
 
208

 
(3
)
Mortgage banking fees
Total

$190

 

$57

 

$357

 

$100

 


82
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 10 - RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the changes in the balances, net of income taxes, of each component of AOCI:
 
 
As of and for the Three Months Ended September 30,
(in millions)
Net Unrealized (Losses) Gains on Derivatives
 
Net Unrealized (Losses) Gains on Debt Securities
 
Employee Benefit Plans
 
Total AOCI
Balance at July 1, 2018

($200
)
 

($575
)
 

($435
)
 

($1,210
)
Other comprehensive loss before reclassifications
(26
)
 
(95
)
 
—

 
(121
)
Other-than-temporary impairment not recognized in earnings on debt securities
—

 
—

 
—

 
—

Amounts reclassified to the Consolidated Statements of Operations
11

 
(2
)
 
4

 
13

Net other comprehensive (loss) income
(15
)
 
(97
)
 
4

 
(108
)
Balance at September 30, 2018

($215
)
 

($672
)
 

($431
)
 

($1,318
)
Balance at July 1, 2019

($6
)
 

($25
)
 

($457
)
 

($488
)
Other comprehensive (loss) income before reclassifications
(4
)
 
42

 
—

 
38

Other-than-temporary impairment not recognized in earnings on debt securities
—

 
(1
)
 
—

 
(1
)
Amounts reclassified to the Consolidated Statements of Operations
10

 
(2
)
 
3

 
11

Net other comprehensive income
6

 
39

 
3

 
48

Balance at September 30, 2019

$—

 

$14

 

($454
)
 

($440
)

 
 
As of and for the Nine Months Ended September 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
(91
)
 
(427
)
 
—

 
(518
)
Other-than-temporary impairment not recognized in earnings on debt securities
—

 
(1
)
 
—

 
(1
)
Amounts reclassified to the Consolidated Statements of Operations
19

 
(8
)
 
10

 
21

Net other comprehensive (loss) income
(72
)
 
(436
)
 
10

 
(498
)
Balance at September 30, 2018

($215
)
 

($672
)
 

($431
)
 

($1,318
)
Balance at January 1, 2019

($143
)
 

($490
)
 

($463
)
 

($1,096
)
Other comprehensive income before reclassifications
103

 
509

 
—

 
612

Other-than-temporary impairment not recognized in earnings on debt securities
—

 
—

 
—

 
—

Amounts reclassified to the Consolidated Statements of Operations
40

 
(10
)
 
9

 
39

Net other comprehensive income
143

 
499

 
9

 
651

Cumulative effect of change in accounting standards
—

 
5

 
—

 
5

Balance at September 30, 2019

$—

 

$14

 

($454
)
 

($440
)


83
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 September 30,
 
Nine Months Ended September 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:

($22
)
 

($17
)
 

($62
)
 

($36
)
Interest income
 
8

 
3

 
9

 
11

Interest expense
 
(14
)
 
(14
)
 
(53
)
 
(25
)
Income before income tax expense
 
(4
)
 
(3
)
 
(13
)
 
(6
)
Income tax expense
 

($10
)
 

($11
)
 

($40
)
 

($19
)
Net income
Reclassification of net debt securities gains to net income:

$3

 

$3

 

$15

 

$13

Securities gains, net
 
(1
)
 
(1
)
 
(2
)
 
(3
)
Net debt securities impairment losses recognized in earnings
 
2

 
2

 
13

 
10

Income before income tax expense
 
—

 
—

 
3

 
2

Income tax expense
 

$2

 

$2

 

$10

 

$8

Net income
Reclassification of changes related to the employee benefit plan:

($5
)
 

($5
)
 

($14
)
 

($13
)
Other operating expense
 
(5
)
 
(5
)
 
(14
)
 
(13
)
Income before income tax expense
 
(2
)
 
(1
)
 
(5
)
 
(3
)
Income tax expense
 

($3
)
 

($4
)
 

($9
)
 

