10-Q 1 citizens10-qxq12018.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended
March 31, 2018

[ ] 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
a5422139a7e5fcpreview620a15.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)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
[ü] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ü] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
[ü]
Accelerated filer
[ ]
Non-accelerated filer (Do not check if a smaller reporting company)
[ ]
Smaller reporting company
[ ]
 
 
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ü] No
There were 484,726,571 shares of Registrant’s common stock ($0.01 par value) outstanding on May 1, 2018.




 
 
 
 
 
 
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Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

CITIZENS FINANCIAL GROUP, INC.

 

GLOSSARY OF ACRONYMS AND TERMS
The following listing provides a comprehensive reference of common acronyms and terms we regularly use in our financial reporting:
AFS
 
Available for Sale
ALLL
 
Allowance for Loan and Lease Losses
AOCI
 
Accumulated Other Comprehensive Income (Loss)
ASU
 
Accounting Standards Update
ATM
 
Automated Teller Machine
Board of Directors
 
The Board of Directors of Citizens Financial Group, Inc.
bps
 
Basis Points
C&I
 
Commercial and Industrial
Capital Plan Rule
 
Federal Reserve’s Regulation Y Capital Plan Rule
CBNA
 
Citizens Bank, National Association
CBPA
 
Citizens Bank of Pennsylvania
CCAR
 
Comprehensive Capital Analysis and Review
CCB
 
Capital Conservation Buffer
CET1
 
Common Equity Tier 1
Citizens or CFG or the Company
 
Citizens Financial Group, Inc. and its Subsidiaries
CLTV
 
Combined Loan to Value
CMO
 
Collateralized Mortgage Obligation
CRE
 
Commercial Real Estate
DFAST
 
Dodd-Frank Act Stress Test
Dodd-Frank Act
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS
 
Earnings Per Share
Exchange Act
 
The Securities Exchange Act of 1934
Fannie Mae (FNMA)
 
Federal National Mortgage Association
FASB
 
Financial Accounting Standards Board
FDIA
 
Federal Deposit Insurance Act
FDIC
 
Federal Deposit Insurance Corporation
FHLB
 
Federal Home Loan Bank
FICO
 
Fair Isaac Corporation (credit rating)
FRB
 
Board of Governors of the Federal Reserve System and, as applicable, Federal Reserve Bank(s)

Freddie Mac (FHLMC)
 
Federal Home Loan Mortgage Corporation
FTP
 
Funds Transfer Pricing
GAAP
 
Accounting Principles Generally Accepted in the United States of America
Ginnie Mae (GNMA)
 
Government National Mortgage Association
HELOC
 
Home Equity Line of Credit
HTM
 
Held To Maturity
LCR
 
Liquidity Coverage Ratio
LGD
 
Loss Given Default
LIBOR
 
London Interbank Offered Rate
LIHTC
 
Low Income Housing Tax Credit
LTV
 
Loan to Value
MBS
 
Mortgage-Backed Securities
Mid-Atlantic
 
District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia
Midwest
 
Illinois, Indiana, Michigan, and Ohio

3

CITIZENS FINANCIAL GROUP, INC.

 

MD&A
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSRs
 
Mortgage Servicing Rights
New England
 
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont
NM
 
Not meaningful
NSFR
 
Net Stable Funding Ratio
OCC
 
Office of the Comptroller of the Currency
OCI
 
Other Comprehensive Income (Loss)
Parent Company
 
Citizens Financial Group, Inc. (the Parent Company of Citizens Bank of Pennsylvania, Citizens Bank, National Association and other subsidiaries)
PD
 
Probability of Default
ROTCE
 
Return on Average Tangible Common Equity
RPA
 
Risk Participation Agreement
SBO
 
Serviced by Others portfolio
SEC
 
United States Securities and Exchange Commission
SVaR
 
Stressed Value at Risk
TBAs
 
To-Be Announced securities
TDR
 
Troubled Debt Restructuring
VaR
 
Value at Risk
VIE
 
Variable Interest Entities




4

CITIZENS FINANCIAL GROUP, INC.

 

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



5

CITIZENS FINANCIAL GROUP, INC.
FORWARD-LOOKING STATEMENTS



FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.”

Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense;
The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment;
Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals;
Our ability to meet heightened supervisory requirements and expectations;
Liabilities and business restrictions resulting from litigation and regulatory investigations;
Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms;
The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;
The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;
Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and
Management’s ability to identify and manage these and other risks.
In addition to the above factors, we also caution that the amount and timing of any future common stock dividends or share repurchases will depend on our financial condition, earnings, cash needs, regulatory constraints, capital requirements (including requirements of our subsidiaries), and any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.

More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2017.

