Last10K.com

Citizens Financial Group Incri (CFG) SEC Filing 10-Q Quarterly report for the period ending Tuesday, June 30, 2020

SEC Filings

Citizens Financial Group Incri

CIK: 759944 Ticker: CFG

Exhibit 99.1

 

 

LOGO

Citizens Financial Group, Inc. Reports Second Quarter Net Income of

$253 million and EPS of $0.53

Underlying Net Income of $263 million and EPS of $0.55*

CECL-related reserve build of $317 million, or $0.59 per share, tied to

COVID-19 impacts

CET1 ratio remains strong, increases to 9.6%

Record revenue with noninterest income up 28% year over year, paced by record results in Mortgage

4.6% positive operating leverage year over year, 5.9% on an Underlying basis

Tangible book value per share stable at $32, up 4% year over year

PROVIDENCE, RI (July 17, 2020) Citizens Financial Group, Inc. (NYSE: CFG or “Citizens”) today reported second quarter net income of $253 million, compared with $453 million in second quarter 2019, with earnings per share of $0.53, compared with $0.95 per share in second quarter 2019. Second quarter 2020 results reflect a net $10 million, or $(0.02) per share,

after-tax reduction from notable items compared with a net $5 million, or $(0.01) per share, in second quarter 2019 and a net $25 million, or $(0.06) per share, in first quarter 2020. Second quarter 2020 Return on Average Tangible Common Equity* (“ROTCE”) of 6.6% compares with 12.8% in second quarter 2019 and 0.4% in first quarter 2020.

On an Underlying basis, which excludes notable items, second quarter 2020 net income available to common stockholders of $235 million compares with $440 million in second quarter 2019 and $37 million in first quarter 2020. Underlying EPS of $0.55 per share compares with $0.96 in second quarter 2019 and $0.09 in first quarter 2020. Underlying second quarter 2020 ROTCE of 6.9% compares with 12.9% in second quarter 2019 and 1.1% in first quarter 2020. Tangible book value per common share of $32.13 compares with $30.88 for second quarter 2019 and $31.97 for first quarter 2020.

In second quarter 2020, Citizens recorded provision for credit losses of $464 million pre-tax, or $0.87 per share after-tax, including a net reserve build under CECL of $317 million pre-tax, or $0.59 per share after-tax, primarily tied to COVID-19 impacts. In addition, in second quarter 2020 the company transferred $936 million of education loans to held for sale in connection with balance sheet optimization strategies and reallocated approximately $100 million of associated credit reserves to the remaining loan portfolio. In first quarter 2020, the company recorded provision for credit losses of $600 million pre-tax, or $1.10 per share after-tax, which includes a $463 million pre-tax, or $0.85 per share after-tax, net reserve build tied to COVID-19 impacts.

*References in this release to “Underlying” results exclude notable items and are Non-GAAP Financial Measures. Where there is a reference to “Underlying” results in a paragraph, all measures that follow these references are on the same basis. Additional information regarding the impact of notable items and Acquisitions on our results is described in this release. Please see the end of this release for important information on our use of Non-GAAP Financial Measures, and their reconciliation to GAAP financial measures. References in this release to balance sheet items are on an average basis and loans exclude loans held for sale (“LHFS”) unless otherwise noted. References to net interest margin are on a fully taxable equivalent (“FTE”) basis and all references to earnings per share represent fully diluted per common share. References to consolidated and/or commercial loans, loan growth, nonaccrual loans and allowance for loan losses include leases. The “Company” refers to Citizens. Current reporting-period regulatory capital ratios are preliminary. Select totals may not sum due to rounding.


The following information was filed by Citizens Financial Group Incri (CFG) on Friday, July 17, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
 
 
 
 
 
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
June 30, 2020
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, each representing a 1/40th interest in a share of 6.350% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D
CFG PrD
New York Stock Exchange
Depositary Shares, each representing a 1/40th interest in a share of 5.000% Fixed-Rate 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,” “smaller reporting company,” and “emerging growth 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 426,828,691 shares of Registrant’s common stock ($0.01 par value) outstanding on July 30, 2020.



 
 
 
 
 
 
image1-logo.jpg
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 3
 
 
 
 
 
 
 5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Citizens Financial Group, Inc. | 2


GLOSSARY OF ACRONYMS AND TERMS
The following is a list of common acronyms and terms we regularly use in our financial reporting:
AACL
 
Adjusted Allowance for Credit Losses
ACL
 
Allowance for Credit Losses: Allowance for Loan and Lease Losses plus Reserve for Unfunded Lending Commitments
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
CARES Act
 
Coronavirus Aid, Relief, and Economic Security Act
CBNA
 
Citizens Bank, National Association
CCAR
 
Comprehensive Capital Analysis and Review
CCB
 
Capital Conservation Buffer
CCMI
 
Citizens Capital Markets, Inc.
CECL
 
Current Expected Credit Losses (ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments)
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
CFPB
 
Consumer Financial Protection Bureau
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
EAD
 
Exposure at Default
EGRRCPA
 
Economic Growth, Regulatory Relief and Consumer Protection Act
EPS
 
Earnings Per Share
Exchange Act
 
The Securities Exchange Act of 1934
Fannie Mae (FNMA)
 
Federal National Mortgage Association
FDIC
 
Federal Deposit Insurance Corporation
FHLB
 
Federal Home Loan Bank
FICO
 
Fair Isaac Corporation (credit rating)
FRB or Federal Reserve
 
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
GAAP
 
Accounting Principles Generally Accepted in the United States of America
GDP
 
Gross Domestic Product
Ginnie Mae (GNMA)
 
Government National Mortgage Association
GSE
 
Government Sponsored Entity
HTM
 
Held To Maturity
LCR
 
Liquidity Coverage Ratio
LGD
 
Loss Given Default
LHFS
 
Loans Held for Sale
LIBOR
 
London Interbank Offered Rate
LIHTC
 
Low Income Housing Tax Credit
LTV
 
Loan to Value

Citizens Financial Group, Inc. | 3


MBS
 
Mortgage-Backed Securities
Mid-Atlantic
 
District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia
Midwest
 
Illinois, Indiana, Michigan, and Ohio
MD&A
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Modified CECL Transition
 
