Companies: 10,652     total market cap: $140.913 T
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Citizens Financial Group
CFG
#909
Rank
$27.56 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$64.18
Share price
-4.01%
Change (1 day)
38.80%
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 FY2020 Q2

Citizens Financial Group - 10-Q quarterly report FY2020 Q2


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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
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
 
 
 
 
 
 
 
 
 
 
 
 
Glossary of Acronyms and Terms
 3
 
 
 
 
 
 
Part I. Financial Information
 5
 
 
 
 
 
 
Item 1. Financial Statements
46
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 (unaudited)
47
 
 
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
48
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
49
 
 
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
50
 
 
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2020 and 2019
52
 
 
Notes to the Consolidated Financial Statements (unaudited)
53
 
 
 
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 5
 
 
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
88
 
 
 
 
 
 
Item 4. Controls and Procedures
88
 
 
 
 
 
 
 
 
 
 
Part II. Other Information
89
 
 
 
 
 
 
Item 1. Legal Proceedings
89
 
 
Item 1A. Risk Factors
89
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
90
 
 
Item 6. Exhibits
90
 
 
 
 
 
 
 
 
 
 
Signature
91
 
 
 
 
 
 
 
 
 
 
 
 
 


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

 
 
Page
Forward-Looking Statements
 
 6
Introduction
 
 7
Recent Events
 
8
Financial Performance
 
 10
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
 
24
Securities
 
24
Loans and Leases
 
25
Allowance for Credit Losses and Nonaccruing Loans and Leases
 
25
Deposits
 
28
Borrowed Funds
 
28
Capital and Regulatory Matters
 
29
Liquidity
 
33
Off-Balance Sheet Arrangements
 
36
Critical Accounting Estimates
 
36
Risk Governance
 
38
Market Risk
 
38
Non-GAAP Financial Measures and Reconciliations
 
43


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

 
70

 
59

 
62

Net income

$320

 

$213

 

$221

 

$216

Average Balances:
 
 
 
 
 
 
 
Total assets

$71,634

 

$65,485

 

$65,280

 

$56,135

Total loans and leases(1)
68,205

 
62,678

 
62,011

 
54,653

Deposits
91,648

 
85,660

 
41,750

 
30,273

Interest-earning assets
68,256

 
62,731

 
62,422

 
54,950

(1) Includes LHFS.
    
Consumer Banking
Net interest income increased $15 million, or 2%, from the second quarter of 2019, driven by the benefit of a $5.5 billion increase in average loans led by growth in education and unsecured personal loans. The increase in average loans includes the $2.6 billion of average PPP loans. Noninterest income increased $151 million, or 55%, from the second quarter of 2019, driven by higher mortgage banking fees, partially offset by lower service charges and fees. Noninterest expense increased $20 million, or 3%, from the second quarter of 2019, reflecting higher salaries and benefits, and outside services. Provision for credit losses of $80 million increased $2 million, or 3%, remaining relatively stable.
Commercial Banking
Net interest income of $419 million increased $48 million, or 13%, from $371 million in the second quarter of 2019, primarily due to higher loan and deposit volume. Noninterest income of $144 million decreased $5 million, or 3%, from $149 million in the second quarter of 2019, driven by a decrease in capital markets syndication fees. Noninterest expense of $213 million decreased $4 million, or 2%, from $217 million in the second quarter of 2019, driven by lower salaries and employee benefits expenses. Provision for credit losses of $70 million increased $45 million from the second quarter of 2019, reflecting the impact of higher net charge-offs.

Citizens Financial Group, Inc. | 22


Year-To-Date 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
 
Six Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
2020

 
2019

 
2020

 
2019

Net interest income

$1,607

 

$1,587

 

$784

 

$743

Noninterest income
785

 
524

 
269

 
299

Total revenue
2,392

 
2,111

 
1,053

 
1,042

Noninterest expense
1,473

 
1,415

 
434

 
426

Profit before provision for credit losses
919

 
696

 
619

 
616

Provision for credit losses
177

 
145

 
113

 
46

Income before income tax expense
742

 
551

 
506

 
570

Income tax expense
186

 
136

 
106

 
127

Net income

$556

 

$415

 

$400

 

$443

Average Balances:
 
 
 
 
 
 
 
Total assets

$70,024

 

$65,247

 

$62,142

 

$55,884

Total loans and leases(1)
66,774

 
62,422

 
59,283

 
54,545

Deposits
88,438

 
84,123

 
37,647

 
30,050

Interest-earning assets
66,825

 
62,475

 
59,719

 
54,838

(1) Includes LHFS.
Consumer Banking
Net interest income increased $20 million, or 1%, from the first half of 2019, driven by the benefit of a $4.4 billion increase in average loans led by growth in education and unsecured personal loans and impacted by the PPP loans program. Noninterest income increased $261 million, or 50%, from the first half of 2019, driven by higher mortgage banking fees, partially offset by lower service charges and fees. Noninterest expense increased $58 million, or 4%, from the first half of 2019, reflecting higher salaries and benefits, and outside services. Provision for credit losses of $177 million increased $32 million, or 22%, reflecting the impact of higher net charge-offs.
Commercial Banking
Net interest income of $784 million increased $41 million, or 6%, from $743 million in the first half of 2019, primarily due to higher loan and deposit volume. Noninterest income of $269 million decreased $30 million, or 10%, from $299 million in the first half of 2019, driven by a decrease in foreign exchange and interest rate products and other income. Noninterest expense of $434 million increased $8 million, or 2%, from $426 million in the first half of 2019, driven by higher salaries and employee benefits expenses. Provision for credit losses of $113 million increased $67 million from the first half of 2019, reflecting the impact of higher net charge-offs.


Citizens Financial Group, Inc. | 23

ANALYSIS OF FINANCIAL CONDITION
Securities
Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns that align with our overall portfolio management strategy. The following table presents our securities AFS and HTM:
 
June 30, 2020
 
December 31, 2019
(in millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
U.S. Treasury and other

$11

 

$11

 

$71

 

$71

State and political subdivisions
4

 
4

 
5

 
5

Mortgage-backed securities, at fair value:
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
20,898

 
21,542

 
19,803

 
19,875

Other/non-agency
551

 
587

 
638

 
662

Total mortgage-backed securities, at fair value
21,449

 
22,129

 
20,441

 
20,537

   Total debt securities available for sale, at fair value

$21,464

 

$22,144

 

$20,517

 

$20,613

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

$2,856

 

$3,009

 

$3,202

 

$3,242

   Total debt securities held to maturity, at cost

$2,856

 

$3,009

 

$3,202

 

$3,242

   Total debt securities available for sale and held to maturity

$24,320

 

$25,153

 

$23,719

 

$23,855

Equity securities, at fair value

$50

 

$50

 

$47

 

$47

Equity securities, at cost
607

 
607

 
807

 
807

   Total equity securities

$657

 

$657

 

$854

 

$854

 
The fair value of the AFS debt securities portfolio of $22.1 billion at June 30, 2020 increased $1.5 billion from $20.6 billion at December 31, 2019 due to an increase of $948 million related to reinvestment timing and a $583 million increase in value due to lower long-term rates. The decline in the fair value of the HTM debt portfolio of $233 million was primarily attributable to portfolio runoff of $350 million, partially offset by an increase in fair value due to lower long-term rates. For further information, see Note 1.
As of June 30, 2020, the portfolio’s average effective duration was 2.1 years compared with 3.7 years as of December 31, 2019, 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 98% 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 Requirements” in our 2019 Form 10-K.

Citizens Financial Group, Inc. | 24

Loans and Leases
The following table presents our loans and leases in portfolio segments and classes:
(in millions)
June 30, 2020
 
December 31, 2019
 
Change
 
 Percent
Commercial(1)

$48,017

 

$41,479

 

$6,538

 
16
 %
Commercial real estate
14,485

 
13,522

 
963

 
7

Leases
2,428

 
2,537

 
(109
)
 
(4
)
Total commercial loans and leases
64,930

 
57,538

 
7,392

 
13

Residential mortgages
19,245

 
19,083

 
162

 
1

Home equity
12,541

 
13,154

 
(613
)
 
(5
)
Automobile
12,028

 
12,120

 
(92
)
 
(1
)
Education
10,591

 
10,347

 
244

 
2

Other retail
6,378

 
6,846

 
(468
)
 
(7
)
Total retail loans
60,783

 
61,550

 
(767
)
 
(1
)
Total loans and leases(2)

$125,713

 

$119,088

 

$6,625

 
6
%
(1) Includes PPP loans fully guaranteed by the SBA of $4.7 billion as of June 30, 2020.
(2) LHFS, at fair value of $3.6 billion and $1.9 billion at June 30, 2020 and December 31, 2019, respectively, and other LHFS of $1.4 billion at June 30, 2020 and December 31, 2019, are not included above.
Total loans and leases increased $6.6 billion from $119.1 billion as of December 31, 2019, due to a $7.4 billion increase in commercial loans, which was largely driven by $4.7 billion of PPP loans to small business customers (note that in Segment Results, most PPP loans are reflected in the Consumer Banking Segment in accordance with how they are managed) and the effect of increased commercial line of credit utilization given the impact of COVID-19 disruption. These increases were partially offset by a decrease in retail loans, due to run off in home equity products and mortgage loan sales. In addition, during the second quarter of 2020, we transferred $936 million of education loans to other LHFS in connection with balance sheet optimization strategies.
As of June 30, 2020, under our COVID-19-related forbearance and other customer accommodation programs that are guided by the CARES Act as well as banking regulator interagency guidance, we have deferred payments on approximately $3.5 billion, or 6%, of our retail portfolio. Further, we are working proactively with our commercial customers seeking flexibility on loan terms and conditions. The vast majority of these retail deferrals or commercial modifications are not classified as TDRs.
Allowance for Credit Losses and Nonaccruing Loans and Leases
The ACL 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.”
The ACL of $2.5 billion as of June 30, 2020 included impacts from the adoption of CECL on January 1, 2020. This compared with the ACL of $1.3 billion as of December 31, 2019. For further information, see Note 4.
The ACL represented 2.01% of total loans and leases (2.09% of loans and leases excluding PPP loans), and 255% of nonaccrual loans and leases as of June 30, 2020 compared with 1.09% and 184%, as of December 31, 2019, respectively, and reflected the impact of CECL implementation and the $780 million CECL reserve build given the impact of COVID-19 disruption.
Nonaccruing loans and leases of $990 million as of June 30, 2020 increased $287 million, or 41%, from December 31, 2019, reflecting a $261 million increase in commercial nonaccruing loans and a $26 million increase in retail.
Second quarter 2020 net charge-offs of $147 million increased $41 million, or 39%, from $106 million in second quarter 2019. Second quarter 2020 annualized net charge-offs of 0.46% of average loans and leases were up 10 basis points from second quarter 2019. First half 2020 annualized net charge-offs of 0.46% of average loans and leases compared with 0.33% in first half 2019. First half of 2020 net charge-offs of $284 million increased $89 million from first half 2019, with a $58 million increase in commercial net charge-offs, reflecting several commercial losses largely unrelated to COVID-19, and a $31 million increase in retail net charge-offs, which may have been larger but for the likely favorable impact of stimulus and customer accommodation efforts.

Citizens Financial Group, Inc. | 25

We continue to assess the impact of the COVID-19 pandemic and have instituted a variety of measures to identify and monitor areas of potential risk, including direct outreach to commercial clients and close monitoring of retail credit metrics.
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.
As of June 30, 2020, nonaccruing commercial loans and leases of $506 million increased $261 million from $245 million as of December 31, 2019. Total commercial nonaccruing loans and leases were 0.8% and 0.4% of the total commercial loan and lease portfolio as of June 30, 2020 and December 31, 2019, respectively. Second quarter 2020 net charge-offs on commercial loan and leases of $71 million compared to $33 million in second quarter 2019. The annualized net charge-off rate of 0.42% increased 19 basis points from second quarter 2019. Total commercial loan and lease net charge-offs of $115 million for first half 2020 compared to net charge-offs of $57 million for first half of 2019. The commercial loan and lease portfolio’s annualized net charge-off rate of 0.37% for first half 2020 compared to a net charge-off rate of 0.20% for first half 2019.
For commercial loans and leases, we utilize regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that we believe will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness, or potential weakness, that indicate an increased probability of future loss. “Criticized” loans are grouped into three categories, “special mention,” “substandard” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of our credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection of the debt. Doubtful loans have the same weaknesses as substandard, with the added characteristics that the possibility of loss is high and collection of the full amount of the loan is improbable.
The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:
 
June 30, 2020
 
 
Criticized
 
(in millions)
Pass

Special Mention
Substandard

Doubtful

Total

Commercial(1)

$43,859


$2,289


$1,498


$371


$48,017

Commercial real estate
13,449

601

374

61

14,485

Leases
2,316

18

16

78

2,428

Total commercial loans and leases

$59,624


$2,908


$1,888


$510


$64,930

(1) Includes $4.7 billion of PPP loans primarily designated as pass that are fully guaranteed by the SBA as of June 30, 2020.
 
December 31, 2019
 
 
Criticized
 
(in millions)
Pass

Special Mention
Substandard

Doubtful

Total

Commercial

$38,950


$1,351


$934


$244


$41,479

Commercial real estate
13,169

318

33

2

13,522

Leases
2,383

109

42

3

2,537

Total commercial loans and leases

$54,502


$1,778


$1,009


$249


$57,538

Total commercial criticized loans and leases of $5.3 billion, or 8.2% of total commercial loans and leases (8.5% adjusting for PPP loans), at June 30, 2020 increased $2.3 billion, or 75%, from December 31, 2019, and up $1.6 billion, or 42%, from March 31, 2020. These increases are largely due to COVID-19-related deterioration in certain industries including oil and gas, accommodation and food services, retail and hospitality, and transportation. Commercial real estate criticized loans totaled $1.0 billion, or 7.2%, of the commercial real estate portfolio and increased from $353 million, or 2.6%, as of December 31, 2019, due to the migration to criticized loans for a few sizable borrowers. Commercial real estate accounted for 20% of total criticized loans as of June 30, 2020, compared to 12% as of December 31, 2019.

Citizens Financial Group, Inc. | 26

Retail Loan Asset Quality
For retail loans, we utilize credit scores provided by FICO which are generally refreshed on a quarterly basis and the loan’s payment and delinquency status to monitor credit quality. FICO credit scores are considered the strongest indicator of credit losses over the contractual life of the loan as the scores are based on current and historical national industry-wide consumer level credit performance data, and assist management in predicting the borrower’s future payment performance. 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.
The following tables present asset quality metrics for the retail loan portfolio:
 
June 30, 2020
 
December 31, 2019
Average refreshed FICO for total portfolio
766

 
764

CLTV ratio for secured real estate(1)
60
%
 
59
%
Nonaccruing retail loans as a percentage of total retail
0.80

 
0.74

(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 June 30,
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
(dollars in millions)
2020

 
2019

 
Change

 
Percent

 
2020

 
2019

 
Change
 
Percent

Net charge-offs

$76

 

$73

 

$3

 
4
%
 

$169

 

$138

 

$31

 
22
%
Annualized net charge-off rate
0.50
%
 
0.49
%
 
1
 bps
 
 
0.56
%
 
0.47
%
 
9
 bps
 
 
Troubled Debt Restructurings
In the first quarter of 2020, we adopted the CARES Act and interagency guidance issued by the bank regulatory agencies which provide that COVID-19-related modifications to retail and commercial loans that met certain eligibility criteria are exempt from classification as a TDR. Payment deferrals and forbearance plans entered into as a result of the COVID-19 pandemic were generally not considered TDRs.
As of June 30, 2020, $700 million of retail loans were classified as TDRs, compared with $667 million as of December 31, 2019. As of June 30, 2020, $152 million of retail TDRs were in nonaccrual status with 37% current with payments compared to $143 million in nonaccrual status with 38% current on payments at December 31, 2019. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated to estimate ACL, 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 Note 5 in our 2019 Form 10-K.
The following tables present retail TDRs by loan class, including delinquency status for accruing TDRs and TDRs in nonaccrual:
 
June 30, 2020
 
 
 
As a % of Accruing Retail TDRs
 
 
 
 
(dollars in millions)
Accruing
 
30-89 Days
Past Due
 
90+ Days Past Due
 
Nonaccruing
 
Total
Residential mortgages

$144

 
2.0
%
 
3.8
%
 

$46

 

$190

Home equity
240

 
1.4

 
2.0

 
81

 
321

Automobile
13

 
0.1

 
—

 
13

 
26

Education
122

 
0.5

 
0.3

 
9

 
131

Other retail
29

 
0.4

 
—

 
3

 
32

Total

$548

 
4.4
%
 
6.1
%
 

$152

 

$700


Citizens Financial Group, Inc. | 27

 
December 31, 2019
 
 
 
As a % of Accruing Retail TDRs
 
 
 
 
(dollars in millions)
Accruing
 
30-89 Days
Past Due
 
90+ Days Past Due
 
Nonaccruing
 
Total
Residential mortgages

$113

 
3.8
%
 
2.1
%
 

$41

 

$154

Home equity
240

 
1.9

 
—

 
84

 
324

Automobile
13

 
0.2

 
—

 
8

 
21

Education
127

 
0.9

 
0.3

 
7

 
134

Other retail
31

 
0.6

 
—

 
3

 
34

Total

$524

 
7.4
%
 
2.4
%
 

$143

 

$667


Non-Core Assets    
(in millions)
June 30, 2020
 
December 31, 2019
 
Change
 
Percent
Commercial

$21

 

$6

 

$15

 
250
%
Commercial real estate
10

 
11

 
(1
)
 
(9
)
Leases
418

 
444

 
(26
)
 
(6
)
Total commercial loans and leases
449

 
461

 
(12
)
 
(3
)
Residential mortgages
82

 
91

 
(9
)
 
(10
)
Home equity
334

 
400

 
(66
)
 
(17
)
Education
153

 
166

 
(13
)
 
(8
)
Total retail loans
569

 
657

 
(88
)
 
(13
)
Total non-core loans and leases
1,018

 
1,118

 
(100
)
 
(9
)
Other assets
114

 
122

 
(8
)
 
(7
)
Total non-core assets

$1,132

 

$1,240

 

($108
)
 
(9
%)
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 following table presents the major components of our deposits:
(in millions)
June 30, 2020
 
December 31, 2019
 
Change

 
Percent

Demand

$40,545

 

$29,233

 

$11,312

 
39
%
Checking with interest
27,200

 
24,840

 
2,360

 
10

Regular savings
16,665

 
13,779

 
2,886

 
21

Money market accounts
44,965

 
38,725

 
6,240

 
16

Term deposits
14,243

 
18,736

 
(4,493
)
 
(24
)
Total deposits

$143,618

 

$125,313

 

$18,305

 
15
%
    
Total deposits as of June 30, 2020 increased $18.3 billion, or 15%, to $143.6 billion, from $125.3 billion as of December 31, 2019, reflecting the impact of government stimulus as well as corporate clients building liquidity. Citizens Access®, our digital platform, ended the quarter with $6.5 billion of deposits, up from $5.8 billion as of December 31, 2019.
Borrowed Funds
Total borrowed funds as of June 30, 2020 decreased $4.9 billion from December 31, 2019, driven by a $19 million and $4.8 billion decrease in short-term and long-term borrowed funds, respectively.