6

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

INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $153.5 billion in assets as of March 31, 2018. Our mission is to help our customers, colleagues and communities reach their potential. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. We help our customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center and the convenience of approximately 3,300 ATMs and approximately 1,150 branches in 11 states in the New England, Mid-Atlantic and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.
The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Item 1 of this Form 10-Q, as well as other information contained in this document and our Annual Report on Form 10-K for the year ended December 31, 2017.
Key Performance Metrics Used by Management and Non-GAAP Financial Measures
As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and statement of operations, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally.
The primary line items we use in our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense, net income and net income available to common stockholders. The primary line items we use in our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives.
We consider various measures when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including:
Return on average common equity, which we define as annualized net income available to common stockholders divided by average common equity;
Return on average tangible common equity, which we define as annualized net income available to common stockholders divided by average common equity excluding average goodwill (net of related deferred tax liability) and average other intangibles;
Return on average total assets, which we define as annualized net income divided by average total assets;
Return on average total tangible assets, which we define as annualized net income divided by average total assets excluding average goodwill (net of related deferred tax liability) and average other intangibles;
Efficiency ratio, which we define as the ratio of our total noninterest expense to the sum of net interest income and total noninterest income. We measure our efficiency ratio to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to our income. A decrease in our efficiency ratio represents improvement;
Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense;
Net interest margin, which we calculate by dividing annualized net interest income for the period by average total interest-earning assets, is a key measure that we use to evaluate our net interest income; and
Common equity tier 1 capital ratio, represents CET1 capital divided by total risk-weighted assets as defined under U.S Basel III Standardized approach.
“Underlying” results, which are non-GAAP measures, exclude certain items, as applicable, that may occur in a reporting period which management does not consider indicative of on-going financial performance.

7

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

We believe these non-GAAP measures provide useful information to investors because these are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our “Underlying” results in any period reflect our operational performance in that period and, accordingly, it is useful to consider our GAAP results and our “Underlying” results together. We believe this presentation also increases comparability of period-to-period 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 other companies. We caution investors not to place undue reliance on such non-GAAP measures, but instead to consider them with the most directly comparable GAAP measure. Non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for our results as reported under GAAP.
Non-GAAP measures are denoted throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” by the use of the term “Underlying” and/or are followed by an asterisk (*).
For additional information regarding our non-GAAP financial measures and reconciliations, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations,” included in this report.


8

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

FINANCIAL PERFORMANCE
First Quarter 2018 compared with First Quarter 2017 - Key Highlights
First quarter 2018 net income of $388 million increased 21% from $320 million in first quarter 2017, with earnings per diluted common share of $0.78, up 28% from $0.61 per diluted common share in first quarter 2017. First quarter 2018 ROTCE of 11.7% improved from 9.7% in first quarter 2017.
There were no notable items recorded in first quarter 2018.* The following table presents results for first quarter 2017, including a $23 million benefit, or $0.04 per diluted common share, related to the settlement of certain state tax matters:
 
Three Months Ended March 31,
 
2018
 
2017
(in millions)
Income tax expense
 
Net Income
 
Income tax expense
 
Net Income
Reported results (GAAP)

$113

 

$388

 

$114

 

$320

Less Notable items: Settlement of certain state tax matters

 

 
(23
)
 
23

Underlying results (Non-GAAP)

$113

 

$388

 

$137

 

$297

*
“Underlying” results, as applicable, exclude a first quarter 2017 $23 million benefit related to the settlement of certain state 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 key performance metrics and non-GAAP financial measures, see “—Introduction — Key Performance Metrics Used By Management and Non-GAAP Financial Measures” and “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations.”

Net income available to common stockholders of $381 million increased $68 million, or 22%, compared to $313 million in first quarter 2017.
On an Underlying basis,* excluding a first quarter 2017 $23 million impact from the settlement of certain tax matters, net income available to common shareholders increased by 31%, led by 6% revenue growth with 9% growth in net interest income, given a 3% average loan growth and a 20 basis point increase in net interest margin.
Generated operating leverage of 2% and ROTCE of 11.7%, despite the impact of continued investing to drive future growth.
On an Underlying basis,* ROTCE improved 2.7% from 9.0%.
Return on average common equity was 7.8% compared to 6.5% for first quarter 2017.
On an Underlying basis,* return on average common equity improved 178 bps from 6.1% for first quarter 2017.
Diluted earnings per common share increased $0.17, or 28%.
On an Underlying basis,* diluted earnings per share increased $0.21, or 37%.
Tangible book value per common share improved 5% to $27.24. Fully diluted average common shares outstanding decreased by 22.1 million shares.
Total revenue of $1.5 billion increased $78 million, or 6%, driven by strong net interest income growth:
Net interest income of $1.1 billion increased $86 million, or 9%, compared to $1.0 billion in first quarter 2017, driven by a 20 basis point improvement in net interest margin and 3% average loan growth.
Net interest margin of 3.16% increased 20 basis points, compared to 2.96% in first quarter 2017, reflecting higher interest-earning asset yields tied to higher interest rates and improving loan mix towards higher-return categories, partially offset by higher deposit and funding costs.
Noninterest income of $371 million decreased $8 million, or 2%, from first quarter 2017, driven by a $9 million decrease in capital market fees from near-record first quarter 2017 levels, as well as lower other income.