The Day-1 CECL adoption entry booked to retained earnings plus 25% of subsequent CECL ACL reserve build
Modified AACL Transition
 
The Day-1 CECL adoption entry booked to ACL plus 25% of subsequent CECL ACL reserve build
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)
PD
 
Probability of Default
PPP
 
Paycheck Protection Program
ROTCE
 
Return on Average Tangible Common Equity
RPA
 
Risk Participation Agreement
SBA
 
United States Small Business Administration
SCB
 
Stress Capital Buffer
SEC
 
United States Securities and Exchange Commission
SVaR
 
Stressed Value at Risk
TBAs
 
To-Be-Announced Mortgage Securities
TDR
 
Troubled Debt Restructuring
Tier 1 capital ratio
 
Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
Tier 1 leverage ratio
 
Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by quarterly adjusted average assets as defined under the U.S. Basel III Standardized approach
Total capital ratio
 
Total capital, which includes Common Equity Tier 1 capital, tier 1 capital and allowance for credit losses and qualifying subordinated debt that qualifies as tier 2 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
VaR
 
Value at Risk
VIE
 
Variable Interest Entities




Citizens Financial Group, Inc. | 4


PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Citizens Financial Group, Inc. | 5


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 as well as the potential effects of the COVID-19 pandemic on our business, operations, financial performance and prospects, 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;
The COVID-19 pandemic and its effects on the economic and business environments in which we operate;
Our ability to meet heightened supervisory requirements and expectations;
Liabilities and business restrictions resulting from litigation and regulatory investigations;
Our capital and liquidity requirements under regulatory capital standards 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;
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 from or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends. Further, statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute what is reflected in those forward-looking statements due to factors and future developments that are uncertain,

Citizens Financial Group, Inc. | 6


unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.

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 II, Item 1A of this Report and Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019.
INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $179.9 billion in assets as of June 30, 2020. Our mission is to help customers, colleagues and communities each reach their potential by listening to them and 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 2,700 ATMs and 1,000 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 Part I, Item 1, as well as other information contained in this document and our 2019 Form 10-K.
Non-GAAP Financial Measures
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 our on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by 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 our MD&A by the use of the term Underlying and where there is a reference to Underlying results in that paragraph, all measures that follow this reference are on the same basis when applicable. For more information on the computation of non-GAAP financial measures, see “—Non-GAAP Financial Measures and Reconciliations.”

Citizens Financial Group, Inc. | 7


RECENT EVENTS
COVID-19
The COVID-19 pandemic has caused significant disruption to the national economy as well as the local economies within our footprint, resulting in many businesses sectors operating below capacity, increased unemployment levels and volatility in the financial markets. In response to the negative effects of COVID-19 on the U.S. economy, Congress enacted the Coronavirus Aide, Relief, and Economic Security Act (“CARES Act”), among other actions, in addition to monetary actions taken by the Federal Reserve, which provide for financial stimulus and government lending programs at unprecedented levels. The effects of these programs, as well as any potential additional stimulus, to support businesses and consumers remain uncertain.
CARES Act
On March 27, 2020, the CARES Act was passed, which allocated $349 billion to the SBA for issuing PPP loans to businesses using financial institutions as the intermediary to disperse the funds. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes. These loans carry a fixed interest rate of 1.00% and a term of 2 years, if not forgiven in whole or in part. Payments are deferred for the first 6 months of the loan. The loans are 100% guaranteed by the SBA, and the SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan.
On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was passed, which authorized $310 billion in additional funding under the CARES Act for PPP loans through the SBA. In addition, the FRB has implemented the Paycheck Protection Program Liquidity Facility (“PPPLF”) available to financial institutions participating in the PPP. In conjunction with the PPP, the PPPLF will allow the Federal Reserve Banks to lend to member banks on a non-recourse basis with PPP loans as collateral. We have completed all of the eligibility requirements to participate in the PPPLF, but we have no outstanding borrowings as June 30, 2020.
On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 was signed into law, which amends the PPP to give borrowers more freedom in how and when loan funds are spent while retaining the possibility of full forgiveness. The key changes include:
Extending the time to use the loan proceeds from 8 to 24 weeks after origination (loan proceeds must be used December 31, 2020);
Extending the maturity of PPP loans from 2 to 5 years for loans originated after June 5, 2020, although pre-June 5 loans may be extended from 2 years to 5 years upon agreement of both lender and borrower;
Extending the loan deferral period from 6 months to 10 months from the time the borrower uses the loan proceeds; and
A reduction in borrower mandatory payroll spending from 75% to 60%.
The CARES Act also provides for relief on existing and new SBA loans through the Small Business Debt Relief. As part of the SBA Small Business Debt Relief, the SBA will automatically pay principal, interest and fees of certain SBA loans for a period of 6 months for both existing loans and new loans issued prior to September 27, 2020. Finally, the CARES Act provides borrowers with mortgage payment relief and a moratorium on foreclosures.
The effectiveness of these programs, as well as that of any potential additional stimulus, in supporting businesses, consumers and, ultimately, the economy is uncertain.
Federal Reserve Bank Actions
The FRB has taken a range of actions to support the flow of credit to households and businesses. On March 15, 2020, the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities as well as begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window by lowering the primary credit rate by 150 basis points and extending the term up to 90 days. On March 26, 2020, the FRB reduced reserve requirements to zero. The FRB has established a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19. These actions include Main Street Lending Facilities to purchase loan participations under specified conditions from banks’ lending to small and medium U.S. businesses. We may participate in some or all of them, including as a lender, agent, or intermediary on behalf of clients or customers or in an advisory capacity.