($10
)
Net income
Total reclassification losses

($11
)
 

($13
)
 

($39
)
 

($21
)
Net income

The following table presents the effects on net income of the amounts reclassified out of AOCI:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Net interest income (includes ($14),($14), ($53) and ($25) of AOCI reclassifications, respectively)

$1,145

 

$1,148

 

$3,471

 

$3,360

Provision for credit losses
101

 
78

 
283

 
241

Noninterest income (includes $2, $2, $13 and $10 of AOCI reclassifications, respectively)
493

 
416

 
1,383

 
1,175

Noninterest expense (includes $5, $5, $14 and $13 of AOCI reclassifications, respectively)
973

 
910

 
2,861

 
2,668

Income before income tax expense
564

 
576

 
1,710

 
1,626

Income tax expense (includes ($6), ($4), ($15) and ($7) income tax net expense from reclassification items, respectively)
115

 
133

 
369

 
370

Net income

$449

 

$443

 

$1,341

 

$1,256



84
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:
 
 
 
September 30, 2019
 
December 31, 2018
(in millions, except per share and share data)
Liquidation value per share
 
Preferred Shares
 
Carrying Amount
 
Preferred Shares
 
Carrying Amount
Authorized ($25 par value)
 
 
100,000,000

 
 
 
100,000,000

 
 
Issued and outstanding:
 
 
 
 
 
 
 
 
 
Series A
$1,000
 
250,000

 
$247
 
250,000

 
$247
Series B
1,000

 
300,000
 
296

 
300,000

 
296

Series C
1,000

 
300,000

 
297

 
300,000

 
297

Series D
1,000

(1) 
300,000

(2) 
293

 
—

 
—

Total
 
 
1,150,000

 
$1,133
 
850,000

 
$840
(1)Equivalent to $25 per depositary share.
(2)Represented by 12,000,000 depositary shares each representing a 1/40th interest in the Series D Preferred Stock.
    
The following table provides information related to the Company’s preferred stock outstanding as of September 30, 2019:
(in millions, except share data)
Preferred Stock(1)
Issue Date
Number of Shares Outstanding
Dividend Dates(2)
Annual Per Share Dividend Rate
Optional Redemption Date(3)
Series A
April 6, 2015
250,000
Semi-annually beginning October 6, 2015 until April 6, 2020
5.500% until April 6, 2020
April 6, 2020
 
 
 
Quarterly beginning July 6, 2020
3 Mo. LIBOR plus 3.960% beginning April 6, 2020
 
Series B
May 24, 2018
300,000
Semi-annually beginning January 6, 2019 until July 6, 2023
6.000% until July 6, 2023
July 6, 2023
 
 
 
Quarterly beginning October 6, 2023
3 Mo. LIBOR plus 3.003% beginning July 6, 2023
 
Series C
October 25, 2018
300,000
Quarterly beginning January 6, 2019 until April 6, 2024
6.375% until April 6, 2024
April 6, 2024
 
 
 
Quarterly beginning July 6, 2024
3 Mo. LIBOR plus 3.157% beginning April 6, 2024
 
Series D
January 29, 2019
300,000(4)
Quarterly beginning April 6, 2019 until April 6, 2024
6.350% until April 6, 2024
April 6, 2024
 
 
 
Quarterly beginning July 6, 2024
3 Mo. LIBOR plus 3.642% beginning April 6, 2024
 
(1) All outstanding series are non-cumulative fixed-to-floating rate perpetual preferred stock. Except in limited circumstances, the preferred stock does not have voting rights.
(2) Dividends are payable when, and if, declared by the Company’s Board of Directors or an authorized committee thereof.    
(3) Redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after the date stated, or in whole but not in part, at any time within 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. Under current rules, any redemption is subject to approval by the FRB.
(4) Represented by 12,000,000 depositary shares each representing a 1/40th interest in the Series D Preferred Stock.