9

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

Noninterest expense of $883 million increased $29 million, or 3%, compared to $854 million in first quarter 2017. Results reflect higher salaries and employee benefits cost, largely reflecting annual merit increases, increased stock-based compensation costs and revenue-driven incentives and the impact of strategic growth initiatives, as well as higher outside services expense largely tied to Consumer Banking strategic growth initiatives.
Provision for credit losses of $78 million decreased $18 million, or 19%, from $96 million in first quarter 2017, despite the impact the of an $8 million reserve build, reflecting lower commercial net charge-offs, partially offset by expected seasoning in retail portfolios.
The income tax rate decreased to 22.5% from 26.4% in first quarter 2017. The decrease in the effective income tax rate was primarily driven by the impact of tax reform, partially offset by the prior year settlement of certain state tax matters.
On an Underlying basis,* the effective income tax rate decreased to 22.5% from 31.6% in first quarter 2017.
Net charge-offs of $70 million decreased $17 million, or 20%, from $87 million in first quarter 2017. The ALLL of $1.2 billion increased $10 million compared to December 31, 2017. ALLL to total loans and leases of 1.12% as of March 31, 2018 remained stable compared to December 31, 2017. ALLL to nonperforming loans and leases ratio was 144% as of March 31, 2018, compared with 142% as of December 31, 2017.
Average loans and leases of $111.1 billion increased $3.1 billion, or 3%, from $108.1 billion in first quarter 2017, reflecting a $2.5 billion increase in retail loans and a $589 million increase in commercial loans and leases.
Average deposits of $113.4 billion increased $3.5 billion, or 3%, from $110.0 billion in first quarter 2017, reflecting strength in term, checking with interest, savings and demand deposits.







10

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

SELECTED CONSOLIDATED FINANCIAL DATA
The summary Consolidated Operating Data for the three months ended March 31, 2018 and 2017 and the summary Consolidated Balance Sheet data as of March 31, 2018 and December 31, 2017 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1 — Financial Statements of this report. Our historical results are not necessarily indicative of the results expected for any future period.
Our unaudited interim Consolidated Financial Statements have been prepared on the same basis as the audited Consolidated Financial Statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the information set forth herein. Our operating results for the three months ended March 31, 2018 are not necessarily indicative of those to be expected for the year ending December 31, 2018 or for any future period. The following selected consolidated financial data should be read in conjunction with our unaudited interim Consolidated Financial Statements and the Notes thereto.

 
Three Months Ended March 31,
(dollars in millions, except per-share amounts)
  2018
 
2017
OPERATING DATA:
 
 
 
Net interest income

$1,091

 

$1,005

Noninterest income
371

 
379

Total revenue
1,462

 
1,384

Provision for credit losses
78

 
96

Noninterest expense
883

 
854

Income before income tax expense
501

 
434

Income tax expense
113

 
114

Net income

$388

 

$320

Net income available to common stockholders

$381

 

$313

Net income per common share - basic

$0.78

 

$0.61

Net income per common share - diluted

$0.78

 

$0.61

OTHER OPERATING DATA:
 
 
 
Return on average common equity
7.83
%
 
6.52
%
Return on average tangible common equity
11.71

 
9.68

Return on average total assets
1.04

 
0.87

Return on average total tangible assets
1.08

 
0.91

Efficiency ratio
60.43

 
61.68

Operating leverage
2.14

 
6.86

Net interest margin
3.16

 
2.96

Effective income tax rate
22.52

 
26.36





11

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

(dollars in millions)
March 31,
2018
 
December 31,
2017
BALANCE SHEET DATA:
 
 
 
Total assets

$153,453

 

$152,336

Loans held for sale, at fair value
478

 
497

Other loans held for sale
322

 
221

Loans and leases
111,425

 
110,617

Allowance for loan and lease losses
(1,246
)
 
(1,236
)
Total securities
25,433

 
25,733

Goodwill
6,887

 
6,887

Total liabilities
133,394

 
132,066

Total deposits
115,730

 
115,089

Federal funds purchased and securities sold under agreements to repurchase
315

 
815

Other short-term borrowed funds
1,494

 
1,856

Long-term borrowed funds
13,486

 
11,765

Total stockholders’ equity
20,059

 
20,270

OTHER BALANCE SHEET DATA:
 
 
 
Asset Quality Ratios:
 
 
 
Allowance for loan and lease losses as a percentage of total loans and leases
1.12
%
 
1.12
%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases
144

 
142

Nonperforming loans and leases as a percentage of total loans and leases
0.78

 
0.79

Capital Ratios:
 
 
 
CET1 capital ratio (1)
11.2
%
 
11.2
%
Tier 1 capital ratio (2)
11.4

 
11.4

Total capital ratio (3)
13.9

 
13.9

Tier 1 leverage ratio (4)
10.0

 
10.0

(1) “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(2) “Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital,
divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(3) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(4) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.