Citizens Financial Group, Inc. | 8


On March 31, 2020, in response to the COVID-19 pandemic, the FRB and the other federal banking regulators issued an interim final rule relative to regulatory capital treatment of ACL under CECL. This rule allowed electing banking organizations to delay the estimated impact of CECL on regulatory capital for a 2-year period ending January 1, 2022, followed by a 3-year transition period ending January 1, 2025 to phase-in the aggregate amount of the capital benefit provided during the initial 2-year delay. In the first quarter of 2020, we elected to delay for 2 years the phase-in of the capital impact from our adoption of the new accounting standard on credit losses.
Citizens Response to COVID-19
Citizens responded in many ways to support our customers, colleagues and communities during this crisis. Citizens mobilized on several fronts:
For our customers, we offered loan forbearance and other forms of relief for those facing financial hardship. We also took action to implement the SBA’s PPP, getting much-needed funds into the hands of small and mid-sized businesses. As of June 30, 2020, PPP loans to small business customers were approximately $4.7 billion with an average loan size of approximately $98,000. Approximately 84% of the loans are under $100,000, with 93% of the loans to companies with under 25 employees supporting over 540,000 jobs.

For our colleagues, we acted quickly and effectively to ensure their safety and welfare, while enabling them to continue providing vital banking services. Actions included alternate work arrangements such as remote working, enhanced workplace safety with enhanced cleaning and social distancing practices, offering additional time off for family and self-care situations related to the coronavirus, and introducing additional pay for those who could not operate remotely. As of June 30, 2020, Citizens allowed colleagues to return to office in 10 States and portions of three others. The total non-branch colleagues assigned to offices in these states is approximately 6,500. Approximately 10% of the assigned non-branch colleagues are considered essential and were working consistently in the office. Additionally, approximately 25% of the assigned non-branch colleagues who are able to productively work from home have returned to the office sporadically through the month of June 2020 for periods ranging from one day to everyday. Return to office for nonessential Citizens colleagues is voluntary at this time.

For our communities, we pledged more than $5 million to provide both immediate relief and longer-term support to help those impacted by the pandemic. This commitment included charitable contributions and other assistance aimed at helping small businesses recover.

Citizens will continue to serve our stakeholders through this crisis and beyond, backed by our strong financial position that enables us to deliver in meaningful ways.
Racial Equity and Social Justice
Citizens has made further commitments to diversity and inclusion, along with initiatives to promote racial equity and social justice. We announced a $10 million investment to help drive social equity and economic advancement in underserved communities across our footprint.  This multi-faceted, multi-year effort to enhance awareness, create access to capital, and improve capabilities and opportunities represents an important step toward achieving long-lasting change across our communities and within our bank in a way that aligns strongly with our values. Primary components of our investment include the following:
Grants and charitable support for immediate and longer-term initiatives aimed at supporting minority-owned small businesses, increasing awareness of racial disparities, and supporting underserved communities through technology, education and digital literacy initiatives.
More than $500 million in incremental financing and capital for small businesses, housing, and other development in predominately minority communities.
An acceleration of our ongoing efforts to increase leadership and workforce diversity while expanding awareness of social equity issues and providing additional opportunities for colleagues to make an impact within our communities.

Citizens Financial Group, Inc. | 9


FINANCIAL PERFORMANCE
Quarterly Results Key Highlights
Second quarter 2020 net income of $253 million decreased 44% from $453 million in the second quarter of 2019, with earnings per diluted common share of $0.53, down $0.42 from $0.95 per diluted common share in second quarter 2019. Second quarter 2020 ROTCE of 6.6% compared to 12.8% in second quarter 2019.
Second quarter 2020 results reflected $10 million after-tax, or $0.02 per diluted common share, of notable items largely tied to TOP 6 transformational and revenue and efficiency initiatives. On an Underlying basis, which excludes notable items, second quarter 2020 net income available to common stockholders of $235 million compared with $440 million in the second quarter of 2019. Underlying EPS of $0.55 compared to $0.96 in the second quarter of 2019. Second quarter 2020 results reflected a net decrease to net income available to common stockholders due to a $317 million before tax, or $0.59 per share after tax, reserve build under CECL primarily tied to the impact of the COVID-19 pandemic on provision for credit losses. Underlying second quarter 2020 ROTCE of 6.9% compared with 12.9% in the second quarter of 2019. Tangible book value per common share of $32.13 increased 4% from second quarter 2019.
 
Three Months Ended June 30,
 
2020
 
2019
(in millions)
Noninterest expense
 
Income tax expense
 
Net Income
 
Noninterest expense
 
Income tax expense
 
Net Income
Reported results (GAAP):

$979

 

$54

 

$253

 

$951

 

$127

 

$453

Less notable items:
 
 
 
 
 
 
 
 
 
 
 
Total integration costs
2

 
(1
)
 
(1
)
 
7

 
(2
)
 
(5
)
Other notable items(1)
17

 
(8
)
 
(9
)
 

 

 

Total notable items
19

 
(9
)
 
(10
)
 
7

 
(2
)
 
(5
)
Underlying results* (non-GAAP)

$960

 

$63

 

$263

 

$944

 

$129

 