85
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


On October 28, 2019, the Company issued $450 million, or 18,000,000 depositary shares, each representing a 1/40th interest in a share of its 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock, liquidation preference of $1,000 per share (equivalent to $25 per depositary share) (the “Series E Preferred Stock”). The Company received net proceeds of $437 million after the underwriting discount and other expenses. The Series E 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 quarterly, in arrears, beginning January 6, 2020, at a rate equal to 5.000% per annum. The Series E Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date, on or after January 6, 2025, or in whole but not in part, at any time within the 90 days following a regulatory capital treatment event, in each case at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends. The Company may not redeem shares of the Series E Preferred Stock without obtaining the prior approval of the FRB if then required under applicable capital guidelines. Except in certain limited circumstances, the Series E Preferred Stock does not have any voting rights.

Dividends
The following table provides information related to dividends per share and in the aggregate, declared and paid, for each type of stock issued and outstanding:
 
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
(in millions, except per share data)
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
Common stock
 

$0.36


$162


$162

 

$0.27


$129


$129

Preferred stock
 
 
 
 
 
 
 
 
   Series A
 

$27.50


$7


$—

 

$27.50


$7


$—

   Series B
 
—

—

9

 
—

—

—

   Series C
 
15.94

5

4

 
—

—

—

Series D
 
15.88

5

5

 
—

—

—

Total preferred stock
 
 

$17


$18

 
 

$7


$—


 
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
(in millions, except per share data)
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
Common stock
 

$1.00


$459


$459

 

$0.71


$344


$344

Preferred stock
 
 
 
 
 
 
 
 
   Series A
 

$55.00


$14


$7

 

$55.00


$14


$7

   Series B
 
30.00

9

20

 
—

—

—

   Series C
 
47.81

14

13

 
—

—

—

Series D
 
43.57

13

8

 
—

—

—

Total preferred stock
 
 

$50


$48

 
 

$14


$7


Treasury Stock
During the nine months ended September 30, 2019, the Company repurchased $820 million, or 23,399,661 shares, of its outstanding common stock, which are held in treasury stock.

86
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 12 - COMMITMENTS AND CONTINGENCIES
A summary of outstanding off-balance sheet arrangements is presented below. For more information on these arrangements, see Note 18 in the Company’s 2018 Form 10-K.
(in millions)
September 30, 2019
 
December 31, 2018
Commitments to extend credit

$70,825

 

$69,553

Letters of credit
2,148

 
2,125

Marketing rights
33

 
37

Risk participation agreements
47

 
19

Loans sold with recourse
32

 
5

Total

$73,085

 

$71,739


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.
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. The principal balances of unsettled commercial loan trade purchases and sales were $121 million and $196 million, respectively, at September 30, 2019 and $68 million and $161 million, respectively, at December 31, 2018.
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 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). 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 in 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 certain breaches of those representations and warranties. The Company also sells the government guaranteed portion of certain SBA loans to outside investors, for 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 88 counterparties. RPAs generally have terms ranging from one year to five years; however, certain outstanding agreements have terms as long as ten years.

87
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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 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 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.
NOTE 13 - FAIR VALUE MEASUREMENTS
Citizens 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. Citizens 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.
Fair Value Option
Citizens elected to account for residential mortgage LHFS and certain commercial and commercial real estate LHFS at fair value. For these LHFS, the aggregate fair value approximates the aggregate unpaid principal balance. For more information on the election of the fair value option for these assets see Note 19 in the Company’s 2018 Form 10-K.
The following table presents the changes in fair value for assets where the Company has elected the fair value option:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(in millions)
2019
 
2018
 
2019
 
2018
Affected Line Item in the Consolidated Statements of Operations
Residential mortgage loans held for sale, at fair value

($4
)
 

($8
)
 

$5

 

($7
)
Mortgage banking fees
Commercial and commercial real estate loans held for sale, at fair value
—

 
1

 
4

 
1

Other income


Recurring Fair Value Measurements
Citizens utilizes a variety of valuation techniques to measure its assets and liabilities at fair value on a recurring basis. For more information on the valuation techniques utilized to measure recurring fair value see Note