12

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

RESULTS OF OPERATIONS
 
Net Income
Net income totaled $388 million, up $68 million, or 21%, from $320 million in first quarter 2017. The following table presents the significant components of our net income:
 
Three Months Ended March 31,
 
 
 
 
(dollars in millions)
2018

 
2017

 
Change
 
Percent

Operating Data:
 
 
 
 
 
 
 
Net interest income

$1,091

 

$1,005

 

$86

 
9
%
Noninterest income
371

 
379

 
(8
)
 
(2
)
Total revenue
1,462

 
1,384

 
78

 
6

Provision for credit losses
78

 
96

 
(18
)
 
(19
)
Noninterest expense
883

 
854

 
29

 
3

Income before income tax expense
501

 
434

 
67

 
15

Income tax expense
113

 
114

 
(1
)
 
(1
)
Net income

$388

 

$320

 

$68

 
21

Net income available to common stockholders

$381

 

$313

 

$68

 
22
%
Return on average common equity
7.83
%
 
6.52
%
 
131
 bps
 
 
Return on average tangible common equity 
11.71
%
 
9.68
%
 
203
 bps
 
 
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the effective yield on such assets and the effective cost of such liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Market Risk — Non-Trading Risk,” included in this report and “—Risk Governance” as described in our Annual Report on Form 10-K for the year ended December 31, 2017.
 

13

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

The following table presents the major components of net interest income and net interest margin:
 
Three Months Ended March 31,
 
 
2018
 
2017
 
Change
(dollars in millions)
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Yields/
Rates
Assets
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and due from banks and deposits in banks

$1,442


$6

1.61
%
 

$1,965


$3

0.63
%
 

($523
)
98 bps
Taxable investment securities
25,433

168

2.64

 
25,789

160

2.48

 
(356
)
16

Non-taxable investment securities
6


2.60

 
7


2.60

 
(1
)

Total investment securities
25,439

168

2.64

 
25,796

160

2.48

 
(357
)
16

Commercial
37,960

357

3.77

 
37,517

312

3.33

 
443

44

Commercial real estate
11,549

119

4.11

 
10,821

87

3.21

 
728

90

Leases
3,114

20

2.61

 
3,696

23

2.47

 
(582
)
14

Total commercial
52,623

496

3.77

 
52,034

422

3.24

 
589

53

Residential mortgages
17,162

153

3.56

 
15,285

136

3.55

 
1,877

1

Home equity loans
1,342

19

5.76

 
1,793

25

5.66

 
(451
)
10

Home equity lines of credit
13,353

138

4.20

 
13,955

118

3.43

 
(602
)
77

Home equity loans serviced by others
520

9

7.31

 
719

13

7.02

 
(199
)
29

Home equity lines of credit serviced by others
142

1

3.98

 
207

2

3.75

 
(65
)
23

Automobile
13,015

112

3.47

 
13,772

107

3.16

 
(757
)
31

Education
8,283

114

5.58

 
6,837

88

5.23

 
1,446

35

Credit cards
1,828

48

10.70

 
1,665

46

11.16

 
163

(46
)
Other retail
2,847

56

7.97

 
1,798

35

7.94

 
1,049

3

Total retail
58,492

650

4.49

 
56,031

570

4.11

 
2,461

38

Total loans and leases
111,115

1,146

4.15

 
108,065

992

3.69

 
3,050

46

Loans held for sale, at fair value
420

4

3.84

 
510

4

3.31

 
(90
)
53

Other loans held for sale
255

4

6.21

 
74

1

6.62

 
181

(41
)
Interest-earning assets
138,671

1,328

3.85

 
136,410

1,160

3.42

 
2,261

43

Allowance for loan and lease losses
(1,236
)
 
 
 
(1,235
)
 
 
 
(1
)
 
Goodwill
6,887

 
 
 
6,876

 
 
 
11

 
Other noninterest-earning assets
7,201

 
 
 
6,735

 
 
 
466

 
Total assets

$151,523

 
 
 

$148,786



 
 

$2,737

 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
Checking with interest

$21,665


$26

0.48
%
 

$20,699


$13

0.26
%
 

$966

22 bps
Money market accounts
37,084

65

0.71

 
37,874

41

0.44

 
(790
)
27
Regular savings
9,627

1

0.05

 
9,110

1

0.04

 
517

1
Term deposits
16,503

53

1.30

 
14,173

31

0.89

 
2,330

41
Total interest-bearing deposits
84,879

145

0.69

 
81,856

86

0.43

 
3,023

26
Federal funds purchased and securities sold under agreements to repurchase (1)
645

1

0.68

 
882

1

0.24

 
(237
)
44
Other short-term borrowed funds
1,481

9

2.40

 
2,963

8

1.05

 
(1,482
)
135
Long-term borrowed funds
13,549

82

2.44

 
12,412

60

1.94

 
1,137

50
Total borrowed funds
15,675

92

2.36

 
16,257

69

1.68

 
(582
)
68
Total interest-bearing liabilities
100,554

237

0.95

 
98,113

155

0.64

 
2,441

31
Demand deposits
28,544

 
 