$458

(1) Other notable items include noninterest expense of $17 million related to our TOP programs and other efficiency initiatives and income tax benefit of $4 million related to legacy tax matters.
* 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 non-GAAP financial measures, see “—Introduction — Non-GAAP Financial Measures” and “—Non-GAAP Financial Measures and Reconciliations.”
Total revenue of $1.7 billion increased $122 million, or 7%, from the second quarter 2019, reflecting stable net interest income and a 28% increase in noninterest income driven by record results in mortgage banking.
Net interest income of $1.2 billion was relatively stable compared to the second quarter 2019, reflecting lower funding costs and growth in average interest-earning assets of 11%, offset by the impact of the lower rate and challenging yield-curve environment on asset yields.
Net interest margin of 2.87% decreased 33 basis points compared to 3.20% in second quarter 2019, reflecting the negative impact of lower interest rates and higher cash balances given strong deposit flows, partially offset by lower funding costs and improved mix.
Net interest margin on a fully taxable-equivalent basis of 2.88% decreased by 33 basis points, compared to 3.21% in second quarter 2019.
Average loans and leases of $128.8 billion increased $11.0 billion, or 9%, from $117.8 billion in the second quarter 2019, reflecting a $9.5 billion increase in commercial loans and leases and a $1.4 billion increase in retail loans.
Average deposits of $141.6 billion increased $18.4 billion, or 15%, from $123.2 billion in the second quarter 2019, reflecting growth in money market accounts, demand deposits, savings and checking with interest, partially offset by lower term deposits.
Noninterest income of $590 million increased $128 million, or 28%, from the second quarter 2019, driven by record results in mortgage banking as well as strength in capital markets fees, partially offset by lower service charges and fees, card fees and trust and investment services fees as a result of the COVID-19 pandemic.
Noninterest expense of $979 million increased $28 million, or 3%, compared to $951 million in second quarter 2019.

Citizens Financial Group, Inc. | 10


On an Underlying basis, noninterest expense increased $16 million, or 2%, from the second quarter 2019, reflecting higher equipment and software expense as well as an increase in outside services, partially offset by lower occupancy and other operating expense.
The efficiency ratio of 55.9% compared to 58.4% in second quarter 2019.
On an Underlying basis, the efficiency ratio of 54.9% compared to 58.0% in the second quarter 2019.
Provision for credit losses of $464 million increased $367 million from $97 million in the second quarter 2019, primarily tied to the impact of COVID-19.
Year to Date and Period End Key Highlights
Net income of $287 million decreased 68% from the first half of 2019, with earnings per diluted common share of $0.55, down $1.31 from $1.86 per diluted common share in the first half of 2019. ROTCE of 3.5% declined from 12.9% in the first half of 2019.
In the first half of 2020, results reflected a $35 million, or $0.09 per diluted common share, after-tax reduction from notable items, largely tied to TOP 6 transformational and revenue and efficiency initiatives. In the first half of 2019, there were $9 million after-tax of notable items, or $0.02 per diluted common share, tied to integration costs associated with acquisitions.
In the first half of 2020, we adopted the CECL accounting standard and recorded first half 2020 provision for credit losses of $1.1 billion pre-tax, or $1.98 per share after-tax, including a net reserve build of $780 million pre-tax, or $1.45 per share after-tax, tied to COVID-19 pandemic impacts.
 
Six Months Ended June 30,
 
2020
 
2019
(in millions)
Noninterest expense
 
Income tax expense
 
Net Income
 
Noninterest expense
 
Income tax expense
 
Net Income
Reported results (GAAP)

$1,991

 

$65

 

$287

 

$1,888

 

$254

 

$892

Less notable items:
 
 
 
 
 
 
 
 
 
 
 
Total integration costs
6

 
(2
)
 
(4
)
 
12

 
(3
)
 
(9
)
Other notable items(1)
46

 
(15
)
 
(31
)
 

 

 

Total notable items
52

 
(17
)
 
(35
)
 
12

 
(3
)
 
(9
)
Underlying results* (non-GAAP)

$1,939

 

$82

 

$322

 

$1,876

 

$257

 

$901

(1) Other notable items include noninterest expense of $46 million related to our TOP programs and other efficiency initiatives and income tax benefit of $4 million related to legacy tax matters.
Net income available to common stockholders of $237 million decreased $622 million, or 72%, compared to $859 million in the first half of 2019.
On an Underlying basis, which excludes notable items, first half 2020 net income available to common stockholders of $272 million compared with $868 million in the first half of 2019.
On an Underlying basis, EPS of $0.64 per share compares with $1.88 in the first half of 2019.
Total revenue of $3.4 billion increased $191 million, or 6%, from the first half of 2019, reflecting a 22% increase in noninterest income and stable net interest income.
Net interest income of $2.3 billion was stable, reflecting 7% growth in average interest-earning assets offset by the impact of the lower rate and challenging yield-curve environment.
Net interest margin of 2.98% decreased 24 basis points from 3.22% in the first half of 2019, reflecting the impact of lower interest rates, partially offset by lower funding costs and improved deposit mix, as well as continued mix shift towards better-returning assets.
Net interest margin on a fully taxable-equivalent basis of 2.99% decreased by 24 basis points, compared to 3.23% in the first half of 2019.
Average loans and leases of $124.9 billion increased $7.2 billion, or 6%, from $117.7 billion in the first half of 2019, reflecting a $5.7 billion increase in commercial loans and leases and a $1.5 billion increase in retail loans.
Period-end loan growth of $6.6 billion, or 6%, from the fourth quarter of 2019, reflected 13% growth in total commercial loans and leases.

Citizens Financial Group, Inc. | 11


Average deposits of $134.1 billion increased $12.3 billion, or 10%, from $121.8 billion in the first half of 2019, reflecting growth in money market accounts, demand deposits, savings and checking with interest, partially offset by a decrease in term deposits.
Period-end deposit growth of $18.3 billion, or 15%, from the fourth quarter of 2019, outpacing loan growth.
Noninterest income of $1.1 billion increased $197 million, or 22%, from the first half of 2019, driven by record results in mortgage banking, partially offset by lower service charges and fees, card fees, foreign exchange and interest rate products revenue, and other income.
Noninterest expense of $2.0 billion increased $103 million, or 5%, from $1.9 billion in the first half of 2019, driven by higher salaries and employee benefits, outside services, and equipment and software expense.
On an Underlying basis, noninterest expense increased 3% from the first half of 2019.
The efficiency ratio of 58.4% compared to 58.7% for the first half of 2019, and ROTCE of 3.5% compared to 12.9%.
On an Underlying basis, the efficiency ratio of 56.9% compared to 58.3% for the first half of 2019 and ROTCE of 4.0% compared to 13.0%, reflecting the challenging environment presented by COVID-19, in particular the CECL provision impact.
Provision for credit losses of $1.1 billion increased $882 million from $182 million for the first half of 2019, driven by a $780 million CECL reserve build primarily tied to COVID-19 impacts.
Tangible book value per common share of $32.13 increased 4% from the first half of 2019. Fully diluted average common shares outstanding decreased 32.6 million shares, or 7%, over the same period.
SELECTED CONSOLIDATED FINANCIAL DATA
The summary Consolidated Operating Data for the three and six months ended June 30, 2020 and 2019 and the summary Consolidated Balance Sheet data as of June 30, 2020 and December 31, 2019 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1. Our historical results are not necessarily indicative of the results expected for any future period.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions, except per share amounts)
  2020