88
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


13 in the Company’s Form 10-Q for the three months ended March 31, 2019 and Note 19 in the Company’s 2018 Form 10-K.
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at September 30, 2019:
(in millions)
Total

Level 1

Level 2

Level 3

Debt securities available for sale:
 
 
 
 
Mortgage-backed securities

$21,377


$—


$21,377


$—

State and political subdivisions
5

—

5

—

U.S. Treasury and other
120

120

—

—

Total debt securities available for sale
21,502

120

21,382

—

Loans held for sale, at fair value:
 
 
 
 
Residential loans held for sale
1,824

—

1,824

—

Commercial loans held for sale
169

—

169

—

Total loans held for sale, at fair value
1,993

—

1,993

—

Mortgage servicing rights
510

—

—

510

Derivative assets:
 
 
 
 
Interest rate contracts
993

—

993

—

Foreign exchange contracts
224

—

224

—

Other contracts
49

—

23

26

Total derivative assets
1,266

—

1,240

26

Equity securities, at fair value:
 
 
 
 
Money market mutual fund investments
47

47

—

—

Total equity securities, at fair value
47

47

—

—

Total assets

$25,318


$167


$24,615


$536

Derivative liabilities:
 
 
 
 
Interest rate contracts

$175


$—


$175


$—

Foreign exchange contracts
195

—

195

—

Other contracts
24

—

24

—

Total derivative liabilities
394

—

394

—

Total liabilities

$394


$—


$394


$—




89
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, 2018:
(in millions)
Total

Level 1

Level 2

Level 3

Debt securities available for sale:
 
 
 
 
Mortgage-backed securities

$19,866


$—


$19,866


$—

State and political subdivisions
5

—

5

—

U.S. Treasury and other
24

24

—

—

Total debt securities available for sale
19,895

24

19,871

—

Loans held for sale, at fair value:
 
 
 
 
Residential loans held for sale
967

—

967

—

Commercial loans held for sale
252

—

252

—

Total loans held for sale, at fair value
1,219

—

1,219

—

Mortgage servicing rights
600

—

—

600

Derivative assets:
 
 
 
 
Interest rate contracts
306

—

306

—

Foreign exchange contracts
129

—

129

—

Other contracts
14

—

14

—

Total derivative assets
449

—

449

—

Equity securities, at fair value:
 
 
 
 
Money market mutual fund investments
181

181

—

—

Total equity securities, at fair value
181

181

—

—

Total assets

$22,344


$205


$21,539


$600

Derivative liabilities:
 
 
 
 
Interest rate contracts

$277


$—


$277


$—

Foreign exchange contracts
113

—

113

—

Other contracts
25

—

25

—

Total derivative liabilities
415

—

415

—

Total liabilities

$415


$—


$415


$—



90
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following tables present a rollforward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as Level 3:
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
 September 30, 2019
(in millions)
Mortgage Servicing Rights
 
Other Derivative Contracts
 
Mortgage Servicing Rights
 
Other Derivative Contracts
Beginning balance

$531

 

$25

 

$600

 

$—

Issuances
78

 
61

 
170

 
104

Settlements (1)
(31
)
 
(64
)
 
(88
)
 
(107
)
Changes in fair value during the period recognized in earnings (2)
(68
)
 
4

 
(172
)
 
11

Transfers from Level 2 to Level 3(3)
—

 
—

 
—

 
18

Ending balance

$510

 

$26

 

$510

 

$26

 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
(in millions)
Mortgage Servicing Rights
 
Mortgage Servicing Rights
Beginning balance

$—

 

$—

Acquired MSRs
590

 
590

Issuances
29

 
29

Settlements (1)
(12
)
 
(12
)
Change in fair value during the period recognized in earnings (2)
5

 
5

Ending balance

$612

 

$612

(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.

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. For more information on the valuation techniques utilized to measure nonrecurring fair value see Note 19 in the Company’s 2018 Form 10-K.