Citizens Financial Group, Inc. | 28

Long-term borrowed funds
The following table presents a summary of our long-term borrowed funds:
(in millions)
June 30, 2020
 
December 31, 2019
Parent Company:
 
 
 
2.375% fixed-rate senior unsecured debt, due July 2021

$350

 

$349

4.150% fixed-rate subordinated debt, due September 2022
349

 
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

 
750

2.850% fixed-rate senior unsecured notes, due July 2026
497

 
496

2.500% fixed-rate senior unsecured notes, due February 2030
297

 
—

3.250% fixed-rate senior unsecured notes, due April 2030
744

 
—

CBNA’s Global Note Program:
 
 
 
2.250% senior unsecured notes, due March 2020
—

 
700

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

 
300

2.217% floating-rate senior unsecured notes, due May 2020 (1)
—

 
250

2.200% senior unsecured notes, due May 2020
—

 
500

2.250% senior unsecured notes, due October 2020
753

 
750

2.550% senior unsecured notes, due May 2021
1,006

 
991

3.250% senior unsecured notes, due February 2022
723

 
711

1.144% floating-rate senior unsecured notes, due February 2022 (1)
299

 
299

1.170% floating-rate senior unsecured notes, due May 2022 (1)
250

 
250

2.650% senior unsecured notes, due May 2022
514

 
501

3.700% senior unsecured notes, due March 2023
533

 
515

1.256% floating-rate senior unsecured notes, due March 2023 (1)
249

 
249

2.250% senior unsecured notes, due April 2025
746

 
—

3.750% senior unsecured notes, due February 2026
558

 
521

Additional Borrowings by CBNA and Other Subsidiaries:
 
 
 
Federal Home Loan Bank advances, 1.599% weighted average rate, due through 2038
6

 
5,008

Other
37

 
18

Total long-term borrowed funds

$9,202

 

$14,047

(1) Rate disclosed reflects the floating rate as of June 30, 2020 or final floating rate, as applicable.
Long-term borrowed funds as of June 30, 2020 decreased $4.8 billion from December 31, 2019, reflecting a decrease of $5.0 billion in FHLB advances, which was partially offset by hedging adjustments. The reduction in FHLB advances was the result of deposit inflows. During the six month period ended June 30, 2020, $1.8 billion of CBNA long-term debt matured, which was offset by $750 million of new CBNA issuance and $1.0 billion of new issuance by the Parent Company.
The Parent Company’s long-term borrowed funds as of June 30, 2020 and December 31, 2019 included principal balances of $3.5 billion and $2.5 billion respectively, and unamortized deferred issuance costs and/or discounts of ($14) million and ($8) million, respectively. CBNA and other subsidiaries’ long-term borrowed funds as of June 30, 2020 and December 31, 2019 included principal balances of $5.5 billion and $11.5 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($14) million and ($13) million, respectively, and hedging basis adjustments of $145 million and $50 million, respectively. See Note 9 for further information about our hedging of certain long-term borrowed funds. For information regarding our liquidity and available borrowing capacity, see “—Liquidity” and Note 8.
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. For more information, see the “Regulation and Supervision” in our 2019 Form 10-K.

Citizens Financial Group, Inc. | 29


Tailoring of Prudential Requirements
    In October 2019, the FRB and the other federal banking regulators finalized rules that tailor the application of the enhanced prudential standards to bank holding companies and depository institutions to implement the EGRRCPA amendments to the Dodd-Frank Act (“Tailoring Rules”). Under the Tailoring Rules, Category IV firms, such as us, are subject to biennial supervisory stress testing and are exempt from company-run stress testing and related disclosure requirements. Category IV firms are also no longer required to submit resolution plans. The FRB continues to supervise Category IV firms on an ongoing basis, including evaluation of the capital adequacy and capital planning processes during off-cycle years. We remain subject to the requirement to develop, maintain and submit an annual capital plan for review and approval by our Board of Directors (or one of its committees). On April 6, 2020, we submitted our 2020 Capital Plan to the FRB under the FRB’s 2020 CCAR process.
On March 4, 2020, the FRB finalized a stress capital buffer (“SCB”) requirement that integrates regulatory capital requirements with the results of the FRB’s supervisory stress tests by replacing the CCB of 2.5% with a dynamic SCB requirement, based on the projected losses under the supervisory severely adverse scenario of each firm subject to CCAR, subject to a floor of 2.5%. Under the SCB framework, the FRB will no longer object to capital plans on quantitative grounds and each firm will be required to maintain capital ratios above the sum of its minimum requirements and the SCB requirements to avoid restrictions on capital distributions and discretionary bonus payments. For Category IV firms, like us, the SCB will be re-calibrated with each biennial supervisory stress test. The first SCB requirement becomes effective on October 1, 2020 and will apply to our capital actions through September 30, 2021.
    On June 29, 2020, we announced key aspects of our 2020 Capital Plan, which includes maintaining quarterly common dividends at the current level of $0.39 per share through the SCB window period ending third quarter 2021. We previously announced our intention to cease stock repurchases through December 31, 2020. We will continue to evaluate our distributions on a quarterly basis going forward. Our announcement followed the FRB’s publication on June 25, 2020 of the DFAST stress test results for the largest bank holding companies, the related CCAR exercise, and the FRB’s communication to us of its preliminary SCB requirement of 3.4%. As previously announced by way of our press release dated June 29, 2020, we elected the option to request reconsideration from the FRB of our 3.4% preliminary SCB. Unless otherwise determined by the FRB, each company will be provided with its final SCB requirement and confirmation of its final planned capital distributions by August 31, 2020.
The FRB has also implemented a restriction for third quarter 2020 that a bank’s quarterly common dividend may not be increased or exceed its average net income over the preceding four quarters regardless of its capital levels, and this limitation may be extended by the FRB quarter-by-quarter. In light of the uncertain macroeconomic environment, the FRB is also requiring large banks, like us, to update and resubmit their capital plans using new scenarios that the FRB will supply later this year. We will be required to resubmit our capital plan within 45 days after the FRB provides the new scenarios.
Many of the provisions of the Tailoring Rules and other laws are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. The ultimate effects of the Tailoring Rules on our activities and us will be subject to any additional rule making issued by the FRB and other federal regulators. We will continue to evaluate the impact of any changes in law and any new regulations promulgated, including changes in regulatory costs and fees, modifications to consumer products or disclosures required by the CFPB and the requirements of the enhanced supervision provisions, among others.
For more information, see “Regulation and Supervision” and “—Capital and Regulatory Matters” in our 2019 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%. A CCB of 2.5% is imposed on top of the three minimum risk-based capital ratios listed above.
Effective for us on April 1, 2020, the CET1 deduction threshold for MSRs, certain deferred tax assets and significant investments in the capital of unconsolidated institutions is 25%. As of June 30, 2020, we did not meet the threshold for these additional capital deductions. MSRs or deferred tax assets not deducted from CET1 capital are assigned a 250% risk weight and significant investments in the capital of unconsolidated financial institutions not deducted from CET1 capital are assigned an exposure category risk weight.

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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 two-year period ending January 1, 2022, followed by a three-year transition period ending January 1, 2025 to phase-in the aggregate amount of the capital benefit provided during the initial two-year delay. As of June 30, 2020, $532 million of the capital benefit has been accumulated for application to the three-year transition period.
For additional discussion of the U.S. Basel III capital framework and its related application, see Regulation and Supervision” in our 2019 Form 10-K. The table below presents our actual regulatory capital ratios under the U.S. Basel III Standardized rules:
 
June 30, 2020
 
December 31, 2019
Required Minimum plus Required CCB for Non-Leverage Ratios(1)
(in millions, except ratio data)
Amount
Ratio
 
Amount
Ratio
   CET1 capital

$14,154

9.6
%
 

$14,304

10.0
%
7.0
%
   Tier 1 capital
16,119

10.9

 
15,874

11.1

8.5

   Total capital
19,319

13.1

 
18,542

13.0

10.5

   Tier 1 leverage
16,119

9.3

 
15,874

10.0

4.0

   Risk-weighted assets
147,260

 
 
142,915

 
 
   Quarterly adjusted average assets
174,017

 
 
158,782

 
 
(1) Required “Minimum Capital ratios” are: CET1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%. “Minimum Capital ratios” also include a CCB of 2.5%; N/A to Tier 1 leverage.
At June 30, 2020, our CET1 capital, tier 1 capital and total capital ratios were 9.6%, 10.9% and 13.1%, respectively, as compared with 10.0%, 11.1%, and 13.0%, respectively, as of December 31, 2019. The CET1 capital ratio decreased as $4.3 billion of risk-weighted asset (“RWA”) growth and the impact of the capital actions described in “—Capital Transactions” below were partially offset by net income for the six months ended June 30, 2020 and 25% of the increase in AACL subsequent to CECL adoption. The tier 1 capital ratio decreased due to changes in CET1 capital and partially offset by the issuance of Series F preferred stock described in “—Capital Transactions” below. The total capital ratio increased as the changes in CET1 and tier 1 capital were more than offset by the net change in AACL attributable to CECL adoption and the modified transition amount. At June 30, 2020, our CET1 capital, tier 1 capital and total capital ratios were approximately 260 basis points, 240 basis points and 260 basis points, respectively, above their regulatory minimums plus the capital conservation buffer. All ratios remained well above the U.S. Basel III minimums.
Regulatory Capital Ratios and Capital Composition
CET1 capital under U.S. Basel III Standardized rules totaled $14.2 billion at June 30, 2020, a decrease of $150 million from $14.3 billion at December 31, 2019, largely driven by common share repurchases and dividends, partially offset by net income for the six months ended June 30, 2020 and 25% of the increase in AACL subsequent to CECL adoption. Tier 1 capital at June 30, 2020 totaled $16.1 billion, reflecting a $245 million increase from $15.9 billion at December 31, 2019, driven by the issuance of Series F preferred stock, partially offset by changes in CET1 capital. Total capital of $19.3 billion at June 30, 2020, increased $777 million from December 31, 2019, driven by the changes in CET1 and Tier 1 capital and the net change in AACL attributable to the adoption of CECL and the modified transition amount.
RWA totaled $147.3 billion at June 30, 2020, based on U.S. Basel III Standardized rules, up $4.3 billion from December 31, 2019. This increase was driven by higher derivative valuations, increases in mortgages held for sale, education loans, commercial real estate loans, market risk RWA and MSR RWA, resulting from the finalization of the simplification rules which increased risk weight from 100% to 250%. These RWA increases were partially offset by lower high volatility commercial real estate loans.
As of June 30, 2020, the tier 1 leverage ratio was 9.3%, decreasing from 10.0% at December 31, 2019 driven by the $15.2 billion increase in quarterly adjusted average assets and higher tier 1 capital.

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The following table presents our capital composition under the U.S. Basel III capital framework:
(in millions)
June 30, 2020
 
December 31, 2019
Total common shareholders' equity
20,453

 
20,631

Exclusions:
 
 
 
Modified CECL transitional amount
532

 
—

Net unrealized (gains)/losses recorded in accumulated other comprehensive income (loss), net of tax:
 
 
 
Debt and equity securities
(448
)
 
(1
)
Derivatives
(54
)
 
(3
)
Unamortized net periodic benefit costs
408

 
415

Deductions:
 
 
 
Goodwill
(7,050
)
 
(7,044
)
Deferred tax liability associated with goodwill
376

 
374

Other intangible assets
(63
)
 
(68
)
Total common equity tier 1
14,154

 
14,304

Qualifying preferred stock
1,965

 
1,570

Total tier 1 capital
16,119

 
15,874

Qualifying subordinated debt(1)
1,372

 
1,372

Allowance for credit losses
2,527

 
1,296
Exclusions from tier 2 capital:
 
 
 
Modified AACL transitional amount
(646
)
 
—

Excess allowance for credit losses(2)
(53
)
 
—

Adjusted allowance for credit losses
1,828

 
1,296

Total capital

$19,319

18,542


$18,542

(1) As of June 30, 2020 and December 31, 2019, the amount of non-qualifying subordinated debt excluded from regulatory capital was $268 million and $267 million, respectively.
(2) Excess allowance represents the amount excluded from Tier 2 capital that is in excess of 1.25% of risk weighted assets, excluding market risk.
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 2019 Form 10-K.
Capital Transactions
We completed the following capital actions during the six months ended June 30, 2020:
•
Issued $400 million, or 400,000 shares, of 5.650% fixed-rate reset non-cumulative perpetual Series F Preferred Stock;
•
Declared and paid quarterly common stock dividends of $0.39 per share for first and second quarters of 2020, aggregating to $336 million;
•
Declared a semi-annual dividend of $27.50 per share in first quarter 2020 and a quarterly dividend of $13.48 per share in second quarter 2020 on the 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock, aggregating to $10 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 first and second quarters of 2020 on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $10 million;
•
Declared quarterly dividends of $15.88 per share for first and second quarters of 2020 on the 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, aggregating to $10 million;
•
Declared quarterly dividends of $12.50 per share for first and second quarters of 2020 on the 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock, aggregating to $11 million; and
•
Repurchased $270 million of our outstanding common stock.

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Banking Subsidiary’s Capital
The following table presents CBNA’s capital ratios under U.S. Basel III Standardized rules:
 
June 30, 2020
 
December 31, 2019
(dollars in millions, except ratio data)
Amount

Ratio

 
Amount

Ratio

CET1 capital

$15,806

10.7
%
 

$15,610

11.0
%
Tier 1 capital
15,806

10.7

 
15,610

11.0

Total capital
18,757

12.8

 
17,937

12.6

Tier 1 leverage
15,806

9.1

 
15,610

9.9

Risk-weighted assets
147,067

 
 
142,555

 
Quarterly adjusted average assets
173,610

 
 
158,391

 
CBNA’s CET1 and tier 1 capital totaled $15.8 billion at June 30, 2020, up $196 million from $15.6 billion at December 31, 2019. The increase was primarily driven by net income for the six months ended June 30, 2020 and 25% of the increase in AACL subsequent to CECL adoption, partially offset by dividends paid to the Parent Company. Total capital was $18.8 billion at June 30, 2020, an increase of $820 million from $17.9 billion at December 31, 2019, driven by the change in CET1 capital and net change in AACL attributable to the adoption of CECL and the modified transition amount.
CBNA’s RWA totaled $147.1 billion at June 30, 2020, up $4.5 billion from December 31, 2019, driven by higher derivative valuations, increases in mortgages held for sale, education loans, commercial real estate loans, market risk RWA and MSR RWA given the finalization of the simplification rules which increased the MSR risk weight from 100% to 250%. These RWA increases were partially offset by lower high volatility commercial real estate loans.
As of June 30, 2020, CBNA’s tier 1 leverage ratio decreased to 9.1% from 9.9% at December 31, 2019, driven by the $15.2 billion increase in quarterly adjusted average assets and higher tier 1 capital.
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 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 dividends and interest received from CBNA as a result of investing in bank equity and subordinated debt and externally issued preferred stock as well as senior and subordinated debt. Uses of cash include the routine cash flow requirements as a bank holding company, including periodic share repurchases and payments of dividends, interest and expenses; the needs of subsidiaries, including CBNA, for additional equity and, as required, its need for debt financing; and the support for extraordinary funding requirements when necessary. To the extent the Parent Company has relied on wholesale borrowings, uses also include payments of related principal and interest.
During the six months ended June 30, 2020, the Parent Company completed the following transactions:
•
Issued $400 million, or 400,000 shares, of 5.650% fixed-rate reset non-cumulative perpetual Series F Preferred Stock on June 4, 2020;
•
Issued $750 million in ten-year 3.250% fixed-rate senior notes on April 30, 2020; and
•
Issued $300 million in ten-year 2.500% fixed-rate senior notes on February 6, 2020.
During the three months ended June 30, 2020 and 2019, the Parent Company declared dividends on common stock of $168 million and $148 million, respectively, and declared dividends on preferred stock of $28 million and

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$18 million, respectively. During the six months ended June 30, 2020 and 2019, the Parent Company declared dividends on common stock of $336 million and $297 million, respectively, and declared dividends on preferred stock of $50 million and $33 million, respectively.
Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $2.5 billion as of June 30, 2020 compared with $1.4 billion as of December 31, 2019. The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At June 30, 2020, the Parent Company’s double-leverage ratio was 99.2%.
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 deposits from our consumer and commercial customers; payments of principal and interest on loans and debt securities; and wholesale borrowings, as needed, and as described under “—Liquidity Risk Management and Governance.” The primary uses of bank liquidity include withdrawals and maturities of deposits; 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 primary business involves 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 April 30, 2020, CBNA issued $750 million in five-year 2.250% fixed-rate senior notes.
Liquidity Risk
We define liquidity risk as the risk that an entity will be unable to meet its payment obligations in a timely manner, at a reasonable cost. Liquidity risk can arise due to contingent liquidity risk and/or funding liquidity risk.
Contingent liquidity risk is the risk that market conditions may reduce an entity’s ability to liquidate, pledge and/or finance certain assets and thereby substantially reduce the liquidity value of such assets. Drivers of contingent liquidity risk include general market disruptions as well as specific issues regarding the credit quality and/or valuation of a security or loan, issuer or borrower and/or asset class.
Funding liquidity risk is the risk that market conditions and/or entity-specific events may reduce an entity’s ability to raise funds from depositors and/or wholesale market counterparties. Drivers of funding liquidity risk may be idiosyncratic or systemic, reflecting impediments to operations and/or damaged market confidence.
Factors Affecting Liquidity
Given the composition of 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 a lender 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.

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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:
 
 
June 30, 2020
 
 
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, CBNA continues to minimize reliance on unsecured wholesale funding. At June 30, 2020, our wholesale funding consisted primarily of 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 — Tailoring of Prudential Requirements” and “—Liquidity Requirements” in our 2019 Form 10-K.
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 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 June 30, 2020 total available liquidity was $68.2 billion, comprised of:
•
$6.4 billion in cash (defined as cash balance held at the FRB);
•
$20.2 billion in unencumbered high-quality liquid securities;
•
$13.0 billion in unused FHLB capacity; and
•
$28.6 billion in available discount window capacity (defined as available total borrowing capacity from the FRB based on identified non-mortgage commercial and retail loans collateral).
Core deposits continued to be our primary source of funding and our consolidated period end loans-to-deposits ratio, which excludes LHFS, was 87.5%. The LDR included $4.7 billion of PPP loans elevating the LDR by 320 basis points as of June 30, 2020.

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For a summary of our sources and uses of cash by type of activity for the six months ended June 30, 2020 and 2019, see the Consolidated Statements of Cash Flows.
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, available and secured FHLB borrowing capacity, available discount window capacity, and undrawn capacity at the PPP Liquidity Facility;
•
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)
June 30, 2020
 
December 31, 2019
 
Change

 
Percent

Commitments to extend credit

$69,015

 

$72,743

 

($3,728
)
 
(5
%)
Letters of credit
2,073

 
2,190

 
(117
)
 
(5
)
Risk participation agreements
109

 
37

 
72

 
195

Loans sold with recourse
48

 
37

 
11

 
30

Marketing rights
31

 
33

 
(2
)
 
(6
)
Total

$71,276

 

$75,040

 

($3,764
)
 
(5
%)
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 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 the fair value of MSRs, see “—Critical Accounting Estimates” in our 2019 Form 10-K.
Allowance for Credit Losses
We reserve for expected credit losses on our loan and lease portfolio through the ALLL and for expected credit losses in our unfunded lending commitments through other liabilities. Collectively, the ALLL and reserves for expected credit losses in unfunded lending commitments are referred to as the ACL.
Changes in the ACL are reflected in net income through provision for credit losses. Changes in the credit risk profile of our loans and leases result in changes in provision expense with a resulting change, net of charge-offs and recoveries, in the ACL balance.
The ACL is often the most critical of all the accounting estimates for banking institutions like us. The ACL is maintained at a level we believe to be appropriate to absorb expected lifetime credit losses over the contractual life of the loan and lease portfolios and on the unfunded lending commitments. Our determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments that are not

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unconditionally cancelable considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information.
Key assumptions used in our ACL measurement process include the use of a two-year reasonable and supportable economic forecast period followed by a one-year period during which the expected credit losses revert to long-term historical macroeconomic inputs.
The evaluation of quantitative and qualitative information is performed through assessments of groups of assets that share similar risk characteristics and certain individual loans and leases that do not share similar risk characteristics with the collective group. Loans are grouped generally by product type (e.g., commercial, commercial real estate, residential mortgage, etc.), and significant loan portfolios are assessed for credit losses using econometric models. The evaluation process is inherently imprecise and subjective as it requires significant management judgment based on underlying factors that are susceptible to change, sometimes materially and rapidly.
The quantitative evaluation of the adequacy of the ACL utilizes a single economic forecast and is primarily based on econometric models that use known or estimated data as of the balance sheet date and forecasted data over the reasonable and supportable period. Known and estimated data include current PD, LGD and EAD (for commercial loans and leases), timing and amount of expected draws (for unfunded lending commitments), mix and level of loan balances, delinquency levels, assigned risk ratings, previous loss experience, current business conditions, amounts and timing of expected future cash flows, and factors particular to a specific commercial credit such as competition, business and management performance. Forward-looking economic assumptions include real gross domestic product, unemployment rate, interest rate curve, and changes in collateral values. This data is aggregated to estimate expected credit losses over the contractual life of the loans and leases, adjusted for expected prepayments. In highly volatile economic environments historical information, such as commercial customer financial statements or consumer credit ratings, may not be as important to estimating future expected losses as forecasted inputs to the models.
The ACL may also be affected materially by a variety of qualitative factors that we consider to reflect our current judgment of various events and risks that are not measured in our statistical procedures including uncertainty related to the economic forecasts used in the modeled credit loss estimates, loan growth, back testing results, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons. The qualitative allowance is further informed by multiple alternative scenarios to support the period-end ACL balance. We recognize that this approach may not be suitable in certain economic environments and differing analysis may be requested at management’s discretion. Due in part to its subjectivity, the qualitative evaluation may be materially impacted during periods of economic uncertainty and late breaking events could lead to revision of reserves to reflect management’s best estimate of expected credit losses.
The measurement process results in specific or pooled allowances for loans, leases and unfunded lending commitments, and qualitative allowances that are judgmentally determined and applied across the portfolio.
There are certain loan portfolios that may not need an econometric model to enable us to calculate management’s best estimate of the expected credit losses. Less data intensive, non-modeled approaches to estimating losses are considered more efficient and practical for portfolios that have lower levels of outstanding balances (e.g., runoff or closed portfolios, and new products or products that are not significant to our overall credit risk exposure).
The ACL is established in accordance with our credit reserve policies, as approved by the Audit Committee of the Board of Directors. The Chief Financial Officer and Chief Risk Officer review the adequacy of the ACL each quarter, together with our risk management team. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the ACL.    
The ACL as of June 30, 2020 as compared to January 1, 2020 continues to be driven by the COVID-19 pandemic and the resulting economic impacts, with a total reserve build of $780 million and an ending balance of $2.5 billion.
To determine the ACL as of June 30, 2020, we utilized the Moody’s May 13 Baseline scenario to integrate the effects of COVID-19 in our loss estimates. The scenario reflected a second quarter 2020 decline in GDP of approximately 33%, peak unemployment of approximately 15% and a gradual recovery in the second half of 2020. The scenario also reflected that the 2020 year ended with a cumulative decline in Real GDP of 7% and an unemployment rate of 9%. This scenario was more severe than the one used in the first quarter 2020. The first quarter scenario had Real GDP down approximately 18% and peak unemployment of approximately 9%. This scenario also reflected year ending cumulative decline in Real GDP of 2.5% and an unemployment rate of 6.5%. Estimated losses were adjusted based upon an analysis of our retail customer’s ability to make loan payments, government actions such as the CARES act, and our own customer assistance actions.