 
28,098

 
 
 
446


Other liabilities
2,446

 
 
 
2,868

 
 
 
(422
)

Total liabilities
131,544

 
 
 
129,079

 
 
 
2,465


Stockholders’ equity
19,979

 
 
 
19,707

 
 
 
272


Total liabilities and stockholders’ equity

$151,523

 
 
 

$148,786

 
 
 

$2,737


Interest rate spread
 
 
2.90
%
 
 
 
2.78
%
 
 
12
Net interest income
 

$1,091

 
 
 

$1,005

 
 
 

Net interest margin
 
 
3.16
%
 
 
 
2.96
%
 
 
20 bps
Memo: Total deposits (interest-bearing and demand)

$113,423


$145

0.52
%
 

$109,954


$86

0.32
%
 

$3,469

20 bps
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. See “—Analysis of Financial Condition — Derivatives” for further information.





14

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

Net interest income of $1.1 billion increased $86 million, or 9%, compared to $1.0 billion in first quarter 2017, reflecting 3% average loan growth and a 20 basis point improvement in net interest margin.
Average interest-earning assets of $138.7 billion increased $2.3 billion, or 2%, from first quarter 2017, driven by a $589 million increase in average commercial loans and leases and a $2.5 billion increase in average retail loans, partially offset by an $880 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by strength in commercial and commercial real estate. Retail loan growth was driven by strength in residential mortgages, education, and other retail.
Average deposits of $113.4 billion increased $3.5 billion from first quarter 2017, reflecting growth in term deposits, checking with interest, savings and demand deposits, partially offset by a decrease in money market deposits. Total interest-bearing deposit costs of $145 million increased $59 million, or 69%, from $86 million in first quarter 2017, primarily due to the impact of rising rates and a shift in mix toward commercial deposits.
Average total borrowed funds of $15.7 billion decreased $582 million from first quarter 2017, reflecting a decrease in other short-term borrowed funds and a decrease in federal funds purchased and repurchase agreements, partially offset by an increase in average long-term borrowed funds, primarily senior debt. Total borrowed funds costs of $92 million increased $23 million from first quarter 2017. The total borrowed funds yield of 2.36% increased 68 basis points from 1.68% in first quarter 2017 due to an increase in long-term rates and a mix shift to long-term senior debt.
Net interest margin of 3.16% increased 20 basis points compared to 2.96% in first quarter 2017, driven by higher interest-earning asset yields given higher interest rates and continued mix shift toward higher-yielding assets. These results were partially offset by the impact of higher deposit and funding costs. Average interest-earning asset yields of 3.85% increased 43 basis points from 3.42% in first quarter 2017, while average interest-bearing liability costs of 0.95% increased 31 basis points from 0.64% in first quarter 2017.
Noninterest Income
The following table presents the significant components of our noninterest income:
 
Three Months Ended March 31,
 
 
 
 
(in millions)
2018

 
2017

 
Change

 
Percent

Service charges and fees

$124

 

$125

 

($1
)
 
(1
%)
Card fees
61

 
60

 
1

 
2

Capital markets fees
39

 
48

 
(9
)
 
(19
)
Trust and investment services fees
40

 
39

 
1

 
3

Letter of credit and loan fees
30

 
29

 
1

 
3

Foreign exchange and interest rate products
27

 
27

 

 

Mortgage banking fees
25

 
23

 
2

 
9

Securities gains, net
8

 
4

 
4

 
100

Other income (1)
17

 
24

 
(7
)
 
(29
)
Noninterest income(2)

$371

 

$379

 

($8
)
 
(2
%)
(1) Includes net securities impairment losses on debt securities available for sale recognized in earnings, bank-owned life insurance income and other income.
(2) First quarter 2018 noninterest income amounts reflect the adoption of ASU 2014-09, Revenue From Contracts With Customers (Topic 606).

Noninterest income of $371 million decreased $8 million, or 2%, from first quarter 2017, largely driven by a $9 million reduction in capital market fees, primarily reflecting seasonality and an overall market reduction in middle market loan syndication activity, as well as a $7 million decrease in other income, partially offset by a $4 million increase in net securities gains and a $2 million increase in mortgage banking fees.
We adopted ASU 2014-09, Revenue From Contracts With Customers (Topic 606), on January 1, 2018 under the modified retrospective method. Adoption of the new standard did not result in a change in the timing or amount of revenue recognized from contracts with customers.