 
  2019

 
2020
 
2019
OPERATING DATA:
 
 
 
 
 
 
 
Net interest income

$1,160

 

$1,166

 

$2,320

 

$2,326

Noninterest income
590

 
462

 
1,087

 
890

Total revenue
1,750

 
1,628

 
3,407

 
3,216

Provision for credit losses
464

 
97

 
1,064

 
182

Noninterest expense
979

 
951

 
1,991

 
1,888

Income before income tax expense
307

 
580

 
352

 
1,146

Income tax expense
54

 
127

 
65

 
254

Net income

$253

 

$453

 

$287

 

$892

Net income available to common stockholders

$225

 

$435

 

$237

 

$859

Net income per common share - basic

$0.53

 

$0.95

 

$0.56

 

$1.87

Net income per common share - diluted

$0.53

 

$0.95

 

$0.55

 

$1.86

OTHER OPERATING DATA:
 
 
 
 
 
 
 
Return on average common equity
4.44
%
 
8.54
 %
 
2.35
%
 
8.58
%
Return on average tangible common equity
6.62

 
12.75

 
3.51

 
12.87

Return on average total assets
0.57

 
1.13

 
0.33

 
1.12

Return on average total tangible assets
0.59

 
1.17

 
0.35

 
1.17

Efficiency ratio
55.91

 
58.41

 
58.43

 
58.70

Operating leverage(1)
4.60

 
(0.85
)
 
0.48

 
0.86

Net interest margin, FTE(2)
2.88

 
3.21

 
2.99

 
3.23

Effective income tax rate
17.69

 
21.86

 
18.51

 
22.14

(1) “Operating leverage” represents the period-over-period percent change in total revenue, less the period-over-period percent change in noninterest expense.
(2) Net interest margin is presented on an FTE basis using the federal statutory tax rate of 21%.

Citizens Financial Group, Inc. | 12


(dollars in millions)
June 30,
2020
 
December 31,
2019
BALANCE SHEET DATA:
 
 
 
Total assets

$179,874

 

$165,733

Loans held for sale, at fair value
3,631

 
1,946

Other loans held for sale
1,362

 
1,384

Loans and leases
125,713

 
119,088

Allowance for loan and lease losses
(2,448
)
 
(1,252
)
Total securities
25,657

 
24,669

Goodwill
7,050

 
7,044

Total liabilities
157,456

 
143,532

Total deposits
143,618

 
125,313

Short-term borrowed funds
255

 
274

Long-term borrowed funds
9,202

 
14,047

Total stockholders’ equity
22,418

 
22,201

OTHER BALANCE SHEET DATA:
 
 
 
Asset Quality Ratios:
 
 
 
Allowance for credit losses as a percentage of loans and leases
2.01
%
 
1.09
%
Allowance for credit losses as a percentage of loans and leases, excluding the impact of PPP loans
2.09

 
1.09

Allowance for credit losses as a percentage of nonaccruing loans and leases
255.39

 
184.31

Nonaccruing loans and leases as a percentage of loans and leases
0.79

 
0.59

Capital Ratios:
 
 
 
CET1 capital ratio
9.6
%
 
10.0
%
Tier 1 capital ratio
10.9

 
11.1

Total capital ratio
13.1

 
13.0

Tier 1 leverage ratio
9.3

 
10.0





Citizens Financial Group, Inc. | 13


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,” and “—Risk Governance” as described in our 2019 Form 10-K.
chart-616027a8fb2f5395a6f.jpg


    


Citizens Financial Group, Inc. | 14


The following table presents the major components of net interest income and net interest margin:
 
Three Months Ended June 30,
 
 
2020
 
2019
 
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

$5,231


$1

0.09
%
 

$1,229


$7

2.16
%
 

$4,002

(207) bps
Taxable investment securities
25,180

130

2.15

 
25,620

164

2.56

 
(440
)
(41
)
Non-taxable investment securities
4


2.60

 
5


2.60

 
(1
)

Total investment securities
25,184

130

2.15

 
25,625

164

2.56

 
(441
)
(41
)
Commercial
50,443

412

3.23

 
41,755

471

4.45

 
8,688

(122
)
Commercial real estate
14,540

106

2.87

 
13,379

166

4.91

 
1,161

(204
)
Leases
2,426

16

2.75

 
2,745

19

2.89

 
(319
)
(14
)
Total commercial loans and leases
67,409

534

3.14

 
57,879

656

4.48

 
9,530

(134
)
Residential mortgages
18,872

150

3.19

 
19,232

176

3.65

 
(360
)
(46
)
Home equity
12,736

111

3.50

 
13,754

180

5.28

 
(1,018
)
(178
)
Automobile
11,998

129

4.33

 
11,984

125

4.19

 
14

14

Education
11,183

145

5.21

 
9,235

137

5.97

 
1,948

(76
)
Other retail
6,557

123

7.52

 
5,699

118

8.24

 
858

(72
)
Total retail loans
61,346

658

4.31

 
59,904

736

4.92

 
1,442

(61
)
Total loans and leases
128,755

1,192

3.69

 
117,783

1,392

4.71

 
10,972

(102
)
Loans held for sale, at fair value
2,710

20

2.85

 
1,528

15

3.93

 
1,182

(108
)
Other loans held for sale
510

7

4.66

 
158

2

5.67

 
352

(101
)
Interest-earning assets
162,390

1,350

3.33

 
146,323

1,580

4.30

 
16,067

(97
)
Allowance for loan and lease losses
(2,172
)
 