Citizens Financial Group, Inc. | 37

To provide context regarding sensitivity to more pessimistic scenarios, our ACL balance of $2.5 billion represents 38% of the $6.7 billion of nine-quarter losses projected in the Federal Reserve run 2020 DFAST Supervisory Severely Adverse scenario (the “DFAST scenario”), which forecasted more protracted unemployment and GDP declines.
Comparatively, our ACL represents 52% of the $4.9 billion of projected losses in the Company run DFAST scenario. Losses under the Company run DFAST scenario are lower than the Federal Reserve run scenario due to methodology and modeling differences. As an example, the Federal Reserve’s models did not recognize contractual loss sharing arrangements in the merchant loan portfolio. In addition, both DFAST scenarios include incremental losses associated with an assumption that balance sheet levels remain flat due to loan originations post-June 30, 2020. In contrast, our June 30, 2020 ACL balance considers only existing loans and lines of credit as of the reporting date.
It is difficult to estimate how changes in economic forecasts might affect our ACL because such forecasts consider a wide variety of variables and inputs, and changes in the variables and inputs may not occur at the same time or in the same direction, and such changes may have differing impacts by product types. Further, the variables and inputs may be idiosyncratically affected by existing or future monetary and fiscal stimulus programs and forbearance and other customer accommodation efforts. Nevertheless, changes in one or multiple of the key variables may have a material impact to our estimation of expected credit losses.
We continue to monitor the impact of the COVID-19 pandemic and related policy measures on the economy and, if the depth of the recession or pace and vigor of the expected recovery is worse than expected, further building of our ACL could be required.
For additional information regarding the ALLL and reserve for unfunded lending commitments, see Note 1 and Note 4 .
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 2019 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 market risk for both non-trading and trading activities.
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 2019 Form 10-K.

Citizens Financial Group, Inc. | 38

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 net interest income sensitivity limits. This analysis would typically include 100 basis point shock and gradual decreases; however, the table has been changed to 25 basis points due to the current low interest rate environment.
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
June 30, 2020
 
December 31, 2019
Instantaneous Change in Interest Rates
 
 
 
+200
14.3
 %
 
6.9
 %
+100
8.1

 
3.6

-25
(1.0
)
 
(1.3
)
Gradual Change in Interest Rates
 
 
 
+200
7.1

 
3.2

+100
3.6

 
1.5

-25
(0.7
)
 
(0.5
)
Asset sensitivity against a 200 basis point gradual increase in rates was 7.1% at June 30, 2020, compared with 3.2% at December 31, 2019. This increase in asset sensitivity is recognition of the current level of historically low interest rates and is consistent with our positioning in prior periods of policy rates between zero and 25 basis points. 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 and AFS securities. The table below summarizes the related hedging activities.
 
June 30, 2020
 
December 31, 2019
 
 
 
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

$17,600


($1
)
1.2
1.7
%
0.2
%
 

$19,350


($2
)
1.5

1.7
%
1.7
%
Fair value - receive-fixed/pay-variable - conventional debt
3,950

—

1.8
2.0

0.5

 
4,650

(1
)
2.0

2.0

1.9

Cash flow - pay-fixed/receive-variable - conventional ALM(1)
4,750

1

4.2

0.2

1.4

 
3,000

2

4.5

1.7

1.7

Fair value - pay-fixed/receive-variable - conventional ALM(2)
2,000

1

4.2

0.2

1.5

 
2,846

2

4.5

1.8

1.8

Total portfolio swaps

$28,300


$1

2.0

1.4
%
0.5
%
 

$29,846


$1

2.2

1.8
%
1.8
%

(1) Includes $1.8 billion of forward starting pay-fixed interest rate swaps.
(2) Certain fair value hedges have been designated as a last-of-layer hedge, which affords us the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar pre-payable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item. As of June 30, 2020, the notional and fair value of these hedges was $2.0 billion and $1 million, respectively.


Citizens Financial Group, Inc. | 39

Capital Markets
A key component of our capital markets activities is the underwriting and distribution of corporate credit facilities to partially finance mergers and acquisitions transactions for our clients. We have a rigorous risk management process around these activities, including a limit structure capping our underwriting risk, our potential loss, and sub limits for specific asset classes. Further, the ability to approve underwriting exposure is delegated only to senior level individuals in the credit risk management and capital markets organizations with each transaction adjudicated in the Loan Underwriting Approval Committee.
Mortgage Servicing Rights    
We have market risk associated with the value of residential MSRs, which are impacted by various types of inherent risks, including duration, basis, convexity, volatility and yield curve. Effective January 1, 2020, we elected to account for all MSRs under the fair value method.
As part of our overall risk management strategy relative to the fair market value of the MSRs, 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 June 30, 2020 and December 31, 2019, the fair value of MSRs was $568 million and $642 million, respectively, and the total notional amount of related derivative contracts was $17.6 billion and $8.6 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 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 2019 Form 10-K.
Market Risk Regulatory Capital
The U.S. banking regulators’ “Market Risk Rule” covers the calculation of market risk capital. For the purposes of the Market Risk Rule, all of our client facing trades and associated hedges maintain a net low risk, and do qualify, as “covered positions.” For the three months ended June 30, 2020, we were subject to the reporting threshold under the Market Risk Rule, which resulted in the inclusion of $1.1 billion of calculated risk-weighted assets. However, for the three months ended June 30, 2019, we were not subject to the reporting threshold. As a result, $634 million of calculated market risk-weighted assets as of June 30, 2019 was not included in our risk-weighted assets and our covered trading activities were risk-weighted under U.S. Basel III Standardized credit risk rules. The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR.

Citizens Financial Group, Inc. | 40

The following table presents the results of our modeled and non-modeled measures for regulatory capital calculations:
(in millions)
 
For the Three Months Ended June 30, 2020
 
For the Three Months Ended June 30, 2019
Market Risk Category 
 
Period End
 
Average 
 
High
 
Low
 
Period End
 
Average
 
High
 
Low
Interest Rate
 

$1

 

$2

 

$5

 

$1

 

$1

 

$—

 

$1

 

$—

Foreign Exchange Currency Rate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Credit Spread
 
13

 
8

 
15

 
4

 
5

 
4

 
5

 
3

Commodity
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

General VaR
 
12

 
11

 
13

 
9

 
5

 
4

 
5

 
3

Specific Risk VaR
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total VaR
 

$12

 

$11

 

$13

 

$9

 

$5

 

$4

 

$5

 

$3

Stressed General VaR
 

$14

 

$13

 

$15

 

$11

 

$13

 

$9

 

$13

 

$7

Stressed Specific Risk VaR
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Stressed VaR
 

$14

 

$13

 

$15

 

$11

 

$13

 

$9

 

$13

 

$7

Market Risk Regulatory Capital
 

$73

 
 
 
 
 
 
 

$37

 
 
 
 
 
 
Specific Risk Not Modeled Add-on
 
13

 
 
 
 
 
 
 
14

 
 
 
 
 
 
de Minimis Exposure Add-on
 
—

 
 
 
 
 
 
 
—

 
 
 
 
 
 
Total Market Risk Regulatory Capital
 

$86

 
 
 
 
 
 
 

$51

 
 
 
 
 
 
Market Risk-Weighted Assets
 

$1,078

 
 
 
 
 
 
 
634

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

$1,078

 
 
 
 
 
 
 

$—

 
 
 
 
 
 
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.

Citizens Financial Group, Inc. | 41

The magnitude of the financial markets sudden dislocation caused by the COVID-19 pandemic resulted in several backtesting exceptions during first quarter 2020. The following graph shows our daily net trading revenue and total internal, modeled VaR for the twelve months ended June 30, 2020.
Daily VaR Backtesting
graph.jpg




Citizens Financial Group, Inc. | 42

NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
For more information on the computation of our non-GAAP financial measures, see “—Introduction — Non-GAAP Financial Measures,” included in this Report. The following tables present computations of non-GAAP financial measures representing our Underlying results used throughout the MD&A:

 
 
As of and for the Three Months Ended June 30,
 
As of and for the Six Months Ended June 30,
(in millions, except share, per share and ratio data)
Ref.
2020

 
2019

 
2020

 
2019

Total revenue, Underlying:
 
 
 
 
 
 
 
 
Total revenue (GAAP)
A

$1,750

 

$1,628

 

$3,407

 

$3,216

Less: Notable items
 
—

 
—

 
—

 
—

Total revenue, Underlying (non-GAAP)
B

$1,750

 

$1,628

 

$3,407

 

$3,216

Noninterest expense, Underlying:
 
 
 
 
 
 
 
 
Noninterest expense (GAAP)
C

$979

 

$951

 

$1,991

 

$1,888

Less: Notable items
 
19

 
7

 
52

 
12

Noninterest expense, Underlying (non-GAAP)
D

$960

 

$944

 

$1,939

 

$1,876

Pre-provision profit:
 
 
 
 
 
 
 
 
Total revenue (GAAP)
A

$1,750

 

$1,628

 

$3,407

 

$3,216

Less: Noninterest expense (GAAP)
B
979

 
951

 
1,991

 
1,888

Pre-provision profit (GAAP)
 

$771

 

$677

 

$1,416

 

$1,328

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

$1,750

 

$1,628

 

$3,407

 

$3,216

Less: Noninterest expense, Underlying (non-GAAP)
D
960

 
944

 
1,939

 
1,876

Pre-provision profit, Underlying (non-GAAP)
 

$790

 

$684

 

$1,468

 

$1,340

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

$307

 

$580

 

$352

 

$1,146

Less: Expense before income tax benefit related to notable items
 
(19
)
 
(7
)
 
(52
)
 
(12
)
Income before income tax expense, Underlying (non-GAAP)
F

$326

 

$587

 

$404

 

$1,158

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

$54

 

$127

 

$65

 

$254

Less: Income tax benefit related to notable items
 
(9
)
 
(2
)
 
(17
)
 
(3
)
Income tax expense, Underlying (non-GAAP)
H

$63

 

$129

 

$82

 

$257

Effective income tax rate (GAAP)
G/E
17.69
%
 
21.86
%
 
18.51
%
 
22.14
%
Effective income tax rate, Underlying (non-GAAP)
H/F
19.36

 
21.89

 
20.36

 
22.16

Net income, Underlying:
 
 
 
 
 
 
 
 
Net income (GAAP)
I

$253

 

$453

 

$287

 

$892

Add: Notable items, net of income tax benefit
 
10

 
5

 
35

 
9

Net income, Underlying (non-GAAP)
J

$263

 

$458

 

$322

 

$901

Net income available to common stockholders, Underlying:
 
 
 
 
 
 
 
 
Net income available to common stockholders (GAAP)
K
225

 
435

 

$237

 

$859

Add: Notable items, net of income tax benefit
 
10

 
5

 
35

 
9

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

$235

 

$440

 

$272

 

$868

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

$20,446

 

$20,420

 

$20,335

 

$20,182

Return on average common equity
K/M
4.44
%
 
8.54
%
 
2.35
%
 
8.58
%
Return on average common equity, Underlying (non-GAAP)
L/M
4.63

 
8.63

 
2.69

 
8.67

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Citizens Financial Group, Inc. | 43

 
 
As of and for the Three Months Ended June 30,
 
As of and for the Six Months Ended June 30,
(in millions, except share, per share and ratio data)
Ref.
2020

 
2019

 
2020

 
2019

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

$20,446

 

$20,420

 

$20,335

 

$20,182

Less: Average goodwill (GAAP)
 
7,050

 
7,040

 
7,048

 
7,029

Less: Average other intangibles (GAAP)
 
65

 
80

 
66

 
69

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
375

 
370

 
374

 
369

Average tangible common equity
N

$13,706

 

$13,670

 

$13,595

 

$13,453

Return on average tangible common equity
K/N
6.62
%
 
12.75
 %
 
3.51
%
 
12.87
%
Return on average tangible common equity, Underlying (non-GAAP)
L/N
6.90

 
12.89

 
4.03

 
13.00

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

$179,793

 

$161,489

 

$173,485

 

$160,955

Return on average total assets
I/O
0.57
%
 
1.13
 %
 
0.33
%
 
1.12
%
Return on average total assets, Underlying (non-GAAP)
J/O
0.59

 
1.14

 
0.37

 
1.13

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

$179,793

 

$161,489

 

$173,485

 

$160,955

Less: Average goodwill (GAAP)
 
7,050

 
7,040

 
7,048

 
7,029

Less: Average other intangibles (GAAP)
 
65

 
80

 
66

 
69

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
375

 
370

 
374

 
369

Average tangible assets
P

$173,053

 

$154,739

 

$166,745

 

$154,226

Return on average total tangible assets
I/P
0.59
%
 
1.17
 %
 
0.35
%
 
1.17
%
Return on average total tangible assets, Underlying (non-GAAP)
J/P
0.61

 
1.19

 
0.39

 
1.18

Efficiency ratio and efficiency ratio, Underlying:
 
 
 
 
 
 
 
 
Efficiency ratio
C/A
55.91
%
 
58.41
 %
 
58.43
%
 
58.70
%
Efficiency ratio, Underlying (non-GAAP)
D/B
54.85

 
58.02

 
56.91

 
58.34

Operating leverage and operating leverage, Underlying:
 
 
 
 
 
 
 
 
Increase in total revenue
 
7.49
%
 
7.81
 %
 
5.94
%
 
8.25
%
Increase in noninterest expense
 
2.89

 
8.66

 
5.46

 
7.39

Operating leverage
 
4.60
%
 
(0.85
)%
 
0.48
%
 
0.86
%
Increase in total revenue, Underlying (non-GAAP)
 
7.49
%
 
7.81
 %
 
5.94
%
 
8.25
%
Increase in noninterest expense, Underlying (non-GAAP)
 
1.62

 
7.93

 
3.34

 
6.73

Operating leverage, Underlying (non-GAAP)
 
5.87
%
 
(0.12
)%
 
2.60
%
 
1.52
%
Tangible book value per common share:
 
 
 
 
 
 
 
 
Common shares - at period end (GAAP)
Q
426,824,594

 
457,903,826

 
426,824,594

 
457,903,826

Common stockholders' equity (GAAP)
 

$20,453

 

$20,884

 

$20,453

 

$20,884

Less: Goodwill (GAAP)
 
7,050

 
7,040

 
7,050

 
7,040

Less: Other intangible assets (GAAP)
 
63

 
74

 
63

 
74

Add: Deferred tax liabilities related to goodwill (GAAP)
 
376

 
371

 
376

 
371

Tangible common equity
R

$13,716

 

$14,141

 

$13,716

 

$14,141

Tangible book value per common share
R/Q

$32.13

 

$30.88

 

$32.13

 

$30.88

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)
S
426,613,053

 
458,154,335

 
427,165,737

 
459,426,685

Average common shares outstanding - diluted (GAAP)
T
427,566,920

 
459,304,224

 
428,292,580

 
460,857,535

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

$0.53

 

$0.95

 

$0.56

 

$1.87

Net income per average common share - diluted (GAAP)
K/T
0.53

 
0.95

 
0.55

 
1.86

Net income per average common share - basic, Underlying (non-GAAP)
L/S
0.55

 
0.96

 
0.64

 
1.89

Net income per average common share - diluted, Underlying (non-GAAP)
L/T
0.55

 
0.96

 
0.64

 
1.88

Dividend payout ratio and dividend payout ratio, Underlying:
 
 
 
 
 
 
 
 
Cash dividends declared and paid per common share
U

$0.39

 

$0.32

 

$0.78

 

$0.64

Dividend payout ratio
U/(K/S)
74
%
 
34
 %
 
140
%
 
34
%
Dividend payout ratio, Underlying (non-GAAP)
U/(L/S)
71

 
33

 
122

 
34


Citizens Financial Group, Inc. | 44


The following table presents computations of non-GAAP financial measures representing certain metrics excluding the impact of PPP loans used throughout the MD&A:
(in millions, except share, per share and ratio data)
Ref.
June 30, 2020
 
December 31, 2019
Allowance for credit losses to total loans and leases, excluding the impact of PPP loans:
 
 
 
 
Total loans and leases (GAAP)
A

$125,713

 

$119,088

Less: PPP loans
 
4,679

 
—

Total loans and leases, excluding the impact of PPP loans (non-GAAP)
B

$121,034

 

$119,088

Allowance for credit losses (GAAP)
C

$2,527

 

$1,296

Allowance for credit losses to total loans and leases (GAAP)
C/A
2.01
%
 
1.09
%
Allowance for credit losses to total loans and leases, excluding the impact of PPP loans (non-GAAP)
C/B
2.09
%
 
1.09
%
Criticized commercial loans and leases to total commercial loans and leases, excluding the impact of PPP loans:
 
 
 
 
Total commercial loans and leases (GAAP)
D

$64,930

 

$57,538

Less: PPP loans
 
4,679

 
—

Total commercial loans and leases, excluding the impact of PPP loans (non-GAAP)
E

$60,251

 

$57,538

Total criticized commercial loans and leases (GAAP)
F

$5,306

 

$3,036

Less: PPP loans
 
200

 
—

Total criticized commercial loans and leases, excluding the impact of PPP loans (non-GAAP)
G

$5,106

 

$3,036

Criticized commercial loans and leases to total commercial loans and leases (GAAP)
F/D
8.2
%
 
5.3
%
Criticized commercial loans and leases to total commercial loans and leases, excluding the impact of PPP loans (non-GAAP)
G/E
8.5
%
 
5.3
%


Citizens Financial Group, Inc. | 45

ITEM 1. FINANCIAL STATEMENTS

 
 
Page
Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 (unaudited)
 
47
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
 
48
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
 
49
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
 
50
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2020 and 2019
 
52
Notes to Consolidated Financial Statements (unaudited)
 
53
Note 1 - Basis of Presentation
 
53
Note 2 - Securities
 
55
Note 3 - Loans and Leases
 
58
Note 4 - Allowance for Credit Losses, Nonaccruing Loans and Leases, and Concentrations of Credit Risk
 
59
Note 5 - Mortgage Banking
 
68
Note 6 - Goodwill
 
70
Note 7 - Variable Interest Entities
 
71
Note 8 - Borrowed Funds
 
72
Note 9 - Derivatives
 
74
Note 10 - Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
 
77
Note 11 - Stockholders’ Equity
 
78
Note 12 - Commitments and Contingencies
 
79
Note 13 - Fair Value Measurements
 
81
Note 14 - Noninterest Income
 
86
Note 15 - Other Operating Expense
 
86
Note 16 - Earnings Per Share
 
87
Note 17 - Business Operating Segments
 
87


Citizens Financial Group, Inc. | 46

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
June 30, 2020
 
December 31, 2019
ASSETS:
 
 
 
Cash and due from banks

$1,088

 

$1,175

Interest-bearing cash and due from banks
6,358

 
2,211

Interest-bearing deposits in banks
475

 
297

Debt securities available for sale, at fair value (including $688 and $359 pledged to creditors, respectively)(1)
22,144

 
20,613

Debt securities held to maturity (fair value of $3,009 and $3,242 respectively, and including $172 and $249 pledged to creditors, respectively)(1)
2,856

 
3,202

Equity investment securities, at fair value
50

 
47

Equity investment securities, at cost
607

 
807

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

Less: Allowance for loan and lease losses
(2,448
)
 
(1,252
)
Net loans and leases
123,265

 
117,836

Derivative assets
2,069

 
807

Premises and equipment, net
751

 
761

Bank-owned life insurance
1,739

 
1,725

Goodwill
7,050

 
7,044

Due from broker
51

 
—

Other assets
6,378

 
5,878

TOTAL ASSETS

$179,874

 

$165,733

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

$40,545

 

$29,233

Interest-bearing
103,073

 
96,080

          Total deposits
143,618

 
125,313

Short-term borrowed funds
255

 
274

Derivative liabilities
198

 
120

Deferred taxes, net
709

 
866

Long-term borrowed funds
9,202

 
14,047

Due to broker
155

 
—

Other liabilities
3,319

 
2,912

TOTAL LIABILITIES
157,456

 
143,532

Contingencies (refer to Note 12)


 


STOCKHOLDERS’ EQUITY:
 
 
 
$25.00 par value,100,000,000 shares authorized; 2,000,000 and 1,600,000 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
1,965

 
1,570

Common stock:
 
 
 
$0.01 par value, 1,000,000,000 shares authorized; 569,490,896 shares issued and 426,824,594 shares outstanding at June 30, 2020 and 568,238,730 shares issued and 433,121,083 shares outstanding at December 31, 2019
6

 
6

Additional paid-in capital
18,908

 
18,891

Retained earnings
6,068

 
6,498

Treasury stock, at cost, 142,666,302 and 135,117,647 shares at June 30, 2020 and December 31, 2019, respectively
(4,623
)
 
(4,353
)
Accumulated other comprehensive income (loss)
94

 
(411
)
TOTAL STOCKHOLDERS’ EQUITY

$22,418

 

$22,201

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$179,874

 

$165,733

(1) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.