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 September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Impaired collateral-dependent loans

($8
)
 

($3
)
 

($36
)
 

($9
)
MSRs
(1
)
 
—

 
(15
)
 
3




91
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following table presents assets and liabilities measured at fair value on a nonrecurring basis:
 
September 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

$332


$—


$332


$—

 

$338


$—


$338


$—

MSRs
178

—

—

178

 
243

—

—

243


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:
 
September 30, 2019
 
Total
 
Level 1
 
Level 2
 
Level 3
(in millions)
Carrying Value
Estimated Fair Value
 
Carrying Value
Estimated Fair Value
 
Carrying Value
Estimated Fair Value
 
Carrying Value
Estimated Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity

$3,319


$3,362

 

$—


$—

 

$3,319


$3,362

 

$—


$—

Equity securities, at cost
734

734

 
—

—

 
734

734

 
—

—

Other loans held for sale
22

22

 
—

—

 
—

—

 
22

22

Loans and leases
117,880

118,961

 
—

—

 
332

332

 
117,548

118,629

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
124,714

124,852

 
—

—

 
124,714

124,852

 
—

—

Federal funds purchased and securities sold under agreements to repurchase
867

867

 
—

—

 
867

867

 
—

—

Other short-term borrowed funds
210

210

 
—

—

 
210

210

 
—

—

Long-term borrowed funds
12,806

12,952

 
—

—

 
12,806

12,952

 
—

—

 
December 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
(in millions)
Carrying Value
Estimated Fair Value
 
Carrying Value
Estimated Fair Value
 
Carrying Value
Estimated Fair Value
 
Carrying Value
Estimated Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity

$4,165


$4,041

 

$—


$—

 

$4,165


$4,041

 

$—


$—

Equity securities, at cost
834

834

 
—

—

 
834

834

 
—

—

Other loans held for sale
101

101

 
—

—

 
—

—

 
101

101

Loans and leases
116,660

116,627

 
—

—

 
338

338

 
116,322

116,289

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
119,575

119,503

 
—

—

 
119,575

119,503

 
—

—

Federal funds purchased and securities sold under agreements to repurchase
1,156

1,156

 
—

—

 
1,156

1,156

 
—

—

Other short-term borrowed funds
161

161

 
—

—

 
161

161

 
—

—

Long-term borrowed funds
15,925

15,877

 
—

—

 
15,925

15,877

 
—

—



92
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 14 - NONINTEREST INCOME
Revenues from Contracts with Customers
The following table presents the components of revenue from contracts with customers disaggregated by revenue stream and business operating segment:
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
(in millions)
Consumer Banking
Commercial Banking
Consolidated (1)
 
Consumer Banking
Commercial Banking
Consolidated (1)
Service charges and fees

$102


$25


$127

 

$105


$26


$131

Card fees
57

10

67

 
51

10

61

Capital markets fees
—

38

38

 
—

46

46

Trust and investment services fees
50

—

50

 
45

—

45

Other banking fees
1

2

3

 
—

2

2

Total revenue from contracts with customers

$210


$75


$285

 

$201


$84


$285

 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
(in millions)
Consumer Banking
Commercial Banking
Consolidated (1)
 
Consumer Banking
Commercial Banking
Consolidated (1)
Service charges and fees

$298


$77


$375

 

$303


$79


$382

Card fees
162

28

190

 
154

28

182

Capital markets fees
—

140

140

 
—

134

134

Trust and investment services fees
150

—

150

 
128

—

128

Other banking fees
1

7

8

 
—

7

7

Total revenue from contracts with customers

$611


$252


$863

 

$585


$248


$833

(1) There is no revenue from contracts with customers included in Other non-segment operations.
The Company recognized trailing commissions of $4 million for the three months ended September 30, 2019 and 2018 and $11 million and $12 million for the nine months ended September 30, 2019 and 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.
Revenue from Other Sources
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Bank-owned life insurance