 
 
(1,247
)
 
 
 
(925
)
 
Goodwill
7,050

 
 
 
7,040

 
 
 
10

 
Other noninterest-earning assets
12,525

 
 
 
9,373

 
 
 
3,152

 
Total assets

$179,793

 
 
 

$161,489

 
 
 

$18,304

 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Checking with interest

$26,312


$11

0.17
%
 

$23,919


$57

0.96
%
 

$2,393

(79)
Money market accounts
45,187

39

0.35

 
35,228

114

1.30

 
9,959

(95)
Regular savings
15,883

15

0.39

 
13,324

21

0.62

 
2,559

(23)
Term deposits
16,470

59

1.44

 
22,292

116

2.09

 
(5,822
)
(65)
Total interest-bearing deposits
103,852

124

0.48

 
94,763

308

1.30

 
9,089

(82)
Short-term borrowed funds
222


0.29

 
863

4

1.81

 
(641
)
(152)
Long-term borrowed funds
11,755

66

2.22

 
12,386

102

3.30

 
(631
)
(108)
Total borrowed funds
11,977

66

2.18

 
13,249

106

3.20

 
(1,272
)
(102)
Total interest-bearing liabilities
115,829

190

0.66

 
108,012

414

1.54

 
7,817

(88)
Demand deposits
37,745

 
 
 
28,389

 
 
 
9,356

 
Other liabilities
4,086

 
 
 
3,536

 
 
 
550

 
Total liabilities
157,660

 
 
 
139,937

 
 
 
17,723

 
Stockholders’ equity
22,133

 
 
 
21,552

 
 
 
581

 
Total liabilities and stockholders’ equity

$179,793

 
 
 

$161,489

 
 
 

$18,304

 
Interest rate spread
 
 
2.67
%
 
 
 
2.77
%
 
 
(10)
Net interest income and net interest margin
 

$1,160

2.87
%
 
 

$1,166

3.20
%
 
 
(33)
Net interest income and net interest margin, FTE(1)
 

$1,163

2.88
%
 
 

$1,172

3.21
%
 
 
(33)
Memo: Total deposits (interest-bearing and demand)

$141,597


$124

0.35
%
 

$123,152


$308

1.00
%
 

$18,445

(65) bps
(1) 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.
Quarterly Results: Net interest income of $1.2 billion was stable with second quarter 2019, despite the lower rate and challenging yield curve environment, given 11% growth in interest-earning assets.
Net interest margin of 2.87% decreased 33 basis points compared to 3.20% in second quarter 2019, as the impact of lower interest rates was partially offset by lower funding costs and improved deposit mix, as well as continued mix shift towards higher yielding assets. Net interest margin on an FTE basis of 2.88% decreased 33 basis points compared to 3.21% in second quarter 2019. Average interest-earning asset yields of 3.33% decreased 97 basis points from 4.30% in second quarter 2019, while average interest-bearing liability costs of 0.66% decreased 88 basis points from 1.54% in second quarter 2019.
Average interest-earning assets of $162.4 billion increased $16.1 billion, or 11%, from second quarter 2019, driven by a $12.5 billion, or 9% increase in average loans and leases and LHFS. Results reflected a $9.5 billion increase

Citizens Financial Group, Inc. | 15


in average commercial loans and leases and a $1.4 billion increase in average retail loans. Commercial loan and lease growth reflected strength in commercial, which included the impact of higher COVID-19-related line of credit utilization of $4.9 billion and the $3.4 billion impact of PPP loans, as well as growth in commercial real estate. Retail loan growth was driven by education and other retail, partially offset by lower home equity and the impact of mortgage loan sales.
Average deposits of $141.6 billion increased $18.4 billion, or 15%, from second quarter 2019, reflecting growth in money market accounts, demand deposits, checking with interest, and savings resulting from the impact of government stimulus as well as corporate clients building liquidity. These results were partially offset by a decline in term deposits. Average total borrowed funds of $12.0 billion decreased $1.3 billion from second quarter 2019, reflecting a decrease in long-term and short-term borrowed funds, resulting from deposit growth. Total borrowed funds costs of $66 million decreased $40 million from second quarter 2019. The total borrowed funds cost of 2.18% decreased 102 basis points from 3.20% in second quarter 2019 due to lower interest cost on long-term senior debt and FHLB borrowings.


Citizens Financial Group, Inc. | 16



The following table presents the major components of net interest income and net interest margin:
 
Six Months Ended June 30,
 
 
2020
 
2019
 
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

$3,545


$6

0.36
%
 

$1,362


$15

2.18
%
 

$2,183

(182) bps
Taxable investment securities
25,259

277

2.24

 
25,379

330

2.60

 
(120
)
(36
)
Non-taxable investment securities
4


2.60

 
5


2.60

 
(1
)