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


Citizens Financial Group, Inc. | 47

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 (in millions, except share and per share data)
2020

 
2019

 
2020

 
2019

INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans and leases

$1,192

 

$1,392

 

$2,494

 

$2,773

Interest and fees on loans held for sale, at fair value
20

 
15

 
35

 
26

Interest and fees on other loans held for sale
7

 
2

 
16

 
6

Investment securities
130

 
164

 
277

 
330

Interest-bearing deposits in banks
1

 
7

 
6

 
15

Total interest income
1,350

 
1,580

 
2,828

 
3,150

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
124

 
308

 
351

 
595

Short-term borrowed funds
—

 
4

 
1

 
6

Long-term borrowed funds
66

 
102

 
156

 
223

Total interest expense
190

 
414

 
508

 
824

Net interest income
1,160

 
1,166

 
2,320

 
2,326

Provision for credit losses
464

 
97

 
1,064

 
182

Net interest income after provision for credit losses
696

 
1,069

 
1,256

 
2,144

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service charges and fees
84

 
126

 
202

 
249

Mortgage banking fees
276

 
62

 
435

 
105

Card fees
48

 
64

 
104

 
123

Capital markets fees
61

 
57

 
104

 
111

Trust and investment services fees
45

 
53

 
98

 
100

Foreign exchange and interest rate products
34

 
35

 
58

 
71

Letter of credit and loan fees
31

 
33

 
65

 
66

Securities gains, net
3

 
4

 
3

 
12

Net impairment losses recognized in earnings on debt securities
—

 
—

 
—

 
(1
)
Other income
8

 
28

 
18

 
54

Total noninterest income
590

 
462

 
1,087

 
890

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
513

 
507

 
1,062

 
1,016

Equipment and software expense
142

 
126

 
275

 
251

Outside services
131

 
118

 
266

 
228

Occupancy
82

 
82

 
166

 
165

Other operating expense
111

 
118

 
222

 
228

Total 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

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
426,613,053

 
458,154,335

 
427,165,737

 
459,426,685

Diluted
427,566,920

 
459,304,224

 
428,292,580

 
460,857,535

Per common share information:
 
 
 
 
 
 
 
Basic earnings

$0.53

 

$0.95

 

$0.56

 

$1.87

Diluted earnings
0.53

 
0.95

 
0.55

 
1.86


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

Citizens Financial Group, Inc. | 48

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Net income

$253

 

$453

 

$287

 

$892

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized derivative instruments (losses) gains arising during the periods, net of income taxes of ($3), $23, $30 and $36, respectively
(8
)
 
68

 
88

 
107

Reclassification adjustment for net derivative (gains) losses included in net income, net of income taxes of ($11), $4, ($12) and $9, respectively
(34
)
 
15

 
(37
)
 
30

Net unrealized debt securities gains arising during the periods, net of income taxes of $16, $72, $145 and $152, respectively
49

 
221

 
449

 
467

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

 
1

 
—

 
1

Reclassification of net debt securities gains to net income, net of income taxes of ($1), ($1), ($1) and ($3), respectively
(2
)
 
(3
)
 
(2
)
 
(8
)
Amortization of actuarial loss, net of income taxes of $0, $1, $1 and $3, respectively
4

 
3

 
7

 
6

Total other comprehensive income, net of income taxes
9

 
305

 
505

 
603

Total comprehensive income

$262

 

$758

 

$792

 

$1,495


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

Citizens Financial Group, Inc. | 49

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 Income (Loss)
Total
(in millions)
Shares
Amount
 
Shares
Amount
Balance at April 1, 2019
1


$1,132

 
461


$6


$18,847


$5,672


($3,333
)

($793
)

$21,531

Dividends to common stockholders
—

—

 
—

—

—

(148
)
—

—

(148
)
Dividends to preferred stockholders
—

—

 
—

—

—

(18
)
—

—

(18
)
Preferred stock issued
—

1

 
—

—

—

—

—

—

1

Treasury stock purchased
—

—

 
(3
)
—

—

—

(120
)
—

(120
)
Share-based compensation plans
—

—

 
—

—

9

—

—

—

9

Employee stock purchase plan shares purchased
—

—

 
—

—

4

—

—

—

4

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

453

—

—

453

Other comprehensive loss
—

—

 
—

—

—

—

—

305

305

Total comprehensive income
—

—

 
—

—

—

453

—

305

758

Balance at June 30, 2019
1


$1,133

 
458


$6


$18,860


$5,959


($3,453
)

($488
)

$22,017

Balance at April 1, 2020
2


$1,570

 
427


$6


$18,901


$6,011


($4,623
)

$85


$21,950

Dividends to common stockholders
—

—

 
—

—

—

(168
)
—

—

(168
)
Dividends to preferred stockholders
—

—

 
—

—

—

(28
)
—

—

(28
)
Preferred stock issued
—

395

 
—

—

—

—

—

—

395

Treasury stock purchased
—

—

 
—

—

—

—

—

—

—

Share-based compensation plans
—

—

 
—

—

1

—

—

—

1

Employee stock purchase plan shares purchased
—

—

 
—

—

6

—

—

—

6

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

253

—

—

253

Other comprehensive income
—

—

 
—

—

—

—

—

9

9

Total comprehensive income
—

—

 
—

—

—

253

—

9

262

Balance at June 30, 2020
2


$1,965

 
427


$6


$18,908


$6,068


($4,623
)

$94


$22,418


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


Citizens Financial Group, Inc. | 50

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 Income (Loss)
Total
(in millions)
Shares
Amount
 
Shares
Amount
Balance at January 1, 2019
1


$840

 
466


$6


$18,815


$5,385


($3,133
)

($1,096
)

$20,817

Dividends to common stockholders
—

—

 
—

—

—

(297
)
—

—

(297
)
Dividends to preferred stockholders
—

—

 
—

—

—

(33
)
—

—

(33
)
Preferred stock issued
—

293

 
—

—

—

—

—

—

293

Treasury stock purchased
—

—

 
(9
)
—

—

—

(320
)
—

(320
)
Share-based compensation plans
—

—

 
1

—

37

—

—

—

37

Employee stock purchase plan shares purchased
—

—

 
—

—

8

—

—

—

8

Cumulative effect of change in accounting principle
—

—

 
—

—

—

12

—

5

17

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

892

—

—

892

Other comprehensive income
—

—

 
—

—

—

—

—

603

603

Total comprehensive income
—

—

 
—

—

—

892

—

603

1,495

Balance at June 30, 2019
1


$1,133

 
458


$6


$18,860


$5,959


($3,453
)

($488
)

$22,017

Balance at January 1, 2020
2


$1,570

 
433


$6


$18,891


$6,498


($4,353
)

($411
)

$22,201

Dividends to common stockholders
—

—

 
—

—

—

(336
)
—

—

(336
)
Dividends to preferred stockholders
—

—

 
—

—

—

(50
)
—

—

(50
)
Preferred stock issued
—

395

 
—

—

—

—

—

—

395

Treasury stock purchased
—

—

 
(7
)
—

—

—

(270
)
—

(270
)
Share-based compensation plans
—

—

 
1

—

7

—

—

—

7

Employee stock purchase plan shares purchased
—

—

 
—

—

10

—

—

—

10

Cumulative effect of change in accounting principle
—

—

 
—

—

—

(331
)
—

—

(331
)
Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

287

—

—

287

Other comprehensive income
—

—

 
—

—

—

—

—

505

505

Total comprehensive income
—

—

 
—

—

—

287

—

505

792

Balance at June 30, 2020
2


$1,965

 
427


$6


$18,908


$6,068


($4,623
)

$94


$22,418


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


Citizens Financial Group, Inc. | 51

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
Six Months Ended June 30,
(in millions)
2020

 
2019

OPERATING ACTIVITIES
 
 
 
Net income

$287

 

$892

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
1,064

 
182

Net change in loans held for sale
(737
)
 
(471
)
Depreciation, amortization and accretion
310

 
270

Amortization of intangibles
6

 
5

Deferred income taxes
(208
)
 
(10
)
Share-based compensation
23

 
32

Net gain on sales of:
 
 
 
Debt securities
(3
)
 
(16
)
Premises and equipment
—

 
(7
)
Increase in other assets
(2,454
)
 
(221
)
Increase (decrease) in other liabilities
299

 
(79
)
Net cash (used in) provided by operating activities
(1,413
)
 
577

INVESTING ACTIVITIES
 
 
 
Investment securities:
 
 
 
Purchases of debt securities available for sale
(3,308
)
 
(3,502
)
Proceeds from maturities and paydowns of debt securities available for sale
2,521

 
1,625

Proceeds from sales of debt securities available for sale
—

 
1,250

Proceeds from maturities and paydowns of debt securities held to maturity
349

 
171

Net (increase) decrease in equity securities, at fair value
(3
)
 
134

Net decrease in equity securities, at cost
200

 
128

Net increase in interest-bearing deposits in banks
(178
)
 
(38
)
Acquisitions, net of cash acquired
(3
)
 
(129
)
Net increase in loans and leases
(7,014
)
 
(806
)
Capital expenditures, net
(53
)
 
(10
)
Other
(110
)
 
(111
)
Net cash used in investing activities
(7,599
)
 
(1,288
)
FINANCING ACTIVITIES
 
 
 
Net increase in deposits
18,305

 
4,429

Net (decrease) increase in short-term borrowed funds
(18
)
 
123

Proceeds from issuance of long-term borrowed funds
8,309

 
4,500

Repayments of long-term borrowed funds
(13,253
)
 
(9,005
)
Treasury stock purchased
(270
)
 
(320
)
Net proceeds from issuance of preferred stock
395

 
293

Dividends declared and paid to common stockholders
(336
)
 
(297
)
Dividends declared and paid to preferred stockholders
(45
)
 
(30
)
Payments of employee tax withholding for share-based compensation
(15
)
 
(21
)
Net cash provided by (used in) financing activities
13,072

 
(328
)
Increase (decrease) in cash and cash equivalents (1)
4,060

 
(1,039
)
Cash and cash equivalents at beginning of period (1)
3,386

 
4,074

Cash and cash equivalents at end of period (1)

$7,446

 

$3,035


(1) Cash and cash equivalents includes cash and due from banks and interest-bearing cash and due from banks as reflected on the Consolidated Balance Sheets.

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

Citizens Financial Group, Inc. | 52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Basis of Presentation
The unaudited interim Consolidated Financial Statements, including the Notes presented in this document 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 presented in this document should be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying Notes included in the Company’s 2019 Form 10-K. The Company’s principal business activity is banking, conducted through its banking subsidiary, CBNA.
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 2019 Form 10-K.


Citizens Financial Group, Inc. | 53

Accounting Pronouncements Adopted in 2020
Pronouncement
Summary of Guidance
Effects on Financial Statements
Financial Instruments - Credit Losses

Issued June 2016
•
Required effective date: January 1, 2020.

•
Establishes a single allowance framework for financial assets carried at amortized cost (including securities HTM), which reflects management’s estimate of credit losses over the full remaining expected life of the financial assets.

•
Amends impairment guidance for securities AFS to incorporate an allowance, which allows 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 adopted the new standard on January 1, 2020, retrospectively for loans and leases and HTM securities and prospectively for AFS securities. Refer to Note 4 for discussion of the significant accounting policy for the allowance for credit losses following adoption.

•
Adoption resulted in a cumulative-effect reduction of $337 million, net of taxes of $114 million, to retained earnings and a corresponding increase to the ACL of $451 million. Refer to Note 4 for the impact of the adoption to the ALLL and reserve for unfunded commitments.

•
The increase in ACL upon adoption will decrease the Company’s CET1 capital ratio by 22 basis points on a fully-phased in basis. Following a two-year delay, this capital impact will be phased-in by 25% per year, or approximately 6 basis points, beginning on January 1, 2022 through January 1, 2025.

•
Adoption of the new standard could produce higher volatility in the quarterly provision for credit losses than the prior incurred loss reserve process and could adversely impact the Company’s ongoing earnings.

•
Based on the credit quality of the Company’s existing debt securities portfolio, the Company did not recognize an allowance for HTM and AFS debt securities upon adoption.

Goodwill

Issued January 2017

•
Requires an impairment loss to be recognized when the estimated fair value of a reporting unit falls below its carrying value.

•
Eliminates the second condition in the current guidance that requires an impairment loss to be recognized only if the estimated implied fair value of the goodwill is below its carrying value.

•
Applied prospectively to all goodwill impairment tests performed after the adoption date.
•
The Company adopted the new standard on January 1, 2020. Refer to Note 6 for discussion of the significant accounting policy for goodwill impairment following adoption.

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


Disclosure Requirements - Fair Value Measurements

Issued August 2018
•
Amends disclosure requirements on fair value measurements.

•
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 disclosures.

•
Retrospective application is required for all other amendments for all periods presented.

•
The Company adopted the new standard on January 1, 2020.

•
Adoption did not have a material impact on the Company’s Consolidated Financial Statements. Required fair value measurement disclosures are included in Note 13.
Simplifying the Accounting for Income Taxes

Issued December 2019
•
Simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

•
Simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates.

•
Clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.


• The Company adopted the new standard on January 1, 2020.

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


Citizens Financial Group, Inc. | 54

Pronouncement
Summary of Guidance
Effects on Financial Statements
Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Issued March 2020
•
Provides the option to apply a number of practical expedients when evaluating if a contract modification as the result of reference rate reform is considered a new contract or a continuation of an existing contract.

•
Provides optional expedients to the evaluation of, and accounting for, fair value and cash flow hedges affected by reference rate reform.

•
Provides an optional one-time election to sell or transfer debt securities classified as HTM that reference a rate affected by reference rate reform
•
The Company adopted the new standard in the first quarter of 2020 upon issuance and is effective through December 31, 2022.

•
Adoption of the new standard did not 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:
 
June 30, 2020
 
December 31, 2019
(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

$11


$—


$—


$11

 

$71


$—


$—


$71

State and political subdivisions
4

—

—

4

 
5

—

—

5

Mortgage-backed securities, at fair value:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
20,898

648

(4
)
21,542

 
19,803

143

(71
)
19,875

Other/non-agency
551

36

—

587

 
638

24

—

662

Total mortgage-backed securities, at fair value
21,449

684

(4
)
22,129

 
20,441

167

(71
)
20,537

Total debt securities available for sale, at fair value

$21,464


$684


($4
)

$22,144

 

$20,517


$167


($71
)

$20,613

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

$2,856


$153


$—


$3,009

 

$3,202


$45


($5
)

$3,242

Total debt securities held to maturity, at cost

$2,856


$153


$—


$3,009

 

$3,202


$45


($5
)

$3,242

Money market mutual fund investments

$50


$—


$—


$50

 

$47


$—


$—


$47

Total equity securities, at fair value

$50


$—


$—


$50

 

$47


$—


$—


$47

Federal Reserve Bank stock

$577


$—


$—


$577

 

$577


$—


$—


$577

Federal Home Loan Bank stock
22

—

—

22

 
222

—

—

222

Other equity securities
8

—

—

8

 
8

—

—

8

Total equity securities, at cost

$607


$—


$—


$607

 

$807


$—


$—


$807



Accrued interest receivable on debt securities totaled $58 million as of June 30, 2020 and December 31, 2019, and is included in other assets on the Consolidated Balance Sheets.

Citizens Financial Group, Inc. | 55

The following table presents the amortized cost and fair value of debt securities by contractual maturity as of June 30, 2020. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.
 
June 30, 2020
 
Distribution of Maturities
(in millions)
1 Year or Less
After 1 Year through 5 Years
After 5 Years through 10 Years
After 10 Years
Total
Amortized cost:
 
 
 
 
 
U.S. Treasury and other

$11


$—


$—


$—


$11

State and political subdivisions
—

—

—

4

4

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
4

169

1,575

19,150

20,898

Other/non-agency
—

—

—

551

551

Total debt securities available for sale
15

169

1,575

19,705

21,464

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

—

—

2,856

2,856

Total debt securities held to maturity
—

—

—

2,856

2,856

Total amortized cost of debt securities

$15


$169


$1,575


$22,561


$24,320

 
 
 
 
 
 
Fair value:
 
 
 
 
 
U.S. Treasury and other

$11


$—


$—


$—


$11

State and political subdivisions
—

—

—

4

4

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
4

176

1,631

19,731

21,542

Other/non-agency
—

—

—

587

587

Total debt securities available for sale
15

176

1,631

20,322

22,144

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

—

—

3,009

3,009

Total debt securities held to maturity
—

—

—

3,009

3,009

Total fair value of debt securities

$15


$176


$1,631


$23,331


$25,153



Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $130 million and $164 million for the three months ended June 30, 2020 and 2019, respectively and $277 million and $330 million for the six months ended June 30, 2020 and 2019, respectively.
The following table presents realized gains and losses on securities:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Gains on sale of debt securities(1)

$3

 

$8

 

$3

 

$16

Losses on sale of debt securities
—

 
—

 
—

 
—

Debt securities gains, net

$3

 

$8

 

$3

 

$16


(1) For the three and six months ended June 30, 2019, $4 million of gains on sale of debt securities were recognized in mortgage banking fees in the Consolidated Statement of Operations as they related to AFS securities held as economic hedges of the value of the MSR portfolio recognized using the amortization method.    