$14

 

$14

 

$41

 

$42


NOTE 15 - OTHER OPERATING EXPENSE
The following table presents the details of other operating expense:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2019

 
2018

 
2019

 
2018

Deposit insurance

$14

 

$29

 

$46

 

$88

Promotional expense
31

 
36

 
86

 
95

Settlements and operating losses
10

 
11

 
30

 
35

Other
72

 
55

 
193

 
160

Other operating expense

$127

 

$131

 

$355

 

$378



93
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 16 - EARNINGS PER SHARE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except share and per share data)
2019

 
2018

 
2019

 
2018

Numerator (basic and diluted):
 
 
 
 
 
 
 
Net income

$449

 

$443

 

$1,341

 

$1,256

Less: Preferred stock dividends
17

 
7

 
50

 
14

Net income available to common stockholders

$432

 

$436

 

$1,291

 

$1,242

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
445,703,987

 
475,957,526

 
454,802,186

 
482,691,884

Dilutive common shares: share-based awards
1,430,608

 
1,642,391

 
1,416,569

 
1,558,959

Weighted-average common shares outstanding - diluted
447,134,595

 
477,599,917

 
456,218,755

 
484,250,843

Earnings per common share:
 
 
 
 
 
 
 
Basic

$0.97

 

$0.92

 

$2.84

 

$2.57

Diluted (1)
0.97

 
0.91

 
2.83

 
2.57



(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted average antidilutive shares totaling 772 and 359,952 for the three and nine months ended September 30, 2019, respectively. There were no weighted average antidilutive shares for the three and nine months ended September 30, 2018 .
NOTE 17 - BUSINESS OPERATING SEGMENTS
Citizens 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 a segment head who reports 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. For more information on our business operating segments, as well as Other non-segment operations, see Note 25 in the Company’s 2018 Form 10-K.
 
As of and for the Three Months Ended September 30, 2019
(in millions)
Consumer Banking
 
Commercial Banking
 
Other
 
Consolidated
Net interest income

$799

 

$360

 

($14
)
 

$1,145

Noninterest income
336

 
133

 
24

 
493

Total revenue
1,135

 
493

 
10

 
1,638

Noninterest expense
718

 
213

 
42

 
973

Profit (loss) before provision for credit losses
417

 
280

 
(32
)
 
665

Provision for credit losses
83

 
27

 
(9
)
 
101

Income (loss) before income tax expense (benefit)
334

 
253

 
(23
)
 
564

Income tax expense (benefit)
83

 
57

 
(25
)
 
115

Net income

$251

 

$196

 

$2

 

$449

Total average assets

$66,365

 

$55,614

 

$40,131

 

$162,110


 
As of and for the Three Months Ended September 30, 2018
(in millions)
Consumer Banking
 
Commercial Banking
 
Other
 
Consolidated
Net interest income

$776

 

$380

 

($8
)
 

$1,148

Noninterest income
258

 
140

 
18

 
416

Total revenue
1,034

 
520

 
10

 
1,564

Noninterest expense
686

 
202

 
22

 
910

Profit (loss) before provision for credit losses
348

 
318

 
(12
)
 
654

Provision for credit losses
71

 
14

 
(7
)
 
78

Income (loss) before income tax expense (benefit)
277

 
304

 
(5
)
 
576

Income tax expense (benefit)
70

 
70

 
(7
)
 
133

Net income

$207

 

$234

 

$2

 

$443

Total average assets

$62,974

 

$52,871

 

$39,779

 

$155,624


94
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
As of and for the Nine Months Ended September 30, 2019
(in millions)
Consumer Banking
 
Commercial Banking
 
Other
 
Consolidated
Net interest income

$2,386

 

$1,103

 

($18
)
 

$3,471

Noninterest income
860

 
432

 
91

 
1,383

Total revenue
3,246

 
1,535

 
73

 
4,854

Noninterest expense
2,133

 
639

 
89

 
2,861

Profit (loss) before provision for credit losses
1,113

 
896

 
(16
)
 