Total investment securities
25,263

277

2.24

 
25,384

330

2.60

 
(121
)
(36
)
Commercial
46,797

829

3.50

 
41,659

931

4.44

 
5,138

(94
)
Commercial real estate
14,208

245

3.40

 
13,325

331

4.94

 
883

(154
)
Leases
2,454

34

2.79

 
2,809

40

2.87

 
(355
)
(8
)
Total commercial loans and leases
63,459

1,108

3.45

 
57,793

1,302

4.48

 
5,666

(103
)
Residential mortgages
18,869

314

3.33

 
19,163

351

3.66

 
(294
)
(33
)
Home equity
12,889

263

4.10

 
13,913

363

5.27

 
(1,024
)
(117
)
Automobile
12,085

260

4.33

 
12,026

245

4.12

 
59

21

Education
10,897

294

5.42

 
9,153

271

5.98

 
1,744

(56
)
Other retail
6,706

255

7.65

 
5,668

241

8.55

 
1,038

(90
)
Total retail loans
61,446

1,386

4.53

 
59,923

1,471

4.94

 
1,523

(41
)
Total loans and leases
124,905

2,494

3.98

 
117,716

2,773

4.72

 
7,189

(74
)
Loans held for sale, at fair value
2,300

35

3.03

 
1,283

26

4.09

 
1,017

(106
)
Other loans held for sale
655

16

4.45

 
175

6

6.41

 
480

(196
)
Interest-earning assets
156,668

2,828

3.61

 
145,920

3,150

4.32

 
10,748

(71
)
Allowance for loan and lease losses
(1,940
)
 
 
 
(1,245
)
 
 
 
(695
)
 
Goodwill
7,048

 
 
 
7,029

 
 
 
19

 
Other noninterest-earning assets
11,709

 
 
 
9,251

 
 
 
2,458

 
Total assets

$173,485

 
 
 

$160,955



 
 

$12,530

 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
Checking with interest

$25,462


$48

0.38
%
 

$23,456


$109

0.94
%
 

$2,006

(56)
Money market accounts
42,513

132

0.63

 
35,218

224

1.28

 
7,295

(65)
Regular savings
15,042

33

0.44

 
12,977

38

0.59

 
2,065

(15)
Term deposits
17,543

138

1.58

 
21,713

224

2.08

 
(4,170
)
(50)
Total interest-bearing deposits
100,560

351

0.70

 
93,364

595

1.28

 
7,196

(58)
Short-term borrowed funds
433

1

0.64

 
781

6

1.61

 
(348
)
(97)
Long-term borrowed funds
12,906

156

2.40

 
13,555

223

3.28

 
(649
)
(88)
Total borrowed funds
13,339

157

2.35

 
14,336

229

3.19

 
(997
)
(84)
Total interest-bearing liabilities
113,899

508

0.90

 
107,700

824

1.54

 
6,199

(64)
Demand deposits
33,553

 
 
 
28,426

 
 
 
5,127


Other liabilities
4,070

 
 
 
3,560

 
 
 
510


Total liabilities
151,522

 
 
 
139,686

 
 
 
11,836


Stockholders’ equity
21,963

 
 
 
21,269

 
 
 
694


Total liabilities and stockholders’ equity

$173,485

 
 
 

$160,955

 
 
 

$12,530


Interest rate spread
 
 
2.71
%
 
 
 
2.78
%
 
 
(7)
Net interest income and net interest margin
 

$2,320

2.98
%
 
 

$2,326

3.22
%
 
 
(24)
Net interest income and net interest margin, FTE(1)
 

$2,327

2.99
%
 
 

$2,338

3.23
%
 
 
(24)
Memo: Total deposits (interest-bearing and demand)

$134,113


$351

0.53
%
 

$121,790


$595

0.98
%
 

$12,323

(45) bps
(1) Net interest income and net interest margin is presented on an FTE basis using the federal statutory tax rate of 21%. The FTE impact is predominantly attributable to commercial loans for the periods presented.
Year-To-Date Results:    Net interest income of $2.3 billion was stable with first half 2019, despite the lower rate and challenging yield-curve environment, given 7% growth in interest-earning assets.
Net interest margin of 2.98% decreased 24 basis points compared to 3.22% in the first half of 2019, as the impact of lower interest rates was partially offset by lower funding costs and improved deposit mix, as well as continued mix shift towards better-returning assets. Net interest margin on an FTE basis of 2.99% decreased 24 basis points compared to 3.23% in the first half of 2019. Average interest-earning asset yields of 3.61% decreased 71 basis points from 4.32% in the first half of 2019, while average interest-bearing liability costs of 0.90% decreased 64 basis points from 1.54% in the first half of 2019.

Citizens Financial Group, Inc. | 17


Average interest-earning assets of $156.7 billion increased $10.7 billion, or 7%, from the first half of 2019, driven by an $8.7 billion, or 7%, increase in average loans and leases and LHFS. Results reflected a $5.7 billion increase in average commercial loans and leases and a $1.5 billion increase in average retail loans. Commercial loan growth reflected strength in commercial and industrial loans and commercial real estate, and was driven by the impact of higher COVID-19-related line of credit utilization and PPP loans. Retail loan growth was driven by education and other retail, partially offset by lower home equity.
Average deposits of $134.1 billion increased $12.3 billion, or 10%, from the first half of 2019, reflecting growth in money market accounts, demand deposits, checking with interest and savings, partially offset by a decline in term deposits. Deposit growth reflected the impact of government stimulus as well as corporate clients building liquidity. Average total borrowed funds of $13.3 billion decreased $997 million from the first half of 2019, reflecting a decrease in long-term and short-term borrowed funds resulting from deposit growth. Total borrowed funds costs of $157 million decreased $72 million from the first half of 2019. The total borrowed funds cost of 2.35% decreased 84 basis points from 3.19% in the first half of 2019 due to lower interest cost on long-term senior debt and FHLB borrowings.
Noninterest Income
chart-16a03661d2075e95b2f.jpg
The following table presents the significant components of our noninterest income:
 
Three Months Ended June 30,
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
(in millions)
2020

 
2019

 
Change

 
Percent

 
2020

 
2019

 
Change

 
Percent

Service charges and fees

$84

 

$126

 

($42
)
 
(33
%)
 

$202

 

$249

 

($47
)
 
(19
%)
Mortgage banking fees
276

 
62

 
214

 
NM

 
435

 
105

 
330

 
NM

Card fees
48

 
64

 
(16
)
 
(25
)
 
104

 
123

 
(19
)
 
(15
)
Capital markets fees
61

 
57

 
4

 
7

 
104

 
111

 
(7
)
 