15

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

Provision for Credit Losses
The provision for credit losses of $78 million decreased $18 million from $96 million in first quarter 2017, reflecting the impact of continued improvement in overall credit quality and a decline in total net charge-offs, partially offset by the impact of loan growth. First quarter 2018 results reflected an $8 million reserve build, compared to a $9 million reserve build in first quarter 2017, largely due to loan volume growth, partially offset by the shift in asset mix toward lower risk retail loans. Net charge-offs of $70 million were $17 million lower than first quarter 2017, primarily reflecting lower commercial losses.
The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ALLL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.
Noninterest Expense
The following table presents the significant components of our noninterest expense:
 
Three Months Ended March 31,
 
 
 
 
(in millions)
2018

 
2017

 
Change

 
Percent

Salaries and employee benefits(1)

$470

 

$446

 

$24

 
5
%
Outside services
99

 
91

 
8

 
9

Occupancy
81

 
82

 
(1
)
 
(1
)
Equipment expense
67

 
67

 

 

Amortization of software
46

 
44

 
2

 
5

Other operating expense(1)
120

 
124

 
(4
)
 
(3
)
Noninterest expense

$883

 

$854

 

$29

 
3
%
(1) Salaries and employee benefits and other operating expense amounts reflect the impact of the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

Noninterest expense of $883 million increased $29 million, or 3%, from first quarter 2017, reflecting an increase in salaries and employee benefits driven by higher revenue-based incentives and merit increases. First quarter 2018 also reflected an increase in outside service costs given investment in strategic initiatives as well as higher amortization of software, partially offset by lower other operating expense, compared to first quarter 2017.
As of January 1, 2018, we retrospectively adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the service cost component of net periodic pension and postretirement benefit cost to be reported separately in the Consolidated Statements of Operations from the other components. The adoption resulted in the presentation of the service cost component of net periodic pension cost in salaries and employee benefits and all other components of net periodic pension cost in other operating expense. Prior periods have been adjusted to conform with the current period presentation.
Income Tax Expense
Income tax expense was $113 million and $114 million in first quarter 2018 and 2017, respectively. Our effective tax rates in first quarter 2018 and 2017 were 22.5% and 26.4%, respectively. The decrease in the effective income tax rate was primarily driven by the impact of tax reform, partially offset by the prior year settlement of certain state tax matters.
At March 31, 2018, our net deferred tax liability was $475 million, compared with $571 million at December 31, 2017. The decrease in the net deferred tax liability was primarily attributable to the tax effect of net unrealized losses on securities and derivatives. For further discussion, see Note 15 “Income Taxes” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

16

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

Business Operating Segments
The following tables present certain financial data of our business operating segments, Other and consolidated:
 
As of and for the Three Months Ended March 31, 2018
(dollars in millions)
Consumer Banking
 
Commercial Banking
 
Other(4)

 
Consolidated

Net interest income (1)

$733

 

$357

 

$1

 

$1,091

Noninterest income
222

 
125

 
24

 
371

Total revenue
955

 
482

 
25

 
1,462

Noninterest expense
656

 
208

 
19

 
883

Profit before provision for credit losses
299

 
274

 
6

 
579

Provision for credit losses
72

 
(4
)
 
10

 
78

Income (loss) before income tax expense (benefit)
227

 
278

 
(4
)
 
501

Income tax expense (benefit)
57

 
63

 
(7
)
 
113

Net income

$170

 

$215

 

$3

 

$388

Loans and leases (period-end) (2)

$59,795

 

$49,868

 

$2,562

 

$112,225

Average Balances:
 
 
 
 
 
 
 
Total assets

$61,348

 

$50,393

 

$39,782

 

$151,523

Total loans and leases (2)
59,942

 
49,285

 
2,563

 
111,790

Deposits
75,416

 
30,766

 
7,241

 
113,423

Interest-earning assets
59,994

 
49,479

 
29,198

 
138,671

Key Performance Metrics:
 
 
 
 
 
 
 
Net interest margin (3)
4.96
%
 
2.93
%
 
NM

 
3.16
%
Efficiency ratio
68.72

 
43.07

 
NM

 
60.43

Loans-to-deposits ratio (average balances)(2)
79.48

 
160.19

 
NM

 
98.56

Return on average total tangible assets (3)
1.12

 
1.73

 
NM

 
1.08

(1) We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.
(2) Includes loans held for sale.
(3) Ratios for the period ended March 31, 2018 are presented on an annualized basis.
(4) Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense, not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”

17

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


 
As of and for the Three Months Ended March 31, 2017
(dollars in millions)
Consumer Banking
 
Commercial Banking
 
Other(3)

 
Consolidated
Net interest income

$638

 

$346

 

$21

 