Citizens Financial Group, Inc. | 56


The following table presents the amortized cost and fair value of debt securities pledged:
 
June 30, 2020
 
December 31, 2019
(in millions)
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Pledged against repurchase agreements

$242


$251

 

$265


$266

Pledged against FHLB borrowed funds
548

587

 
638

662

Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law
3,861

3,998

 
3,670

3,672



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 June 30, 2020 or December 31, 2019. Citizens offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information, see Note 9.
There were no securitizations of mortgage loans retained in the investment portfolio for the three and six months ended June 30, 2020. Securitizations of mortgage loans retained in the investment portfolio were $13 million for the three months ended June 30, 2019, and $44 million for the six months ended June 30, 2019. These securitizations include a substantive guarantee by a third party. In 2019, the guarantors were FNMA, FHLMC, and GNMA. The debt securities received from the guarantors are classified as AFS.
Impairment
Upon purchase of HTM investment securities and each subsequent measurement period, Citizens recognizes a reserve for credit losses expected to be incurred over the life of the security, even if the risk of loss is remote. Recognition of a reserve for expected credit losses is not required if the amount the Company expects to realize is zero (commonly referred to as “zero expected credit losses”). The Company evaluated its existing HTM portfolio and concluded that all of the securities met the zero expected credit loss criteria, and therefore no CECL reserve was booked for HTM securities as of the balance sheet date.
Citizens reviews its AFS debt securities for impairment at the individual security level on a quarterly basis, or more frequently if a potential loss triggering event occurs. The initial indicator of impairment for debt securities classified as AFS is a decline in fair value below its amortized cost basis. For any security that has declined in fair value below the amortized cost basis, the Company recognizes an impairment loss in current period earnings if management has the intent to sell the security or if it is more likely than not it will be required to sell the security before recovery of its amortized cost basis.
Estimating the recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of cash flows expected to be collected, discounted at the security’s original effective yield, is less than the amortized cost basis, impairment equal to the shortfall in cash flows has occurred. Citizens evaluates whether any portion of the impairment is attributable to credit-related factors or various other market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), and the public credit rating of the security. If credit-related factors exist, credit-related impairment has occurred regardless of the Company’s intent to hold the security until it recovers.
The credit-related portion of impairment is recognized in current period earnings as provision expense through the establishment of an allowance for AFS securities, to the extent the allowance does not reduce the value of the AFS security below its current fair value. The remaining non-credit related portion of impairment is recognized in OCI. Improvement in credit losses in subsequent periods results in a reversal of the allowance for AFS securities and a corresponding decrease to provision expense, to the extent the allowance does not become negative. Accrued interest receivable on AFS debt securities is excluded from the balances used to calculate the allowance for AFS securities. All accrued and uncollected interest is immediately reversed against interest income when it is deemed uncollectible. The Company has evaluated any AFS securities in an unrealized loss position at June 30, 2020 and concluded that all unrealized losses are due to non-credit related factors. As such, the Company does not have an allowance for AFS securities as of June 30, 2020.

Citizens Financial Group, Inc. | 57

The following table presents AFS mortgage-backed debt securities with fair values below their respective carrying values, separated by the duration the securities have been in a continuous unrealized loss position:
 
June 30, 2020
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities

$851


($4
)
 

$—


$—

 

$851


($4
)

The following table present AFS and HTM mortgage-backed debt securities with fair values below their respective carrying values, separated by the duration the securities have been in a continuous unrealized loss position:
 
December 31, 2019
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities

$5,135


($24
)
 

$3,748


($52
)
 

$8,883


($76
)


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 June 30, 2020. 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.
NOTE 3 - LOANS AND LEASES
Loans held for investment are reported at the amount of their outstanding principal, net of charge-offs, unearned income, deferred loan origination fees and costs, and unamortized premiums or discounts on purchased loans.
Loans and leases are disclosed in portfolio segments and classes. The Company’s loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential mortgages, home equity, automobile, education and other retail.
The following table presents the Company’s loans and leases disclosed in portfolio segments and classes:
(in millions)
June 30, 2020
 
December 31, 2019
Commercial(1)(2)

$48,017

 

$41,479

Commercial real estate
14,485

 
13,522

Leases
2,428

 
2,537

Total commercial loans and leases
64,930

 
57,538

Residential mortgages
19,245

 
19,083

Home equity
12,541

 
13,154

Automobile
12,028

 
12,120

Education
10,591

 
10,347

Other retail
6,378

 
6,846

Total retail loans(3)
60,783

 
61,550

Total loans and leases(4)

$125,713

 

$119,088


(1) Includes PPP loans fully guaranteed by the SBA of $4.7 billion as of June 30, 2020.
(2) SBA loans serviced for others of $45 million and $33 million at June 30, 2020 and December 31, 2019, respectively, are not included above. These loans represent the government guaranteed portion of SBA loans sold to outside investors.
(3) Mortgage loans serviced for others of $79.9 billion and $77.5 billion at June 30, 2020 and December 31, 2019, respectively, are not included above.
(4)  LHFS, at fair value of $3.6 billion and $1.9 billion at June 30, 2020 and December 31, 2019, respectively, and other LHFS of $1.4 billion at June 30, 2020 and December 31, 2019, are not included above.

Citizens Financial Group, Inc. | 58



Accrued interest receivable on loans and leases held for investment totaled $530 million and $495 million as of June 30, 2020 and December 31, 2019, respectively, and is included in other assets in the Consolidated Balance Sheets.
The following table presents the composition of LHFS.
 
June 30, 2020
 
December 31, 2019
(in millions)
Residential Mortgages(1)
Commercial(2)
Education(3)
Total
 
Residential Mortgages(1)
Commercial(2)
Total
Loans held for sale at fair value

$3,449


$182


$—


$3,631

 

$1,778


$168


$1,946

Other loans held for sale
—

426

936

1,362

 
1,101

283

1,384

(1) Residential mortgage LHFS are originated for sale.
(2) Commercial LHFS at fair value consist of loans managed by the Company’s commercial secondary loan desk. Other commercial LHFS generally consist of loans associated with the Company’s syndication business.
(3) Education other LHFS represents a loan portfolio sale expected to settle in third quarter 2020.
Loans pledged as collateral for FHLB borrowed funds, primarily residential mortgages and home equity loans, totaled $25.5 billion and $25.3 billion at June 30, 2020 and December 31, 2019, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, were primarily comprised of auto, commercial, commercial real estate, and education loans, and totaled $40.9 billion and $17.4 billion at June 30, 2020 and December 31, 2019, respectively.
During the three months ended June 30, 2020, the Company purchased $691 million of education loans and $255 million of other retail loans. During the three months ended June 30, 2019, the Company purchased $99 million of education loans. During the six months ended June 30, 2020, the Company purchased $909 million of education loans and $527 million of other retail loans. During the six months ended June 30, 2019, the Company purchased $300 million of education loans.
The Company sold $71 million of commercial loans during the three months ended June 30, 2020 and sold $492 million of residential mortgage loans during the three months ended June 30, 2019. During the six months ended June 30, 2020, the Company sold $262 million of commercial loans and $1.5 billion of retail loans. During the six months ended June 30, 2019 the Company sold $182 million of commercial loans and $628 million of retail loans, including $22 million of retail TDRs.
Interest income on direct financing and sales-type leases was $19 million and $20 million for the three months ended June 30, 2020 and 2019, respectively, and was $37 million and $40 million for the six months ended June 30, 2020 and 2019, respectively, and is reported within interest and fees on loans and leases in the Consolidated Statements of Operations.
NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONACCRUING LOANS AND LEASES, AND CONCENTRATIONS OF CREDIT RISK
Allowance for Credit Losses    
Management’s estimate of expected credit losses in the Company’s loan and lease portfolios is recorded in the ALLL and the reserve for unfunded lending commitments (collectively the ACL). See Note 5 in the Company’s 2019 Form 10-K for a detailed discussion of the ACL reserve methodology and estimation techniques as of December 31, 2019. Upon adoption of CECL effective January 1, 2020, the Company’s ACL reserve methodology changed to estimate expected credit losses over the contractual life of the loans and leases.
The ACL is maintained at a level the Company believes to be appropriate to absorb expected lifetime credit losses over the contractual life of the loan and lease portfolios and on the unfunded lending commitments. The determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments that are not unconditionally cancelable considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information.
Key assumptions used in the ACL measurement process include the use of a two-year reasonable and supportable economic forecast period followed by a one-year period during which the expected credit losses revert to long-term historical macroeconomic inputs.

Citizens Financial Group, Inc. | 59

The evaluation of quantitative and qualitative information is performed through assessments of groups of assets that share similar risk characteristics and certain individual loans and leases that do not share similar risk characteristics with the collective group. Loans are grouped generally by product type (e.g., commercial, commercial real estate, residential mortgage, etc.), and significant loan portfolios are assessed for credit losses using econometric models.
The quantitative evaluation of the adequacy of the ACL utilizes a single economic forecast and is primarily based on econometric models that use known or estimated data as of the balance sheet date and forecasted data over the reasonable and supportable period. Known and estimated data include current PD, LGD and EAD (for commercial loans and leases), timing and amount of expected draws (for unfunded lending commitments), mix and level of loan balances, delinquency levels, assigned risk ratings, previous loss experience, current business conditions, amounts and timing of expected future cash flows, and factors particular to a specific commercial credit such as competition, business and management performance. Forward-looking economic assumptions include real gross domestic product, unemployment rate, interest rate curve, and changes in collateral values. This data is aggregated to estimate expected credit losses over the contractual life of the loans and leases, adjusted for expected prepayments. In highly volatile economic environments historical information, such as commercial customer financial statements or consumer credit ratings, may not be as important to estimating future expected losses as forecasted inputs to the models.
The ACL may also be affected materially by a variety of qualitative factors that the Company considers to reflect current judgment of various events and risks that are not measured in the statistical procedures including uncertainty related to the economic forecasts used in the modeled credit loss estimates, loan growth, back testing results, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons. The qualitative allowance is further informed by multiple alternative scenarios to support the period-end ACL balance.
The measurement process results in specific or pooled allowances for loans, leases and unfunded lending commitments, and qualitative allowances that are judgmentally determined and applied across the portfolio.
There are certain loan portfolios that may not need an econometric model to enable the Company to calculate management’s best estimate of the expected credit losses. Less data intensive, non-modeled approaches to estimating losses are considered more efficient and practical for portfolios that have lower levels of outstanding balances (e.g., runoff or closed portfolios, new products or products that are not significant to the Company’s overall credit risk exposure).
Loans and leases that do not share similar risk characteristics are individually assessed for expected credit losses. Nonaccruing commercial and commercial real estate loans with an outstanding balance of $5 million or greater and all commercial and commercial real estate TDRs (regardless of size) are assessed on an individual loan level basis. Generally, the measurement of ACL on individual loans and leases is the present value of its future cash flows or the fair value of its underlying collateral, if the loan or lease is collateral dependent. Loans that are deemed to be collateral dependent are written down to the fair value, less costs to sell, if sale of the collateral is expected as of the evaluation date and are reassessed each subsequent period to determine if a change to the ACL is required. Subsequent evaluations may result in an increase or decrease to the ACL, based on a corresponding change in the fair value of the collateral during the period. Any subsequent decrease to the ACL (because of an increase to the collateral-dependent loan’s fair value) is limited to the total amount previously written off for that loan. For retail TDRs that are not collateral dependent, the ACL is developed using the present value of expected future cash flows compared to the amortized cost basis in the loans. Expected re-default factors are considered in this analysis. Retail TDRs that are deemed collateral dependent are written down to fair market value less cost to sell.
Expected recoveries are considered in management’s estimate of the ACL and may result in a negative adjustment (i.e., reduction) to the ACL balance. A loan is collateral dependent if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty as of the evaluation date. Generally, repayment would be expected to be provided substantially by the sale or continued operation of the underlying collateral if cash flows to repay the loan from all other available sources (including guarantors) are expected to be no more than nominal. If repayment is dependent only on the operation of the collateral, the fair value of the collateral would not be adjusted for estimated costs to sell. If a loan is considered collateral dependent, the ACL is calculated as the difference between the fair value of collateral (adjusted for the costs to sell if the sale of the collateral is expected) and the amortized cost basis as of the evaluation date. It is possible to have a negative ACL for a collateral dependent loan if the fair value of the collateral

Citizens Financial Group, Inc. | 60

increases in a subsequent reporting period. The negative ACL cannot exceed the total amount previously charged off.
Accrued interest receivable on loans and leases is excluded from asset balances used to calculate the ACL. All accrued and uncollected interest is immediately reversed against interest income when a loan or lease is placed on nonaccrual status. Uncollectible interest is written off timely in accordance with regulatory guidelines. Generally, loans and leases are placed on nonaccrual status when contractually past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Residential mortgages are placed on nonaccrual status when contractually past due 120 days or more, or sooner if deemed collateral-dependent, unless guaranteed by the Federal Housing Administration. The amount of accrued interest receivable reversed against interest income for the three months ended June 30, 2020 was $2 million and $4 million for commercial and retail, respectively. Accrued interest reversed against interest income for the six months ended June 30, 2020 was $3 million and $9 million for commercial and retail, respectively.
The Company estimates expected credit losses associated with off-balance sheet financial instruments such as standby letters of credit, financial guarantees and unfunded loan commitments that are not unconditionally cancelable. Off-balance sheet financial instruments are subject to individual reviews and are analyzed and segregated by risk according to the Company’s internal risk rating scale. These risk classifications, in conjunction with historical loss experience, current and future economic conditions, timing and amount of expected draws, and performance trends within specific portfolio segments, result in the estimate of the reserve for unfunded lending commitments. The Company does not recognize a reserve for future draws from credit lines that are unconditionally cancelable (e.g., credit cards).
The ALLL and the reserve for unfunded lending commitments are reported on the Consolidated Balance Sheets in the allowance for loan and lease losses and in other liabilities, respectively. Provision for credit losses related to the loans and leases portfolio and the unfunded lending commitments are reported in the Consolidated Statements of Operations as provision for credit losses.
The following table presents a summary of changes in the ALLL and the reserve for unfunded lending commitments for the three and six months ended June 30, 2020:

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020
(in millions)
Commercial

Retail

Total


Commercial

Retail

Total

Allowance for loan and lease losses, beginning of period

$752


$1,419


$2,171



$674


$578


$1,252

Cumulative effect of change in accounting principle
—

—

—


(176
)
629

453

Allowance for loan and lease losses, beginning of period, adjusted
752

1,419

2,171


498

1,207

1,705

Charge-offs
(74
)
(106
)
(180
)

(121
)
(233
)
(354
)
Recoveries
3

30

33


6

64

70

Net charge-offs
(71
)
(76
)
(147
)

(115
)
(169
)
(284
)
Provision charged to income
554

(130
)
424


852

175

1,027

Allowance for loan and lease losses, end of period

$1,235


$1,213


$2,448



$1,235


$1,213


$2,448













Reserve for unfunded lending commitments, beginning of period

$38


$1


$39



$44


$—


$44

Cumulative effective of change in accounting principle
—

—

—


(3
)
1

(2
)
Reserve for unfunded lending commitments, beginning of period, adjusted
38

1

39


41

1

42

Provision for unfunded lending commitments
31

9

40


28

9

37

Reserve for unfunded lending commitments, end of period

$69


$10


$79



$69


$10


$79



Citizens Financial Group, Inc. | 61

The following table provides additional detail on the cumulative effect of change in accounting principle on the ACL:
 
December 31, 2019
 
January 1, 2020
 
June 30, 2020
(in millions)
Amortized Cost Basis
ACL Balance
Coverage
 
Impact of Adoption of CECL
ACL Balance
Coverage
 
Amortized Cost Basis
ACL Balance
Coverage
Commercial(1)

$41,479


$575

1.4
%
 

($199
)

$376

0.9
%
 

$48,017


$847

1.8
%
Commercial real estate
13,522

124

0.9

 
(57
)
67

0.5

 
14,485

330

2.3

Leases
2,537

19

0.7

 
77

96

3.8

 
2,428

127

5.2

Total commercial loans and leases
57,538

718

1.2

 
(179
)
539

0.9

 
64,930

1,304

2.0

Residential
19,083

35

0.2

 
95

130

0.7

 
19,245

104

0.5

Home equity
13,154

83

0.6

 
73

156

1.2

 
12,541

143

1.1

Automobile
12,120

123

1.0

 
83

206

1.7

 
12,028

277

2.3

Education
10,347

116

1.1

 
298

414

4.0

 
10,591

312

2.9

Other retail
6,846

221

3.2

 
81

302

4.4

 
6,378

387

6.1

Total retail loans
61,550

578

0.9

 
630

1,208

2.0

 
60,783

1,223

2.0

Total loans and leases

$119,088


$1,296

1.1
%
 

$451


$1,747

1.5
%
 

$125,713


$2,527

2.0
%

(1) The commercial coverage ratio includes a 19 basis point reduction associated with PPP loans as of June 30, 2020.
In addition to the adoption of CECL, macroeconomic assumptions shifted as the COVID-19 pandemic and related economic impacts surfaced during the quarter ended March 31, 2020, resulting in a significant impact to the ACL. The significant increase in the ACL as of June 30, 2020 as compared to the January 1, 2020 ACL was driven by the COVID-19 pandemic and the resulting economic impacts, with a total reserve build of $780 million and an ending balance of $2.5 billion.
To determine the ACL as of June 30, 2020, the Company utilized the Moody’s May 13th Baseline scenario to integrate the effects of COVID-19 in the Company’s loss estimates, which reflected a second quarter 2020 decline in GDP of approximately 33%, with peak unemployment of approximately 15% followed by a gradual recovery in the second half of 2020. This scenario was more severe than first quarter 2020 which had second quarter 2020 GDP down approximately 18% and peak unemployment of approximately 9%. Estimated losses were adjusted for the expected benefit of COVID-19-related fiscal and monetary stimulus measures and the expected beneficial impacts of the Company’s own customer assistance actions. These actions include forbearance and other customer accommodation efforts encouraged by the CARES Act and regulatory interagency guidance that the Company believes will stabilize credit profiles in both its commercial and retail portfolios.
The following table presents a summary of changes in the ALLL and the reserve for unfunded lending commitments for the three and six months ended June 30, 2019:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Allowance for loan and lease losses, beginning of period

$691


$554


$1,245

 

$690


$552


$1,242

Charge-offs
(45
)
(111
)
(156
)
 
(71
)
(223
)
(294
)
Recoveries
12

38

50

 
14

85

99

Net charge-offs
(33
)
(73
)
(106
)
 
(57
)
(138
)
(195
)
Provision charged to income
22

66

88

 
47

133

180

Allowance for loan and lease losses, end of period

$680


$547


$1,227

 

$680


$547


$1,227

 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments, beginning of period

$84


$—

84

 

$91


$—


$91

Provision for unfunded lending commitments
9

—

9

 
2

—

2

Reserve for unfunded lending commitments, end of period
93

—

93

 

$93


$—


$93



Citizens Financial Group, Inc. | 62

Credit Quality Indicators
Loan and lease portfolio segments and classes, excluding LHFS, are presented by credit quality indicator and vintage year. Citizens defines the vintage date for the purpose of this disclosure as the date of the most recent credit decision. In general, renewals are categorized as new credit decisions and reflect the renewal date as the vintage date. Loans modified in a TDR are considered to be a continuation of the original loan and vintage date corresponds with the initial loan origination date.
For commercial loans and leases, Citizens utilizes regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that the Company believes will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness or potential weakness that indicate an increased probability of future loss. “Criticized” loans are grouped into three categories, “special mention,” “substandard” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of the Company’s credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection of the debt. Doubtful loans have the same weaknesses as substandard, with the added characteristics that the possibility of loss is high and collection of the full amount of the loan is improbable.
The following table presents the amortized cost basis of commercial loans and leases, by vintage date and regulatory classification rating, as of June 30, 2020:
 
Term Loans by Origination Year
 
Revolving Loans
 
 
(in millions)
2020
 
2019
 
2018
 
2017
 
2016
 
Prior to 2016
 
Within the Revolving Period
Converted to Term
 
Total

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass(1)

$6,585

 

$7,127

 

$5,054

 

$2,897

 

$1,564

 

$2,724

 

$17,515


$393

 

$43,859

Special Mention
159

 
245

 
287

 
131

 
126

 
209

 
1,110

22

 
2,289

Substandard
92

 
89

 
238

 
120

 
119

 
119

 
702

19

 
1,498

Doubtful
8

 
26

 
9

 
49

 
5

 
97

 
173

4

 
371

Total commercial
6,844

 
7,487

 
5,588

 
3,197

 
1,814

 
3,149

 
19,500

438

 
48,017

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Pass
1,227

 
3,375

 
3,674

 
1,792

 
1,037

 
1,152

 
1,192

—

 
13,449

Special Mention
31

 
70

 
145

 
132

 
64

 
82

 
77

—

 
601

Substandard
—

 
58

 
106

 
2

 
56

 
3

 
149

—

 
374

Doubtful
—

 
38

 
16

 
5

 
—

 
2

 
—

—

 
61

Total commercial real estate
1,258

 
3,541

 
3,941

 
1,931

 
1,157

 
1,239

 
1,418

—

 
14,485

Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Pass
263

 
351

 
275

 
184

 
236

 
1,007

 
—

—

 
2,316

Special Mention
—

 
2

 
5

 
6

 
4

 
1

 
—

—

 
18

Substandard
—

 
2

 
3

 
6

 
4

 
1

 
—

—

 
16

Doubtful
—

 
4

 
30

 
1

 
14

 
29

 
—

—

 
78

Total leases
263

 
359

 
313

 
197

 
258

 
1,038

 
—

—

 
2,428

Total commercial loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
8,075

 
10,853

 
9,003

 
4,873

 
2,837

 
4,883

 
18,707

393

 
59,624

Special Mention
190

 
317

 
437

 
269

 
194

 
292

 
1,187

22

 
2,908

Substandard
92

 
149

 
347

 
128

 
179

 
123

 
851

19

 
1,888

Doubtful
8

 
68

 
55

 
55

 
19

 
128

 
173

4

 
510

Total commercial loans and leases

$8,365

 

$11,387

 

$9,842

 

$5,325

 

$3,229

 

$5,426

 

$20,918


$438

 

$64,930

(1) Includes $4.7 billion of PPP loans primarily designated as pass that are fully guaranteed by the SBA originating in 2020.
For retail loans, Citizens utilizes credit scores provided by FICO which are generally refreshed on a quarterly basis and the loan’s payment and delinquency status to monitor credit quality. FICO credit scores are considered the strongest indicator of credit losses over the contractual life of the loan as the scores are based on current and historical national industry-wide consumer level credit performance data, and assist management in predicting the borrower’s future payment performance.