(6
)
Trust and investment services fees
45

 
53

 
(8
)
 
(15
)
 
98

 
100

 
(2
)
 
(2
)
Foreign exchange and interest rate products
34

 
35

 
(1
)
 
(3
)
 
58

 
71

 
(13
)
 
(18
)
Letter of credit and loan fees
31

 
33

 
(2
)
 
(6
)
 
65

 
66

 
(1
)
 
(2
)
Securities gains, net
3

 
4

 
(1
)
 
(25
)
 
3

 
12

 
(9
)
 
(75
)
Other income (1)
8

 
28

 
(20
)
 
(71
)
 
18

 
53

 
(35
)
 
(66
)
Noninterest income

$590

 

$462

 

$128

 
28
%
 

$1,087

 

$890

 

$197

 
22
%
(1) Includes bank-owned life insurance income and other income for all periods presented, and net impairment losses recognized in earnings on available for sale debt securities for the 2019 periods presented.

Quarterly Results: Noninterest income increased $128 million from second quarter 2019, as results in mortgage banking fees and capital markets fees were partially offset by COVID-19 impacts on service charges and fees, card fees and trust and investment services fees. Mortgage banking fees of $276 million reflected increased origination volumes and improved gain on sale margins. Other income decreased from second quarter 2019 levels that reflected higher leasing income.
Year-To-Date Results: Noninterest income increased $197 million from the first half of 2019, as record results in mortgage banking fees resulting from higher refinancing activity caused by lower rates were partially offset by COVID-19 impacts on service charges and fees, card fees and trust and investment service fees. Mortgage banking fees of $435 million reflected increased origination volumes and improved gain on sale margins. The decline

Citizens Financial Group, Inc. | 18


in foreign exchange and interest rate products was primarily driven by a lower rate environment in 2020. Other income decreased from the first half of 2019 levels that included higher leasing income and higher gains related to asset dispositions and efficiency initiatives.
Noninterest Expense
chart-0024cb41ebe955d98a8.jpg
The following table presents the significant components of our noninterest expense:
 
Three Months Ended June 30,
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
(in millions)
2020

 
2019

 
Change

 
Percent

 
2020

 
2019

 
Change

 
Percent

Salaries and employee benefits

$513

 

$507

 

$6

 
1
%
 

$1,062

 

$1,016

 

$46

 
5
%
Equipment and software expense
142

 
126

 
16

 
13

 
275

 
251

 
24

 
10

Outside services
131

 
118

 
13

 
11

 
266

 
228

 
38

 
17

Occupancy
82

 
82

 

 

 
166

 
165

 
1

 
1

Other operating expense
111

 
118

 
(7
)
 
(6
)
 
222

 
228

 
(6
)
 
(3
)
Noninterest expense

$979

 

$951

 

$28

 
3
%
 

$1,991

 

$1,888

 

$103

 
5
%
Quarterly Results: Noninterest expense increased $28 million and underlying noninterest expense of $960 million increased 2% from second quarter 2019. The results were due to higher equipment and software expense given continued investments in technology, as well as an increase in outside services, partially offset by lower other operating expense. Salaries and employee benefits expense was relatively stable.
Year-To-Date Results:    Noninterest expense increased $103 million, or 5%, from the first half of 2019, largely reflecting higher salaries and employee benefits given the impact of annual merit increases and revenue-based compensation tied to increased mortgage originations. Results also reflect higher equipment and software expense given continued investments in technology as well as higher outside services largely tied to growth initiatives. Underlying noninterest expense of $1.9 billion increased $63 million, or 3%.

Citizens Financial Group, Inc. | 19


Provision for Credit Losses
chart-b163499e64a2525cbc4.jpg
The provision for credit losses is the result of a detailed analysis performed to estimate our ACL. The total provision for credit losses includes the provision for loan and lease losses and the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonaccruing Loans and Leases” for more information.
Quarterly Results: The provision for credit losses of $464 million includes a $317 million reserve build primarily associated with the impact of COVID-19 compared with $97 million in second quarter 2019. Net charge-offs of $147 million increased $41 million from the second quarter of 2019, driven primarily by an increase in commercial as well as a slight increase in retail.
Year-To-Date Results:    The provision for credit losses of $1.1 billion includes a $780 million reserve build primarily associated with COVID-19 compared with $182 million in first half 2019. Net charge-offs of $284 million increased $89 million from the first half of 2019, driven by a $58 million increase in commercial loan and lease net charge-offs, and a $31 million increase in retail.

Citizens Financial Group, Inc. | 20


Income Tax Expense
chart-111951743d835158895.jpg
Quarterly Results: Income tax expense decreased $73 million from second quarter 2019. The effective income tax rate decreased to 17.7% from 21.9% in second quarter 2019, driven by increased benefit of tax advantaged investments on lower pre-tax income.
Year-To-Date Results: Income tax expense decreased $189 million from the first half of 2019. The effective income tax rate decreased to 18.5% from 22.1% in the first half of 2019, driven by the increased benefit of tax advantaged investments on lower pre-tax income.

Citizens Financial Group, Inc. | 21


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 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 2019 Form 10-K.
Quarterly Results: The following table presents certain financial data of our business operating segments. Total business operating segment financial results differ from total consolidated net income. These differences are reflected in Other non-segment operations. See Note 17 in Item 1 for further information.
 
Consumer Banking
 
Commercial Banking
 
Three Months Ended June 30,
 
Three Months Ended June 30,
(dollars in millions)
2020

 
2019

 
2020

 
2019

Net interest income

$814

 

$799

 

$419

 

$371

Noninterest income
428

 
277

 
144

 
149

Total revenue
1,242

 
1,076

 
563

 
520

Noninterest expense
735

 
715

 
213

 
217

Profit before provision for credit losses
507

 
361

 
350

 
303

Provision for credit losses
80

 
78

 
70

 
25

Income before income tax expense
427

 
283

 
280

 
278

Income tax expense
107