$1,005

Noninterest income
220

 
134

 
25

 
379

Total revenue
858

 
480

 
46

 
1,384

Noninterest expense
647

 
190

 
17

 
854

Profit before provision for credit losses
211

 
290

 
29

 
530

Provision for credit losses
64

 
19

 
13

 
96

Income before income tax expense (benefit)
147

 
271

 
16

 
434

Income tax expense (benefit)
52

 
91

 
(29
)
 
114

Net income

$95

 

$180

 

$45

 

$320

Loans and leases (period-end) (1)

$57,494

 

$48,013

 

$3,273

 

$108,780

Average Balances:
 
 
 
 
 
 
 
Total assets

$58,660

 

$49,243

 

$40,883

 

$148,786

Total loans and leases (1)
57,309


48,154

 
3,186

 
108,649

Deposits
74,133

 
28,973

 
6,848

 
109,954

Interest-earning assets
57,361

 
48,283

 
30,766

 
136,410

Key Performance Metrics
 
 
 
 
 
 
 
Net interest margin (2)
4.51
%
 
2.91
%
 
NM

 
2.96
%
Efficiency ratio
75.41

 
39.80

 
NM

 
61.68

Loans-to-deposits ratio (average balances)(1)
77.31

 
166.20

 
NM

 
98.81

Return on average total tangible assets (2)
0.66

 
1.48

 
NM

 
0.91

(1) Includes loans held for sale.
(2) Ratios for the period ended March 31, 2017 are presented on an annualized basis.
(3) Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense, not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”


We operate through two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and their related revenues, provision for credit losses and expenses. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets, community development, non-core assets (including legacy Royal Bank of Scotland Group plc aircraft loan and leasing), and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.” In addition, Other includes goodwill and any associated goodwill impairment charges. For impairment testing purposes, we allocate goodwill to Consumer Banking and Commercial Banking reporting units. For management reporting purposes, we present the goodwill balance (and any related impairment charges) in Other.
Our capital levels are evaluated and managed centrally, however, capital is allocated to the business operating segments to support evaluation of business performance. Business operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. Interest income and expense is determined based on the assets and liabilities managed by the business operating segment. Because funding and asset liability management is a central function, funds transfer pricing (“FTP”) methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business operating segment assets, liabilities and capital, respectively, using a matched-funding concept. The residual effect on net interest income of asset/liability management, including the residual net interest income related to the FTP process, is included in Other. We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In the first quarter of 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.

18

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

Provision for credit losses is allocated to each business operating segment based on actual net charge-offs that have been recognized by the business operating segment. The difference between the consolidated provision for credit losses and the business operating segments’ net charge-offs is reflected in Other.
Noninterest income and expense directly managed by each business operating segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each business operating segment’s financial results in a manner similar to our unaudited interim Consolidated Financial Statements. Occupancy costs are allocated based on utilization of facilities by each business operating segment. Noninterest expenses incurred by centrally managed operations or business operating segments that directly support another business operating segment’s operations are charged to the applicable business operating segment based on its utilization of those services.
Income taxes are assessed to each business operating segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.
Developing and applying methodologies used to allocate items among the business operating segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines change, or our organizational structure changes.
Consumer Banking
 
As of and for the Three Months Ended March 31,
 
 
 
 
(dollars in millions)
2018


2017

              
Change

Percent

Net interest income (1)

$733



$638



$95


15
%
Noninterest income
222


220


2


1

Total revenue
955


858


97


11

Noninterest expense
656


647


9


1

Profit before provision for credit losses
299


211


88


42

Provision for credit losses
72


64


8


13

Income before income tax expense
227


147


80


54

Income tax expense
57


52


5


10

Net income

$170



$95



$75


79

Loans (period-end) (2)

$59,795



$57,494



$2,301


4

Average Balances:
 
 
 

 



Total assets

$61,348



$58,660



$2,688


5
%
Total loans and leases (2)
59,942


57,309


2,633


5

Deposits
75,416


74,133


1,283


2

Interest-earning assets
59,994


57,361


2,633


5

Key Performance Metrics:
 

 




 
Net interest margin (3)
4.96
%

4.51
%

45
  bps

 
Efficiency ratio
68.72


75.41


(669
) bps

 
Loans-to-deposits ratio (average balances)(2)
79.48


77.31


217
  bps

 
Return on average total tangible assets (3)
1.12


0.66


46
  bps

 
(1) We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.
(2)  Includes loans held for sale.
(3) Ratios for the periods ended March 31, 2018 and 2017 are presented on an annualized basis.