Citizens Financial Group, Inc. | 63

The following table presents the amortized cost basis of retail loans, by vintage date and FICO scores, as of June 30, 2020:
 
Term Loans by Origination Year
 
Revolving Loans
 
 
(in millions)
2020
 
2019
 
2018
 
2017
 
2016
 
Prior to 2016
 
Within the Revolving Period
Converted to Term
 
Total

Residential mortgages
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
800+

$1,067

 

$2,018

 

$876

 

$1,488

 

$1,986

 

$2,353

 

$—


$—

 

$9,788

740-799
1,574

 
1,594

 
520

 
677

 
858

 
1,059

 
—

—

 
6,282

680-739
387

 
459

 
242

 
226

 
329

 
556

 
—

—

 
2,199

620-679
46

 
105

 
40

 
58

 
89

 
240

 
—

—

 
578

<620
1

 
21

 
36

 
48

 
55

 
221

 
—

—

 
382

No FICO available(1)
3

 
1

 
—

 
—

 
—

 
12

 
—

—

 
16

Total residential mortgages
3,078

 
4,198

 
1,714

 
2,497

 
3,317

 
4,441

 
—

—

 
19,245

Home equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
800+
2

 
10

 
14

 
9

 
6

 
269

 
4,331

379

 
5,020

740-799
1

 
7

 
7

 
5

 
5

 
216

 
3,164

345

 
3,750

680-739
—

 
3

 
6

 
12

 
7

 
213

 
1,730

304

 
2,275

620-679
—

 
3

 
10

 
20

 
11

 
150

 
480

203

 
877

<620
—

 
4

 
11

 
33

 
20

 
153

 
170

227

 
618

No FICO available(1)
—

 
—

 
—

 
—

 
—

 
—

 
1

—

 
1

Total home equity
3

 
27

 
48

 
79

 
49

 
1,001

 
9,876

1,458

 
12,541

Automobile
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
800+
550

 
924

 
521

 
412

 
255

 
131

 
—

—

 
2,793

740-799
740

 
1,218

 
679

 
466

 
261

 
124

 
—

—

 
3,488

680-739
667

 
1,126

 
600

 
384

 
209

 
98

 
—

—

 
3,084

620-679
332

 
646

 
342

 
215

 
123

 
64

 
—

—

 
1,722

<620
52

 
268

 
231

 
186

 
121

 
69

 
—

—

 
927

No FICO available(1)
2

 
—

 
—

 
—

 
—

 
12

 
—

—

 
14

Total automobile
2,343

 
4,182

 
2,373

 
1,663

 
969

 
498

 
—

—

 
12,028

Education
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
800+
651

 
1,165

 
773

 
751

 
601

 
811

 
—

—

 
4,752

740-799
820

 
1,199

 
627

 
443

 
314

 
475

 
—

—

 
3,878

680-739
267

 
424

 
231

 
163

 
117

 
258

 
—

—

 
1,460

620-679
20

 
59

 
46

 
38

 
34

 
119

 
—

—

 
316

<620
1

 
9

 
15

 
16

 
13

 
67

 
—

—

 
121

No FICO available(1)
—

 
—

 
—

 
—

 
—

 
64

 
—

—

 
64

Total education
1,759

 
2,856

 
1,692

 
1,411

 
1,079

 
1,794

 
—

—

 
10,591

Other retail
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
800+
239

 
534

 
209

 
87

 
20

 
54

 
293

—

 
1,436

740-799
339

 
726

 
268

 
116

 
28

 
39

 
613

2

 
2,131

680-739
266

 
500

 
178

 
74

 
16

 
18

 
579

6

 
1,637

620-679
142

 
204

 
66

 
24

 
4

 
8

 
196

7

 
651

<620
13

 
60

 
34

 
12

 
2

 
4

 
95

10

 
230

No FICO available(1)
39

 
1

 
—

 
—

 
—

 
—

 
251

2

 
293

Total other retail
1,038

 
2,025

 
755

 
313

 
70

 
123

 
2,027

27

 
6,378

Retail
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
800+
2,509

 
4,651

 
2,393

 
2,747

 
2,868

 
3,618

 
4,624

379

 
23,789

740-799
3,474

 
4,744

 
2,101

 
1,707

 
1,466

 
1,913

 
3,777

347

 
19,529

680-739
1,587

 
2,512

 
1,257

 
859

 
678

 
1,143

 
2,309

310

 
10,655

620-679
540

 
1,017

 
504

 
355

 
261

 
581

 
676

210

 
4,144

<620
67

 
362

 
327

 
295

 
211

 
514

 
265

237

 
2,278

No FICO available(1)
44

 
2

 
—

 
—

 
—

 
88

 
252

2

 
388

Total retail

$8,221

 

$13,288

 

$6,582

 

$5,963

 

$5,484

 

$7,857

 

$11,903


$1,485

 

$60,783

(1) Represents loans for which an updated FICO score was unavailable (e.g., due to recent profile changes).

Citizens Financial Group, Inc. | 64


Nonaccrual and Past Due Assets
The following table presents nonaccrual loans and leases and loans accruing and 90 days or more past due:
 
As of June 30, 2020
 
As of December 31, 2019
(in millions)
Nonaccrual loans and leases
90+ days past due and accruing
Nonaccrual with no related ACL
 
Nonaccrual loans and leases
Commercial

$366


$33


$40

 

$240

Commercial real estate
61

—

6

 
2

Leases
79

—

—

 
3

Total commercial loans and leases
506

33

46

 
245

Residential mortgages
112

13

54

 
93

Home equity
254

—

86

 
246

Automobile
67

—

18

 
67

Education
18

2

4

 
18

Other retail
33

7

—

 
34

Total retail
484

22

162

 
458

Total loans and leases

$990


$55


$208

 

$703


Interest income is generally not recognized for loans and leases that are on nonaccrual status. The Company reverses accrued interest receivable with a charge to interest income upon classifying the loan or lease as nonaccrual.
The following table presents an analysis of the age of both accruing and nonaccruing loan and lease past due amounts:
 
June 30, 2020
 
December 31, 2019
 
Days Past Due
 
Days Past Due
(in millions)
Current-29
30-59
60-89
 90 or More
 Total

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

Commercial

$47,768


$60


$30


$159


$48,017

 

$41,340


$45


$27


$67


$41,479

Commercial real estate
14,340

92

52

1

14,485

 
13,520

1

1

—

13,522

Leases
2,347

5

12

64

2,428

 
2,498

37

—

2

2,537

Total commercial loans and leases
64,455

157

94

224

64,930

 
57,358

83

28

69

57,538

Residential mortgages
19,044

65

33

103

19,245

 
18,947

35

17

84

19,083

Home equity
12,212

71

41

217

12,541


12,834

91

40

189

13,154

Automobile
11,784

162

66

16

12,028

 
11,788

227

81

24

12,120

Education
10,548

25

12

6

10,591

 
10,290

30

15

12

10,347

Other retail
6,285

31

25

37

6,378


6,729

45

31

41

6,846

Total retail loans
59,873

354

177

379

60,783

 
60,588

428

184

350

61,550

Total

$124,328


$511


$271


$603


$125,713

 

$117,946


$511


$212


$419


$119,088


The Company estimates expected credit losses based on the fair value of collateral for collateralized loans that management believes will not be paid under the terms of the original loan contract. These loans are considered to be collateral dependent, and the estimated credit loss is calculated as the difference between the loan’s amortized cost basis and the fair value of the collateral as of each evaluation date.
Collateral values for residential mortgage and home equity loans are based on refreshed valuations which are updated at least every 90 days less estimated costs to sell. At June 30, 2020 and December 31, 2019, the Company had collateral-dependent residential mortgage and home equity loans totaling $405 million and $227 million, respectively.
For collateral-dependent commercial loans, the ACL is individually assessed based on the fair value of the collateral. Various types of collateral are used, including real estate, inventory, equipment, accounts receivable, securities and cash, among others. For commercial real estate loans, collateral values are generally based on

Citizens Financial Group, Inc. | 65

appraisals which are updated based on management judgment under the specific circumstances on a case-by-case basis. At June 30, 2020 and December 31, 2019, the Company had collateral-dependent commercial loans totaling $213 million and $85 million, respectively.
The amortized cost basis of mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process was $135 million and $152 million as of June 30, 2020 and December 31, 2019, respectively.
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 the Company would not otherwise make. Citizens implemented various retail and commercial loan modification programs to provide borrowers relief from the economic impacts of COVID-19. The CARES Act and bank regulatory agencies provided guidance stating certain loan modifications to borrowers experiencing financial distress as a result of COVID-19 may not be accounted for as TDRs under U.S. GAAP. In accordance with the CARES Act, Citizens has elected to not apply TDR classification to any COVID-19 related loan modifications performed after March 1, 2020 to borrowers who were current as of December 31, 2019. In addition, for loans modified in response to the COVID-19 pandemic that are not eligible for relief from TDR classification under the CARES Act, the Company elected to apply the guidance issued by the bank regulatory agencies. Under this guidance deferral of principal and interest for up to six months to borrowers who were current as of March 1, 2020 and impacted by COVID-19 are not classified as TDRs.
For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. The following table summarizes TDRs by class and total unfunded commitments:
(in millions)
June 30, 2020
 
December 31, 2019
Commercial

$265

 

$297

Retail
700

 
667

Unfunded commitments related to TDRs
52

 
42


The following tables below summarize how loans were modified during the six months ended June 30, 2020 and 2019. The reported balances represent the post-modification outstanding amortized cost basis 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 June 30, 2020
 
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
—


$—

 
4


$3

 
15


$53

Commercial real estate
—

—

 
—

—

 
—

—

Total commercial loans
—

—

 
4

3

 
15

53

Residential mortgages
54

11

 
71

14

 
20

3

Home equity
27

2

 
49

4

 
190

11

Automobile
36

—

 
1

—

 
910

15

Education
—

—

 
—

—

 
142

4

Other retail
645

3

 
—

—

 
65

1

Total retail loans
762

16

 
121

18

 
1,327

34

Total
762


$16

 
125


$21

 
1,342


$87



Citizens Financial Group, Inc. | 66

 
Three Months Ended June 30, 2019
 
Primary Modification Types
 
Interest Rate Reduction(1)
 
Maturity Extension(2)
 
Other(3)
(dollars in millions)
Number of Contracts
Amortized Cost
 
Number of Contracts
Amortized Cost
 
Number of Contracts
Amortized Cost
Commercial
1


$—

 
7


$—

 
6


$47

Commercial real estate
—

—

 
1

—

 
—

—

Total commercial loans
1

—

 
8

—

 
6

47

Residential mortgages
9

2

 
10

1

 
32

5

Home equity
49

5

 
15

3

 
100

6

Automobile
40

1

 
7

—

 
335

5

Education
—

—

 
—

—

 
13

1

Other retail
941

5

 
—

—

 
143

—

Total retail loans
1,039

13

 
32

4

 
623

17

Total
1,040


$13

 
40


$4

 
629


$64

 
Six Months Ended June 30, 2020
 
Primary Modification Types
 
Interest Rate Reduction(1)
 
Maturity Extension(2)
 
Other(3)
(dollars in millions)
Number of Contracts
Amortized Cost
 
Number of Contracts
Amortized Cost
 
Number of Contracts
Amortized Cost
Commercial
—


$—

 
6


$3

 
32


$94

Commercial real estate
—

—

 
—

—

 
—

—

Total commercial loans
—

—

 
6

3

 
32

94

Residential mortgages
92

17

 
108

21

 
41

7

Home equity
73

6

 
55

4

 
261

15

Automobile
83

1

 
1

—

 
1,093

17

Education
—

—

 
—

—

 
233

6

Other retail
1,506

7

 
—

—

 
177

2

Total retail loans
1,754

31

 
164

25

 
1,805

47

Total
1,754


$31

 
170


$28

 
1,837


$141

 
Six Months Ended June 30, 2019
 
Primary Modification Types
 
Interest Rate Reduction(1)
 
Maturity Extension(2)
 
Other(3)
(dollars in millions)
Number of Contracts
Amortized Cost
 
Number of Contracts
Amortized Cost
 
Number of Contracts
Amortized Cost
Commercial
1


$—

 
12


$1

 
18


$87

Commercial real estate
—

—

 
1

—

 
—

—

Total commercial loans
1

—

 
13

1

 
18

87

Residential mortgages
13

4

 
21

3

 
62

9

Home equity
85

9

 
50

9

 
238

15

Automobile
65

1

 
12

—

 
624

9

Education
—

—

 
—

—

 
80

3

Other retail
1,557

9

 
—

—

 
144

—

Total retail loans
1,720

23

 
83

12

 
1,148

36

Total
1,721


$23

 
96


$13

 
1,166


$123

(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 modification of loans for the three months ended June 30, 2020 and 2019 was $5 million and $2 million, respectively. The net change to ALLL resulting from modifications of loans for the six months ended June 30, 2020 and 2019 was $9 million and $4 million, respectively. Charge-offs may also be

Citizens Financial Group, Inc. | 67

recorded on TDRs. Citizens recorded $4 million and $1 million of charge-offs resulting from modification of loans in the three months ended June 30, 2020 and 2019, respectively. Citizens recorded $6 million and $2 million for the six months ended June 30, 2020 and 2019, respectively.
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 June 30, 2020 and 2019. For commercial loans, recorded investment in TDRs that defaulted within 12 months of their modification date for the three months ended June 30, 2020 and 2019 were $26 million and $1 million, respectively, and $39 million and $1 million in the six months ended June 30, 2020 and 2019. For retail loans, there were $14 million and $10 million of loans which defaulted within their restructuring date for the three months ended June 30, 2020 and 2019, respectively, and $25 million and $19 million of loans which defaulted within 12 months of their restructuring date for the six months ended June 30, 2020 and 2019, respectively.
Concentrations of Credit Risk
As of June 30, 2020, under the Company’s COVID-19-related forbearance and other customer accommodation programs that are guided by the CARES Act as well as banking regulator interagency guidance, Citizens deferred payments on approximately $3.5 billion, or 6%, of the retail portfolio. Further, the Company is working with its commercial customers seeking flexibility on loan terms and conditions. The vast majority of these retail deferrals or commercial modifications are not classified as TDRs.
Most of the Company’s lending activity is with customers located in the New England, Mid-Atlantic and Midwest regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of June 30, 2020 and December 31, 2019, Citizens had a significant amount of loans collateralized by residential and commercial real estate. There were no significant concentration risks within the commercial loan or retail loan portfolios. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which may not perform according to contractual agreements. The Company’s policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.
Certain loan products, including residential mortgages, home equity loans and lines of credit, and credit cards, have contractual features that may increase credit exposure to the Company in the event of an increase in interest rates or a decline in housing values. These products include loans that exceed 90% of the value of the underlying collateral (high LTV loans), interest-only and negative amortization residential mortgages, and loans with low introductory rates. The following tables present balances of loans with these characteristics:
 
June 30, 2020
(in millions)
Residential Mortgages

Home Equity

Other Retail

Total

High loan-to-value

$456


$104


$—


$560

Interest-only/negative amortization
2,324

—

—

2,324

Low introductory rate
—

—

208

208

Multiple characteristics and other
3

—

—

3

Total

$2,783


$104


$208


$3,095

 
December 31, 2019
(in millions)
Residential Mortgages

Home Equity

Other Retail

Total

High loan-to-value

$402


$151


$—


$553

Interest-only/negative amortization
2,043

—

—

2,043

Low introductory rate
—

—

235

235

Total

$2,445


$151


$235


$2,831


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.

Citizens Financial Group, Inc. | 68

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 June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Cash proceeds from residential mortgage loans sold with servicing retained

$8,797

 

$4,229

 

$14,164

 

$7,148

Gain on sales (1)
283

 
55

 
426

 
92

Contractually specified servicing, late and other ancillary fees (1)
55

 
51

 
113

 
99

(1) Reported in mortgage banking fees on the Consolidated Statements of Operations.
Effective January 1, 2020, the Company elected to account for all MSRs previously accounted for under the amortization method under the fair value method. Under the fair value method, MSRs are recorded at fair value at each reporting date with any changes in fair value during the period recorded in mortgage banking fees in the Consolidated Statements of Operations. The unpaid principal balance of the related residential mortgage loans was $79.9 billion and $77.5 billion as of June 30, 2020 and December 31, 2019, respectively. The Company manages an active hedging strategy to manage the risk associated with changes in the value of the MSR portfolio, which includes the purchase of freestanding derivatives.
The following table summarizes changes in MSRs recorded using the fair value method:
 
As of and for the Three Months Ended June 30,
 
As of and for the Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Fair value as of beginning of the period

$577

 

$563

 

$642

 

$600

Transfers upon election of fair value method
—

 
—

 
190

 
—

Fair value as of beginning of the period, adjusted
577

 
563

 
832

 
600

Amounts capitalized
86

 
57

 
153

 
92

Changes in unpaid principal balance during the period (1)
(46
)
 
(31
)
 
(86
)
 
(57
)
Changes in fair value during the period (2)
(49
)
 
(58
)
 
(331
)
 
(104
)
Fair value at end of the period

$568

 

$531

 

$568

 

$531

(1) Represents changes in value due to i) passage of time including the impact from both regularly scheduled loan principal payments and partial paydowns, and ii)
loans that paid off during the period.
(2) Represents changes in value primarily due to market driven changes in interest rates and prepayment speeds.


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.

Citizens Financial Group, Inc. | 69

The sensitivity analysis below presents 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 largely dependent upon movements in market interest rates.
 