1,993

Provision for credit losses
228

 
73

 
(18
)
 
283

Income before income tax expense (benefit)
885

 
823

 
2

 
1,710

Income tax expense (benefit)
219

 
184

 
(34
)
 
369

Net income

$666

 

$639

 

$36

 

$1,341

Total average assets

$65,624

 

$55,793

 

$39,927

 

$161,344

 
As of and for the Nine Months Ended September 30, 2018
(in millions)
Consumer Banking
 
Commercial Banking
 
Other
 
Consolidated
Net interest income

$2,268

 

$1,113

 

($21
)
 

$3,360

Noninterest income
708

 
405

 
62

 
1,175

Total revenue
2,976

 
1,518

 
41

 
4,535

Noninterest expense
2,000

 
610

 
58

 
2,668

Profit (loss) before provision for credit losses
976

 
908

 
(17
)
 
1,867

Provision for credit losses
209

 
19

 
13

 
241

Income (loss) before income tax expense (benefit)
767

 
889

 
(30
)
 
1,626

Income tax expense (benefit)
193

 
203

 
(26
)
 
370

Net income (loss)

$574

 

$686

 

($4
)
 

$1,256

Total average assets

$61,857

 

$51,820

 

$39,805

 

$153,482


There have been no significant changes in the management accounting practices utilized by the Company regarding the basis of presentation for segment results as discussed in Note 25 in the Company’s 2018 Form 10-K.

95
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.
    
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is set forth in Note 12 of this Report, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Report, you should consider the risks described under the caption “Risk Factors” in the Company’s 2018 Form 10-K.

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 September 30, 2019 are included below:
Period
Total Number of Shares Repurchased
Weighted Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
Maximum Dollar Amount of Shares That May Yet Be Purchased As Part of Publicly Announced Plans or Programs (1)
July 1, 2019 - July 31, 2019
10,817,308
$35.43
10,817,308
$891,734,124
August 1, 2019 - August 31, 2019
2,018,648
$35.43
2,018,648
$820,211,810
September 1, 2019 - September 30, 2019
1,276,061
$35.43
1,276,061
$775,000,000
(1) On June 27, 2019, the Company announced that its Board of Directors has authorized share repurchases of CFG common stock of up to $1.275 billion for the four-quarter period ending with the second quarter of 2020. This share repurchase plan allowed for share repurchases that may be executed in the open market or in privately negotiated transactions, including under Rule 10b5-1 plans. Shares repurchased by the Company during the third quarter were executed pursuant to an accelerated share repurchase transaction and open market repurchases, which were completed by September 30, 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.


96
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 Certificate of Designations of the Registrant with respect to the Series C Preferred Stock, dated October 24, 2018, filed with the Secretary of State of the State of Delaware and effective October 24, 2018 (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed October 25, 2018)

3.4 Certificate of Designations of the Registrant with respect to the Series D Preferred Stock, dated January 23, 2019, filed with the Secretary of State of the State of Delaware and effective January 23, 2019 (incorporated herein by reference to Exhibit 3.4 to the Registration Statement on Form 8-A, filed January 29, 2019)

3.5 Certificate of Designations of the Registrant with respect to the Series E Preferred Stock, dated October 22, 2019, filed with the Secretary of State of the State of Delaware and effective October 22, 2019 (incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form 8-A, filed October 25, 2019)

3.6 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 June 21, 2019)

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 September 30, 2019, formatted in inline 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*

104
Cover page interactive data file in inline XBRL format, included in Exhibit 101 to this report*

* Filed herewith.

97
CITIZENS FINANCIAL GROUP, INC.

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 6, 2019.

CITIZENS FINANCIAL GROUP, INC.
(Registrant)
 
 
By:
/s/ C. Jack Read
 
Name: C. Jack Read
 
Title: Executive Vice President, Chief Accounting Officer and Controller
 
(Principal Accounting Officer and Authorized Officer)


98

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