June 30, 2020
 
December 31, 2019
 
Actual
Decline in fair value due to
 
Actual
Decline in fair value due to
(dollars in millions)
 
Fair value
$568
50 bps adverse change
100 bps adverse change
 
$642
50 bps adverse change
100 bps adverse change
Weighted average life (in years)
3.7
 
5.5
Weighted average constant prepayment rate
21.0%
$109
$145
 
13.9%
$116
$222
Weighted average option adjusted spread
621 bps
9
19
 
440 bps
12
25

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 - GOODWILL
Goodwill is the purchase premium associated with the acquisition of a business and is assigned to the Company’s reporting units at the acquisition date. A reporting unit is a business operating segment or a component of a business operating segment. Citizens has identified and assigned goodwill to two reporting units - Consumer Banking and Commercial Banking - based upon reviews of the structure of the Company’s executive team and supporting functions, resource allocations and financial reporting processes. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Goodwill is not amortized, but is subject to annual impairment tests. Citizens reviews goodwill for impairment annually as of October 31st and in interim periods when events or changes indicate the carrying value of one or more reporting units may not be recoverable. The Company has the option of performing a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of each reporting unit is less than the carrying value. If it is more likely than not that the fair value exceeds the carrying value, then no further testing is necessary; otherwise, Citizens must perform a quantitative assessment of goodwill.
Citizens may elect to bypass the qualitative assessment and perform a quantitative assessment. The quantitative assessment, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value inclusive of goodwill, applicable goodwill is deemed to be not impaired. If the carrying value of the reporting unit inclusive of goodwill exceeds its fair value, an impairment charge is recorded for the excess. The impairment loss recognized cannot exceed the amount of goodwill assigned to the reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
Under the quantitative impairment assessment, the fair values of the Company’s reporting units are determined using a combination of income and market-based approaches. Citizens relies on the income approach (discounted cash flow method) for determining fair value. Market and transaction approaches are used as benchmarks only to corroborate the value determined by the discounted cash flow method. Citizens relies on several assumptions when estimating the fair value of its reporting units using the discounted cash flow method. These assumptions include the discount rate, as well as projected loan loss, income tax and capital retention rates.
Discount rates are estimated based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta, and size premium adjustments specific to a particular reporting unit. The discount rates are also calibrated on the assessment of the risks related to the projected cash flows of each reporting unit. Cash flow projections include estimates for projected loan loss, income tax and capital retention rates. Multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new

Citizens Financial Group, Inc. | 70

business initiatives, customer retention standards, market share changes, anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. The long-term growth rate used in determining the terminal value of each reporting unit is estimated based on management’s assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic considerations such as GDP and inflation.
In 2020, economic conditions deteriorated significantly with the spread of the COVID-19 pandemic. The outbreak resulted in social distancing requirements throughout the world, severely restricting the economy. In response to the crisis, the Federal Reserve lowered the Federal Funds rate in March 2020 to close to zero. Additionally, the U.S. government initiated numerous measures to support the economy, including the CARES Act. Given the current macroeconomic environment, Citizens assessed whether it was more likely than not that the fair value of its reporting units was less than carrying value as of June 30, 2020. Impairment indicators evaluated included economic conditions, including projections of the duration of current conditions and timing of a potential recovery; industry and market considerations; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting units; performance of the Company’s stock; and other relevant events. Citizens further considered the amount by which fair value exceeded book value for each unit in the most recent quantitative analysis and sensitivities performed. At the conclusion of the assessment, the Company determined that it was more likely than not that the fair value of each reporting unit exceeded its carrying value as of June 30, 2020.
The interim assessment of goodwill impairment included evaluation of various factors that continue to rapidly evolve and for which significant uncertainty remains, including future growth rates and operating margins, the impact of the COVID-19 pandemic to the economy and ongoing government intervention to mitigate that impact. Further weakening in the economic environment, such as continued decline in the performance of the reporting units or other factors, could cause the fair value of one or more of the reporting units to fall below their carrying value, resulting in a goodwill impairment charge. Additionally, new legislative or regulatory changes not anticipated in management's expectations may cause the fair value of one or more of the reporting units to fall below the carrying value, resulting in a goodwill impairment charge. Any impairment charge would not affect the Company’s regulatory capital ratios, tangible common equity ratio or liquidity position.
The change in the carrying value of goodwill for the six months ended June 30, 2020 is presented below:
(in millions)
Consumer Banking
 
Commercial Banking
 
Total

Balance at December 31, 2019

$2,258

 

$4,786

 

$7,044

Business acquisitions
—

 
6

 
6

Balance at June 30, 2020

$2,258

 

$4,792

 

$7,050


Accumulated impairment losses related to the Consumer Banking reporting unit totaled $5.9 billion at June 30, 2020 and December 31, 2019. The accumulated impairment losses related to the Commercial Banking reporting unit totaled $50 million at June 30, 2020 and December 31, 2019. No impairment was recorded for the three and six months ended June 30, 2020 or 2019.
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)
June 30, 2020
 
December 31, 2019
Lending to special purpose entities included in loans and leases

$1,499

 

$1,101

LIHTC investment included in other assets
1,469

 
1,401

LIHTC unfunded commitments included in other liabilities
754

 
716

Renewable energy investments included in other assets
414

 
355



Citizens Financial Group, Inc. | 71

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 June 30, 2020 and December 31, 2019, the lending facilities had aggregate unpaid principal balances of $1.5 billion and $1.1 billion, respectively, and undrawn commitments to extend credit of $1.0 billion and $1.2 billion, respectively.
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 other information related to the Company’s affordable housing tax credit investments:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Tax credits included in income tax expense

$39

 

$34

 

$80

 

$69

Amortization expense included in income tax expense
42

 
35

 
85

 
72

Other tax benefits included in income tax expense
10

 
8

 
20

 
16


No LIHTC investment impairment losses were recognized for the three and six months ended June 30, 2020 and 2019, 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.
NOTE 8 - BORROWED FUNDS
Short-term borrowed funds
Short-term borrowed funds were $255 million and $274 million as of June 30, 2020 and December 31, 2019, respectively.

Citizens Financial Group, Inc. | 72

Long-term borrowed funds
The following table presents a summary of the Company’s long-term borrowed funds:
(in millions)
June 30, 2020
 
December 31, 2019
Parent Company:
 
 
 
2.375% fixed-rate senior unsecured debt, due July 2021

$350

 

$349

4.150% fixed-rate subordinated debt, due September 2022
349

 
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

 
750

2.850% fixed-rate senior unsecured notes, due July 2026
497

 
496

2.500% fixed-rate senior unsecured notes, due February 2030
297

 
—

3.250% fixed-rate senior unsecured notes, due April 2030
744

 
—

CBNA’s Global Note Program:
 
 
 
2.250% senior unsecured notes, due March 2020
—

 
700

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

 
300

2.217% floating-rate senior unsecured notes, due May 2020 (1)
—

 
250

2.200% senior unsecured notes, due May 2020
—

 
500

2.250% senior unsecured notes, due October 2020
753

 
750

2.550% senior unsecured notes, due May 2021
1,006

 
991

3.250% senior unsecured notes, due February 2022
723

 
711

1.144% floating-rate senior unsecured notes, due February 2022 (1)
299

 
299

1.170% floating-rate senior unsecured notes, due May 2022 (1)
250

 
250

2.650% senior unsecured notes, due May 2022
514

 
501

3.700% senior unsecured notes, due March 2023
533

 
515

1.256% floating-rate senior unsecured notes, due March 2023 (1)
249

 
249

2.250% senior unsecured notes, due April 2025
746

 
—

3.750% senior unsecured notes, due February 2026
558

 
521

Additional Borrowings by CBNA and Other Subsidiaries:

 
 
 
Federal Home Loan Bank advances, 1.599% weighted average rate, due through 2038
6

 
5,008

Other
37

 
18

Total long-term borrowed funds

$9,202

 

$14,047


(1) Rate disclosed reflects the floating rate as of June 30, 2020 or final rate, as applicable.

The Parent Company’s long-term borrowed funds as of June 30, 2020 and December 31, 2019 included principal balances of $3.5 billion and $2.5 billion, respectively, and unamortized deferred issuance costs and/or discounts of ($14) million and ($8) million, respectively. CBNA and other subsidiaries’ long-term borrowed funds as of June 30, 2020 and December 31, 2019 included principal balances of $5.5 billion and $11.5 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($14) million and ($13) million, respectively, and hedging basis adjustments of $145 million and $50 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 $4.0 billion and $9.8 billion at June 30, 2020 and December 31, 2019, respectively. The Company’s available FHLB borrowing capacity was $13.0 billion and $7.2 billion at June 30, 2020 and December 31, 2019, 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 June 30, 2020, the Company’s unused secured borrowing capacity was approximately $61.8 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

Citizens Financial Group, Inc. | 73

The following table presents a summary of maturities for the Company’s long-term borrowed funds at June 30, 2020:
(in millions)
Parent Company
CBNA and Other Subsidiaries
Consolidated

Year
 
 
 
2020

$—


$756


$756

2021
350

1,014

1,364

2022
349

1,796

2,145

2023
—

783

783

2024
292

—

292

2025 and thereafter
2,537

1,325

3,862

Total

$3,528


$5,674


$9,202


NOTE 9 - DERIVATIVES
In the normal course of business, Citizens enters into a variety of derivative transactions 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 TBAs, forward sale contracts and purchase options. The Company does not use derivatives for speculative purposes.
The Company’s derivative instruments are recognized on the Consolidated Balance Sheets in derivative assets and derivative liabilities 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 19 in the Company’s 2019 Form 10-K.
Derivative assets and derivative liabilities are netted by counterparty on the Consolidated Balance Sheets if a “right of setoff” has been established in a master netting agreement between the Company and the counterparty. This netted derivative asset or liability position is also netted against the fair value of any cash collateral that has been pledged or received in accordance with a master netting agreement.
The following table presents derivative instruments included on the Consolidated Balance Sheets:
 
June 30, 2020
 
December 31, 2019
(in millions)
Notional Amount(1)
Derivative Assets
Derivative Liabilities
 
Notional Amount(1)
Derivative Assets
Derivative Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts

$28,300


$2


$1

 

$29,846


$1


$—

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
154,654

1,903

250

 
142,386

772

133

Foreign exchange contracts
16,032

299

261

 
15,101

174

166

TBA contracts
12,156

18

47

 
—

—

—

Other contracts
6,746

230

56

 
6,868

37

23

Total derivatives not designated as hedging instruments
 
2,450

614

 
 
983

322

Gross derivative fair values
 
2,452

615

 
 
984

322

Less: Gross amounts offset in the Consolidated Balance Sheets (2)
 
(222
)
(222
)
 
 
(107
)
(107
)
Less: Cash collateral applied (2)
 
(161
)
(195
)
 
 
(70
)
(95
)
Total net derivative fair values presented in the Consolidated Balance Sheets
 

$2,069


$198

 
 

$807


$120

(1) The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate contracts, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they do not measure the true economic risk of these contracts.
(2) Amounts represent the impact of enforceable master netting agreements that allow the Company to net settle positive and negative positions.


Citizens Financial Group, Inc. | 74

The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan. Certain derivative transactions within these sub-groups are designated as fair value or cash flow hedges, as described below:
Derivatives Designated As Hedging Instruments
The Company’s institutional derivatives qualify for hedge accounting treatment. The net interest accruals on interest rate swaps designated in a fair value or cash flow hedge relationship are treated as an adjustment to interest income or interest expense of the item being hedged. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company monitors the effectiveness of its hedge relationships during the duration of the hedge period. The methods utilized to assess hedge effectiveness vary based on hedge relationship and the Company monitors each relationship to ensure that management’s initial intent continues to be satisfied. 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 subsequently reflects changes in the fair value of the derivative in earnings after termination of the hedge relationship.
Fair Value Hedges
In a fair value hedge, changes in the fair value of both the derivative instrument and the hedged asset or liability attributable to the risk being hedged are recognized in the same income statement line item in the Consolidated Statements of Operations when the changes in fair value occur.
Citizens has outstanding interest rate swap agreements utilized to manage the interest rate exposure on its long-term borrowings and AFS debt securities. In March 2020 the fair value hedge of certain fixed rate residential mortgages was terminated due to a portion of the hedged item being sold. Certain fair value hedges have been designated as a last-of-layer hedge, which affords the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar pre-payable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item.
The following table presents 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 June 30,
 
Six Months Ended June 30,
 
(in millions)
2020

 
2019

 
2020

 
2019

Affected Line Item in the Consolidated Statements of Operations
Interest rate swaps hedging borrowed funds

$5

 

$64

 

$98

 

$104

Interest expense - borrowed funds
Hedged long-term debt attributable to the risk being hedged
(3
)
 
(64
)
 
(95
)
 
(103
)
Interest expense - borrowed funds
Interest rate swaps hedging fixed rate loans
—

 
(16
)
 
17

 
(16
)
Interest and fees on loans and leases
Hedged fixed rate loans attributable to the risk being hedged
—

 
16

 
(17
)
 
16

Interest and fees on loans and leases
Interest rate swaps hedging debt securities available for sale
(14
)
 
—

 
(121
)
 
—

Interest income - investment securities
Hedged debt securities available for sale attributable to risk being hedged
14

 
—

 
121

 
—

Interest income - investment securities


Citizens Financial Group, Inc. | 75

The following table reflects amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:    
 
June 30, 2020
 
December 31, 2019
(in millions)
Debt securities available for sale(1)
Long-term borrowed funds
 
Debt securities available for sale(1)
Residential mortgages
Long-term borrowed funds
Carrying amount of hedged assets

$13,794


$—

 

$15,798


$976


$—

Carrying amount of hedged liabilities
—

4,087

 
—

—

4,689

Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items
114

145

 
(8
)
17

50

(1) The Company designated $2.0 billion as the hedged amount (from a closed portfolio of prepayable financial assets with a carrying value of $13.8 billion and $15.8 billion at June 30, 2020 and December 31, 2019, respectively) in a last-of-layer hedging relationship, which commenced in the third quarter of 2019.

Cash Flow Hedges
In a cash flow hedge, the entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is initially recorded in OCI and is subsequently reclassified from OCI to current period earnings (interest income or interest expense) in the same period that the hedged item affects earnings.
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 highly effective cash flow hedges. During the next 12 months, there are $4 million in pre-tax net gains 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 June 30, 2020.
During the three and six months ended June 30, 2020 and 2019, there were no gains or losses reclassified from OCI to current period earnings (other income) related to the discontinuance of a cash flow hedge where it became probable that the original forecasted transaction would no longer occur by the end of the originally specified time period.
The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Amount of pre-tax net (losses) gains recognized in OCI

($11
)
 

$91

 

$118

 

$143

Amount of pre-tax net gains (losses) reclassified from OCI into interest income
55

 
(20
)
 
60

 
(40
)
Amount of pre-tax net (losses) gains reclassified from OCI into interest expense
(10
)
 
1

 
(11
)
 
1



Derivatives Not Designated As Hedging Instruments
Economic Hedges
The Company’s economic hedges include those related to offsetting customer derivatives, residential mortgage loan derivatives (including interest rate lock commitments and forward sales commitments) and derivatives to hedge its residential MSR portfolio. Customer derivatives include interest rate and foreign exchange derivative contracts designed to meet the hedging and financing needs of the Company’s customers, and are economically hedged by the Company to offset its market exposure. Interest rate lock commitments on residential mortgage loans that will be held for sale are considered derivative instruments, and are economically hedged by entering into forward sale commitments to manage changes in fair value due to interest rate risk. Residential MSR portfolio derivatives are entered to hedge the risk of changes in the fair value of the Company’s MSR asset.

Citizens Financial Group, Inc. | 76

The following table presents the effect of economic hedges on noninterest income:
 
Amounts Recognized in
Noninterest Income for the
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Affected Line Item in the Consolidated Statements of Operations
(in millions)
2020

 
2019

 
2020

 
2019

Economic hedge type:
 
 
 
 
 
 
 
 
Customer interest rate contracts

$180

 

$425

 

$1,269

 

$654

Foreign exchange and interest rate products
Customer foreign exchange contracts
23

 
(47
)
 
(7
)
 
(81
)
Foreign exchange and interest rate products
Derivative transactions to hedge interest rate risk
(161
)
 
(410
)
 
(1,246
)
 
(627
)
Foreign exchange and interest rate products
Derivative transactions to hedge foreign exchange risk
(50
)
 
54

 
49

 
94

Foreign exchange and interest rate products
Residential loan commitments
14

 
11

 
154

 
16

Mortgage banking fees
Derivative contracts used to hedge residential loan commitments
110

 
(9
)
 
(19
)
 
(5
)
Mortgage banking fees
Derivative contracts used to hedge residential MSRs
62

 
71

 
333

 
116

Mortgage banking fees
Other derivative contracts
7

 
—

 
(56
)
 
—

Foreign exchange and interest rate products
Derivative transactions to hedge other derivative risk
(7
)
 
—

 
57

 
—

Foreign exchange and interest rate products
Total

$178

 

$95

 

$534

 

$167

 

NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in the balances, net of income taxes, of each component of AOCI:
 
 
As of and for the Three Months Ended June 30,
(in millions)
Net Unrealized (Losses) Gains on Derivatives
 
Net Unrealized (Losses) Gains on Debt Securities
 
Employee Benefit Plans
 
Total AOCI
Balance at April 1, 2019

($89
)
 

($244
)
 

($460
)
 

($793
)
Other comprehensive income before reclassifications
68

 
221

 
—

 
289

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

 
1

 
—

 
1

Amounts reclassified to the Consolidated Statements of Operations
15

 
(3
)
 
3

 
15

Net other comprehensive income
83

 
219

 
3

 
305

Balance at June 30, 2019

($6
)
 

($25
)
 

($457
)
 

($488
)
Balance at April 1, 2020

$96

 

$401

 

($412
)
 

$85

Other comprehensive (loss) income before reclassifications
(8
)
 
49

 
—

 
41

Amounts reclassified to the Consolidated Statements of Operations
(34
)
 
(2
)
 
4

 
(32
)
Net other comprehensive (loss) income
(42
)
 
47

 
4

 
9

Balance at June 30, 2020

$54

 

$448

 

($408
)
 

$94

Primary location of amounts reclassified to the Consolidated Statements of Operations
Net interest income
 
Securities gains, net
 
Other operating expense
 
 



Citizens Financial Group, Inc. | 77

 
 
As of and for the Six Months Ended June 30,
(in millions)
Net Unrealized (Losses) Gains on Derivatives
 
Net Unrealized (Losses) Gains on Debt Securities
 
Employee Benefit Plans
 
Total AOCI
Balance at January 1, 2019

($143
)
 

($490
)
 

($463
)
 

($1,096
)
Other comprehensive income before reclassifications
107

 
467

 
—

 
574

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

 
1

 
—

 
1

Amounts reclassified to the Consolidated Statements of Operations
30

 
(8
)
 
6

 
28

Net other comprehensive income
137

 
460

 
6

 
603

Cumulative effect of change in accounting principle
—

 
5

 
—

 
5

Balance at June 30, 2019

($6
)
 

($25
)
 

($457
)
 

($488
)
Balance at January 1, 2020

$3

 

$1

 

($415
)
 

($411
)
Other comprehensive income before reclassifications
88

 
449

 
—

 
537

Amounts reclassified to the Consolidated Statements of Operations
(37
)
 
(2
)
 
7

 
(32
)
Net other comprehensive income
51

 
447

 
7

 
505

Balance at June 30, 2020

$54

 

$448

 

($408
)
 

$94

Primary location of amounts reclassified to the Consolidated Statements of Operations
Net interest income
 
Securities gains, net
 
Other operating expense
 
 

NOTE 11 - STOCKHOLDERS’ EQUITY
Preferred Stock
The following table summarizes the Company’s preferred stock:
 
 
 
June 30, 2020
 
December 31, 2019
(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

 
300,000

 
293

Series E
1,000

(1) 
450,000

(3) 
437

 
450,000

 
437

Series F
1,000

 
400,000

 
395

 
—

 
—

Total
 
 
2,000,000

 
$1,965
 
1,600,000

 
$1,570
(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.
(3) Represented by 18,000,000 depositary shares each representing a 1/40th interest in the Series E Preferred Stock.
On June 4, 2020, the Company issued $400 million, or 400,000 shares, of 5.650% fixed-rate reset non-cumulative perpetual Series F Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (the “Series F Preferred Stock”). As a result of this issuance, the Company received net proceeds of $395 million after the underwriting discount and other expenses. The Series F 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, at a rate equal to 5.650% from the date of issuance to, but excluding, October 6, 2025, and from and including October 6, 2025, for each dividend reset period, at a rate equal to the five-year U.S. treasury rate as of the most recent reset dividend determination date, plus 5.313% per annum. The Series F Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date, on or after October 6, 2025 or, in whole but not in part, at any time within the 90 days following a regulatory capital treatment event at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends. The Company may not redeem shares of the Series F Preferred Stock without obtaining the prior approval of the FRB if then required under applicable capital guidelines. Except in certain limited circumstances, the Series F Preferred Stock does not have any voting rights.

Citizens Financial Group, Inc. | 78


For further detail regarding the terms and conditions of the Company’s preferred stock see Note 16 to the Company’s Consolidated Financial Statements in the 2019 Form 10-K.
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 June 30, 2020
 
Three Months Ended June 30, 2019
(in millions, except per share data)
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
Common stock
 

$0.39


$168


$168

 

$0.32


$148


$148

Preferred stock
 
 
 
 
 
 
 
 
Series A
 

$13.48


$3


$7

 

$—


$—


$7

Series B
 
30.00

9

—

 
30.00

9

—

Series C
 
15.94

5

5

 
15.94

4

5

Series D
 
15.88

5

5

 
15.88

5

3

Series E
 
12.50

6

5

 
—

—

—

Total preferred stock
 
 

$28


$22

 
 

$18


$15


 
 
Six Months Ended June 30, 2020
 
Six Months Ended June 30, 2019
(in millions, except per share and share data)
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
 
Dividends Declared per Share
Dividends Declared
Dividends Paid
Common stock
 

$0.78


$336


$336

 

$0.64


$297


$297

Preferred stock
 
 
 
 
 
 
 
 
Series A
 

$40.98


$10


$7

 

$27.50


$7


$7

Series B
 
30.00

9

9

 
30.00

9

11

Series C
 
31.88

10

10

 
31.88

9

9

Series D
 
31.75

10

10

 
27.70

8

3

Series E
 
25.00

11

9

 
—

—

—

Total preferred stock
 
 

$50


$45

 
 

$33


$30


Treasury Stock
During the six months ended June 30, 2020, the Company repurchased $270 million, or 7,548,655 shares, of its outstanding common stock, which are held in treasury stock.
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 2019 Form 10-K.
(in millions)
June 30, 2020
 
December 31, 2019
Commitments to extend credit

$69,015

 

$72,743

Letters of credit
2,073

 
2,190

Risk participation agreements
109

 
37

Loans sold with recourse
48

 
37

Marketing rights
31

 
33

Total

$71,276

 

$75,040


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

Citizens Financial Group, Inc. | 79

its clients. Unsettled loan trades (e.g., loan purchase contracts) represent firm commitments to purchase or sell loans from / to 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 $75 million and $144 million, respectively, at June 30, 2020 and $183 million and $236 million, respectively, at December 31, 2019.
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 87 counterparties. RPAs generally have terms ranging from one year to five years; however, certain outstanding agreements have terms as long as nine years.
Contingencies
The Company operates in a legal and regulatory environment that exposes it to potentially significant risks. A certain amount of litigation ordinarily results from the nature of the Company’s banking and other businesses. The Company is a party to legal proceedings, including class actions. The Company is also the subject of investigations, reviews, subpoenas, and regulatory matters arising out of its normal business operations, which, in some instances, relate to concerns about fair lending, unfair and/or deceptive practices, mortgage-related issues, and mis-selling 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.

Citizens Financial Group, Inc. | 80

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.
 
June 30, 2020
 
December 31, 2019
(in millions)
Aggregate Fair Value
Aggregate Unpaid Principal
Aggregate Fair Value Less Aggregate Unpaid Principal
 
Aggregate Fair Value
Aggregate Unpaid Principal
Aggregate Fair Value Less Aggregate Unpaid Principal
Residential mortgage loans held for sale, at fair value

$3,449


$3,267


$182

 

$1,778


$1,727


$51

Commercial and commercial real estate loans held for sale, at fair value
182

203

(21
)
 
168

175

(7
)

For more information on the election of the fair value option for these assets see Note 19 in the Company’s 2019 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 June 30,
 
Six Months Ended June 30,
 
(in millions)
2020

 
2019

 
2020

 
2019

Affected Line Item in the Consolidated Statements of Operations
Residential mortgage loans held for sale, at fair value

$45

 

$10

 

$103

 

$9

Mortgage banking fees
Commercial and commercial real estate loans held for sale, at fair value
12

 
1

 
(8
)
 
4

Capital market fees


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 19 in the Company’s 2019 Form 10-K.
Forward commitments to sell to-be-announced mortgage securities
The fair value of TBAs is estimated using observable prices of similar loan pools that transact in the marketplace, as well as sector curves and benchmarking techniques. Therefore, the Company classifies TBAs in Level 2 of the fair value hierarchy given the observable market inputs.


Citizens Financial Group, Inc. | 81

The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at June 30, 2020:
(in millions)
Total

Level 1

Level 2

Level 3

Debt securities available for sale:
 
 
 
 
Mortgage-backed securities

$22,129


$—


$22,129


$—

State and political subdivisions
4

—

4

—

U.S. Treasury and other
11

11

—

—

Total debt securities available for sale
22,144

11

22,133

—

Loans held for sale, at fair value:
 
 
 
 
Residential loans held for sale
3,449

—

3,449

—

Commercial loans held for sale
182

—

182

—

Total loans held for sale, at fair value
3,631

—

3,631

—

Mortgage servicing rights
568

—

—

568

Derivative assets:
 
 
 
 
Interest rate contracts
1,905

—

1,905

—

Foreign exchange contracts
299

—

299

—

TBA contracts
18

—

18

—

Other contracts
230

—

57

173

Total derivative assets
2,452

—

2,279

173

Equity securities, at fair value:
 
 
 
 
Money market mutual fund investments
50

50

—

—

Total equity securities, at fair value
50

50

—

—

Total assets

$28,845


$61


$28,043


$741

Derivative liabilities:
 
 
 
 
Interest rate contracts

$251


$—


$251


$—

Foreign exchange contracts
261

—

261

—

TBA contracts
47

—

47

—

Other contracts
56

—

56

—

Total derivative liabilities
615

—

615

—

Total liabilities

$615


$—


$615


$—



Citizens Financial Group, Inc. | 82

The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at December 31, 2019:
(in millions)
Total

Level 1

Level 2

Level 3

Debt securities available for sale:
 
 
 
 
Mortgage-backed securities

$20,537


$—


$20,537


$—

State and political subdivisions
5

—

5

—

U.S. Treasury and other
71

71

—

—

Total debt securities available for sale
20,613

71

20,542

—

Loans held for sale, at fair value:
 
 
 
 
Residential loans held for sale
1,778

—

1,778

—

Commercial loans held for sale
168

—

168

—

Total loans held for sale, at fair value
1,946

—

1,946

—

Mortgage servicing rights
642

—

—

642

Derivative assets:
 
 
 
 
Interest rate contracts
773

—

773

—

Foreign exchange contracts
174

—

174

—

Other contracts
37

—

18

19

Total derivative assets
984

—

965

19

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

47

—

—

Total equity securities, at fair value
47

47

—

—

Total assets

$24,232


$118


$23,453


$661

Derivative liabilities:
 
 
 
 
Interest rate contracts

$133


$—


$133


$—

Foreign exchange contracts
166

—

166

—

Other contracts
23

—

23

—

Total derivative liabilities
322

—

322

—

Total liabilities

$322


$—


$322


$—



Citizens Financial Group, Inc. | 83

The following tables present a roll forward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as Level 3:
 
Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
(in millions)
Mortgage Servicing Rights
 
Other Derivative Contracts
 
Mortgage Servicing Rights
 
Other Derivative Contracts
Beginning balance

$577

 

$143

 

$642

 

$19

Transfers upon election of fair value method
—

 
—

 
190

 
—

Beginning balance, adjusted
577

 
143

 
832

 
19

Purchases
—

 
—

 
—

 
—

Issuances
86

 
234

 
153

 
405

Settlements (1)
(46
)
 
(344
)
 
(86
)
 
(420
)
Changes in fair value during the period recognized in earnings (2)
(49
)
 
140

 
(331
)
 
169

Ending balance

$568

 

$173

 

$568

 

$173



 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
(in millions)
Mortgage Servicing Rights
 
Other Derivative Contracts
 
Mortgage Servicing Rights
 
Other Derivative Contracts
Beginning balance

$563

 

$18

 

$600

 

$—

Issuances
57

 
43

 
92

 
43

Settlements (1)
(31
)
 
(43
)
 
(57
)
 
(43
)
Changes in fair value during the period recognized in earnings (2)
(58
)
 
7

 
(104
)
 
7

Transfers from Level 2 to Level 3 (3)
—

 
—

 
—

 
18

Ending balance

$531

 

$25

 

$531

 

$25


(1) Represents changes in value of the MSRs due to i) passage of time including the impact from both regularly scheduled loan principal payments and partial
paydowns, and ii) loans that paid off during the period.
(2) Represents changes in value primarily driven by market conditions. These changes are recorded in mortgage banking fees in the Consolidated Statements of Operations.
(3) Reflects changes in the significance of unobservable inputs on derivative contracts associated with mortgage origination activities.
The following table presents quantitative information about the Company’s Level 3 assets, including the range and weighted-average of the significant unobservable inputs used to fair value these assets, as well as valuation techniques used.
 
As of June 30, 2020
 
Valuation Technique
Unobservable Input
Range (Weighted Average)
Mortgage servicing rights
Discounted Cash Flow
Constant prepayment rate
10.48-39.43% CPR (21.0% CPR)
Option adjusted spread
350-1,123 bps (621 bps)
Other derivative contracts
Internal Model
Pull through rate
32.06-100.00% (78.17%)
MSR value
(57.20)-135.73 bps (88.78 bps)

Nonrecurring Fair Value Measurements
Fair value is also used on a nonrecurring basis to evaluate collateral-dependent loans for impairment or for disclosure purposes. For more information on the valuation techniques utilized to measure nonrecurring fair value see Note 19 in the Company’s 2019 Form 10-K.
The following table presents losses on assets measured at fair value on a nonrecurring basis and recorded in earnings:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Collateral-dependent loans

($22
)
 

($24
)
 

($44
)
 

($28
)



Citizens Financial Group, Inc. | 84

The following table presents assets measured at fair value on a nonrecurring basis:
 
June 30, 2020
 
December 31, 2019
(in millions)
Total

Level 1

Level 2

Level 3

 
Total

Level 1

Level 2

Level 3

Collateral-dependent loans

$618


$—


$618


$—

 

$312


$—


$312


$—


The following table presents the estimated fair value for financial instruments not recorded at fair value in the unaudited interim Consolidated Financial Statements. The carrying amounts are recorded in the Consolidated Balance Sheets under the indicated captions:
 
June 30, 2020
 
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

$2,856


$3,009

 

$—


$—

 

$2,856


$3,009

 

$—


$—

Equity securities, at cost
607

607

 
—

—

 
607

607

 
—

—

Other loans held for sale
1,362

1,362

 
—

—

 
—

—

 
1,362

1,362

Loans and leases
125,713

126,701

 
—

—

 
618

618

 
125,095

126,083

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
143,618

143,728

 
—

—

 
143,618

143,728

 
—

—

Federal funds purchased and securities sold under agreements to repurchase
251

251

 
—

—

 
251

251

 
—

—

Other short-term borrowed funds
4

4

 
—

—

 
4

4

 
—

—

Long-term borrowed funds
9,202

8,994

 
—

—

 
9,202

8,994

 
—

—

 
December 31, 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

$3,202


$3,242

 

$—


$—

 

$3,202


$3,242

 

$—


$—

Equity securities, at cost
807

807

 
—

—

 
807

807

 
—

—

Other loans held for sale
1,384

1,384

 
—

—

 
—

—

 
1,384

1,384

Loans and leases
119,088

119,792

 
—

—

 
312

312

 
118,776

119,480

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
125,313

125,340

 
—

—

 
125,313

125,340

 
—

—

Federal funds purchased and securities sold under agreements to repurchase
265

265

 
—

—

 
265

265

 
—

—

Other short-term borrowed funds
9

9

 
—

—

 
9

9

 
—

—

Long-term borrowed funds
14,047

14,228

 
—

—

 
14,047

14,228

 
—

—



Citizens Financial Group, Inc. | 85

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 June 30, 2020
 
Three Months Ended June 30, 2019
(in millions)
Consumer Banking
Commercial Banking
Consolidated (1)
 
Consumer Banking
Commercial Banking
Consolidated (1)
Service charges and fees

$59


$25


$84

 

$99


$26


$125

Card fees
42

7

49

 
55

9

64

Capital markets fees
—

48

48

 
—

53

53

Trust and investment services fees
45

—

45

 
53

—

53

Other banking fees
—

1

1

 
—

3

3

Total revenue from contracts with customers

$146


$81


$227

 

$207


$91


$298

 
Six Months Ended June 30, 2020
 
Six Months Ended June 30, 2019
(in millions)
Consumer Banking
Commercial Banking
Consolidated (1)
 
Consumer Banking
Commercial Banking
Consolidated (1)
Service charges and fees

$151


$51


$202

 

$196


$52


$248

Card fees
87

17

104

 
105

18

123

Capital markets fees
—

113

113

 
—

102

102

Trust and investment services fees
98

—

98

 
100

—

100

Other banking fees
—

4

4

 
—

5

5

Total revenue from contracts with customers

$336


$185


$521

 

$401


$177


$578

(1) There is no revenue from contracts with customers included in Other non-segment operations.
The Company recognized trailing commissions of $3 million for the three months ended June 30, 2020 and 2019, and $7 million for the six months ended June 30, 2020 and 2019, 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 June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Bank-owned life insurance

$14

 

$13

 

$28

 

$27


NOTE 15 - OTHER OPERATING EXPENSE
The following table presents the details of other operating expense:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020

 
2019

 
2020

 
2019

Promotional expense

$27

 

$28

 

$51

 

$55

Other
84

 
90

 
171

 
173

Other operating expense

$111

 

$118

 

$222

 

$228



Citizens Financial Group, Inc. | 86

NOTE 16 - EARNINGS PER SHARE
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except share and per share data)
2020

 
2019

 
2020

 
2019

Numerator (basic and diluted):
 
 
 
 
 
 
 
Net income

$253

 

$453

 

$287

 

$892

Less: Preferred stock dividends
28

 
18

 
50

 
33

Net income available to common stockholders

$225

 

$435

 

$237

 

$859

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
426,613,053

 
458,154,335

 
427,165,737

 
459,426,685

Dilutive common shares: share-based awards
953,867

 
1,149,889

 
1,126,843

 
1,430,850

Weighted-average common shares outstanding - diluted
427,566,920

 
459,304,224

 
428,292,580

 
460,857,535

Earnings per common share:
 
 
 
 
 
 
 
Basic

$0.53

 

$0.95

 

$0.56

 

$1.87

Diluted (1)
0.53

 
0.95

 
0.55

 
1.86


(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 1,579,361 and 371,627 for the three months ended June 30, 2020 and 2019, respectively, and 1,211,751 and 1,073,431 for the six months ended June 30, 2020 and 2019, respectively.
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 the Company’s business operating segments, as well as Other non-segment operations, see Note 25 in the Company’s 2019 Form 10-K.
 
As of and for the Three Months Ended June 30, 2020
(in millions)
Consumer Banking
 
Commercial Banking
 
Other
 
Consolidated
Net interest income

$814

 

$419

 

($73
)
 

$1,160

Noninterest income
428

 
144

 
18

 
590

Total revenue
1,242

 
563

 
(55
)
 
1,750

Noninterest expense
735

 
213

 
31

 
979

Profit (loss) before provision for credit losses
507

 
350

 
(86
)
 
771

Provision for credit losses
80

 
70

 
314

 
464

Income (loss) before income tax expense (benefit)
427

 
280

 
(400
)
 
307

Income tax expense (benefit)
107

 
59

 
(112
)
 
54

Net income (loss)

$320

 

$221

 

($288
)
 

$253

Total average assets

$71,634

 

$65,280

 

$42,879

 

$179,793



Citizens Financial Group, Inc. | 87

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

$799

 

$371

 

($4
)
 

$1,166

Noninterest income
277

 
149

 
36

 
462

Total revenue
1,076

 
520

 
32

 
1,628

Noninterest expense
715

 
217

 
19

 
951

Profit before provision for credit losses
361

 
303

 
13

 
677

Provision for credit losses
78

 
25

 
(6
)
 
97

Income before income tax expense (benefit)
283

 
278

 
19

 
580

Income tax expense (benefit)
70

 
62

 
(5
)
 
127

Net income

$213

 

$216

 

$24

 

$453

Total average assets

$65,485

 

$56,135

 

$39,869

 

$161,489


 
As of and for the Six Months Ended June 30, 2020
(in millions)
Consumer Banking
 
Commercial Banking
 
Other
 
Consolidated
Net interest income

$1,607

 

$784

 

($71
)
 

$2,320

Noninterest income
785

 
269

 
33

 
1,087

Total revenue
2,392

 
1,053

 
(38
)
 
3,407

Noninterest expense
1,473

 
434

 
84

 
1,991

Profit (loss) before provision for credit losses
919

 
619

 
(122
)
 
1,416

Provision for credit losses
177

 
113

 
774

 
1,064

Income (loss) before income tax expense (benefit)
742

 
506

 
(896
)
 
352

Income tax expense (benefit)
186

 
106

 
(227
)
 
65

Net income (loss)

$556

 

$400

 

($669
)
 

$287

Total average assets

$70,024

 

$62,142

 

$41,319

 

$173,485

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

$1,587

 

$743

 

($4
)
 

$2,326

Noninterest income
524

 
299

 
67

 
890

Total revenue
2,111

 
1,042

 
63

 
3,216

Noninterest expense
1,415

 
426

 
47

 
1,888

Profit before provision for credit losses
696

 
616

 
16

 
1,328

Provision for credit losses
145

 
46

 
(9
)
 
182

Income before income tax expense (benefit)
551

 
570

 
25

 
1,146

Income tax expense (benefit)
136

 
127

 
(9
)
 
254

Net income

$415

 

$443

 

$34

 

$892

Total average assets

$65,247

 

$55,884

 

$39,824

 

$160,955


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 2019 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in the “Market Risk” section of Part I, Item 2 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,

Citizens Financial Group, Inc. | 88

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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is presented in Note 12, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

In addition to the risks below and other information presented in this Report, you should consider the risks described in Item 1A. “Risk Factors” in the Company’s 2019 Form 10-K.

Additional Risks Related to our Business

The COVID-19 pandemic is adversely affecting us and creates significant risks and uncertainties for our business, and the ultimate impact of the pandemic on us will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has negatively affected the global and U.S. economies, increased unemployment levels, disrupted supply chains and businesses in many industries, lowered equity market valuations, decreased liquidity in fixed income markets, and created significant volatility and disruption in financial markets. This has resulted, and could continue to result, in higher and more volatile provisions for credit losses, and is also expected to result in increased charge offs, particularly as more customers experience credit deterioration and as customers need to draw on their committed credit lines to help finance their businesses and activities. The pandemic’s negative economic impact and its effect on customer needs and behaviors could adversely affect our liquidity and also continue to adversely affect our capital profile. Moreover, governmental actions in response to the pandemic are meaningfully influencing the interest-rate environment, which has, and is likely to continue to, reduce our net interest margin. The effects of the pandemic have also resulted in lower service charges and fees, card fees and trust and investment services fees, as well as volatility in capital markets fees and foreign exchange and interest rate products revenue, which have, and are likely to continue to, negatively affect our noninterest income.
In addition, our reliance on work-from-home capabilities and the potential inability to maintain critical staff in our operational facilities present risks associated with our local infrastructure, restrictive stay-at-home orders across jurisdictions, illness, quarantines and the sustainability of a work-from-home environment, as well as heightened cybersecurity, information security and operational risks. Many of our service providers have been, and may further be, affected by similar factors that increase their risks of business disruptions or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could result in losses or increased operational costs, regulatory fines, penalties or other sanctions, or harm to our reputation. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and the actions of governmental authorities in response to those conditions.
The federal banking regulators have issued interagency guidance to clarify supervisory expectations regarding loan modifications due to COVID-19-related non-payment and the regulatory capital transition for the current expected credit loss accounting standard. Further, the Federal Reserve has announced a program for lending directly to U.S. businesses. In addition, President Trump has signed into law a number of economic stimulus packages, including the $2 trillion CARES Act, the Families First Coronavirus Response Act, and the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020. In response to the pandemic, we have (i) assisted our retail

Citizens Financial Group, Inc. | 89

and small business customers through loan forbearances and modifications, (ii) extended loans under the Small Business Administration’s Paycheck Protection Program, and (iii) committed funding for community support with a particular emphasis on small businesses and non-profit partners. These government programs are complex and our participation may lead to governmental and regulatory scrutiny, negative publicity and damage to our reputation. On April 17, 2020, we announced that we would temporarily suspend our stock repurchase program through December 31, 2020 to support the efforts of the Federal Reserve and other banks to moderate the impact of the pandemic by making additional capital and liquidity available to our customers, including corporates, small businesses and individuals. Further, in June 2020, the Federal Reserve announced that it has required participating CCAR firms, including us, to update and resubmit their capital plans and that, as a result, unless otherwise approved by the Federal Reserve, participating firms would not be permitted, during the third quarter of 2020, to conduct common stock repurchases, to increase their common stock dividends or to pay common stock dividends that exceed average net income for the preceding four quarters. The Federal Reserve also stated that it may extend these limitations quarter-by-quarter. The pandemic may cause us to further limit capital distributions.
The extent to which the pandemic adversely affects our business, financial condition and results of operations, as well as our liquidity and regulatory capital ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements and staffing levels in operational facilities, actions taken by governmental authorities and other third parties in response to the pandemic and the direct and indirect impact of the pandemic on us, our clients and customers, our service providers and other market participants. As the pandemic adversely affects us, it may also have the effect of heightening many of the other risks described in Item 1A, Risk Factors in our 2019 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

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 Current Report on Form 8-K, filed April 24, 2020)

3.2 Certificate of Designations of the Registrant with respect to the Series F Preferred Stock, dated June 1, 2020, filed with the Secretary of State of the State of Delaware and effective June 1, 2020 (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed June 4, 2020)

3.3 Amended and Restated Bylaws of the Registrant (as amended and restated on April 23, 2020) (incorporated herein by reference to Exhibit 3.2 of the Current Report on Form 8-K, filed April 24, 2020)

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

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

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

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

101
The following materials from the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, 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.

Citizens Financial Group, Inc. | 90

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 August 6, 2020.

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)


Citizens Financial Group, Inc. | 91

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