Consumer Banking net income of $170 million increased $75 million, or 79%, from $95 million in first quarter 2017, as the benefit of a $97 million increase in total revenue more than offset a $9 million increase in noninterest expense. Net interest income of $733 million increased $95 million, or 15%, from first quarter 2017, driven by the impact of the FTP methodology enhancement as well as the benefit of a $2.6 billion increase in average loans led by residential mortgage, education and retail unsecured categories with higher loan yields that included the benefit of higher rates, partially offset by an increase in deposit costs.
Noninterest income increased $2 million, or 1%, from first quarter 2017, driven by an increase in mortgage banking fees and trust and investment services fees, partially offset by lower service charges and fees. Noninterest

19

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

expense of $656 million increased $9 million, or 1%, from first quarter 2017, driven by higher salaries and benefits and outside services. These results were partially offset by lower credit collection costs. Provision for credit losses of $72 million increased $8 million, or 13%, largely driven by higher net charge-offs in auto and retail unsecured categories.
Commercial Banking
 
As of and for the Three Months Ended March 31,
 
 
 
 
(dollars in millions)
2018

 
2017

 
Change
 
Percent

Net interest income (1)

$357

 

$346

 

$11

 
3
%
Noninterest income
125

 
134

 
(9
)
 
(7
)
Total revenue
482

 
480

 
2

 

Noninterest expense
208

 
190

 
18

 
9

Profit before provision for credit losses
274

 
290

 
(16
)
 
(6
)
Provision for credit losses
(4
)
 
19

 
(23
)
 
(121
)
Income before income tax expense
278

 
271

 
7

 
3

Income tax expense
63

 
91

 
(28
)
 
(31
)
Net income

$215

 

$180

 

$35

 
19

Loans and leases (period-end) (2)

$49,868

 

$48,013

 

$1,855

 
4

Average Balances:
 
 
 
 
 
 


Total assets

$50,393

 

$49,243

 

$1,150

 
2
%
Total loans and leases (2)
49,285

 
48,154

 
1,131

 
2

Deposits
30,766

 
28,973

 
1,793

 
6

Interest-earning assets
49,479

 
48,283

 
1,196

 
2

Key Performance Metrics:
 
 
 
 
 
 
 
Net interest margin (3)
2.93
%
 
2.91
%
 
2
  bps
 
 
Efficiency ratio
43.07

 
39.80

 
327
  bps
 
 
Loans-to-deposits ratio (average balances)(2)
160.19

 
166.20

 
(601
) bps
 
 
Return on average total tangible assets (3)
1.73

 
1.48

 
25
  bps
 
 
(1) We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.
(2)  Includes loans held for sale.
(3) Ratios for the periods ended March 31, 2018 and 2017 are presented on an annualized basis.

Commercial Banking net income of $215 million increased $35 million, or 19%, from $180 million in first quarter 2017, as the benefit of a $2 million increase in total revenue and a $23 million decrease in provision for credit losses was partially offset by an $18 million increase in noninterest expense. Net interest income of $357 million increased $11 million, or 3%, from $346 million in first quarter 2017, reflecting a $1.1 billion increase in average loans and leases and a $1.8 billion increase in average deposits.
Noninterest income of $125 million decreased $9 million, or 7%, from $134 million in first quarter 2017, reflecting lower capital markets and leasing fees. Noninterest expense of $208 million increased $18 million, or 9%, from $190 million in first quarter 2017, largely driven by higher salaries and employee benefits and outside services. Provision for credit losses decreased $23 million from first quarter 2017, driven by lower net charge-offs.

20

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

Other
 
As of and for the Three Months Ended March 31,
 
 
 
 
(in millions)
2018

 
2017

 
Change

 
Percent

Net interest income (1)

$1

 

$21

 

($20
)
 
(95
%)
Noninterest income
24

 
25

 
(1
)
 
(4
)
Total revenue
25

 
46

 
(21
)
 
(46
)
Noninterest expense
19

 
17

 
2

 
12

Profit before provision for credit losses
6

 
29

 
(23
)
 
(79
)
Provision for credit losses
10

 
13

 
(3
)
 
(23
)
(Loss) income before income tax benefit
(4
)
 
16

 
(20
)
 
(125
)
Income tax benefit
(7
)
 
(29
)
 
22

 
76

Net income

$3

 

$45

 

($42
)
 
(93
)
Loans and leases (period-end) (2)

$2,562

 

$3,273

 

($711
)
 
(22
)
Average Balances:
 
 
 
 


 


Total assets

$39,782

 

$40,883

 

($1,101
)
 
(3
%)
Total loans and leases (2)
2,563

 
3,186

 
(623
)
 
(20
)
Deposits
7,241

 
6,848

 
393

 
6

Interest-earning assets
29,198

 
30,766

 
(1,568
)
 
(5
)
(1) We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.
(2)  Includes loans held for sale.

Other net income of $3 million decreased from $45 million in first quarter 2017, primarily driven by a $23 million benefit related to the settlement of state tax matters in first quarter 2017 and lower net interest income. Net interest income decreased $20 million, including an FTP methodology enhancement. Results also reflected lower net charge-offs and a reserve build of $8 million in first quarter 2018, compared to a reserve build of $9 million in first quarter 2017.

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


ANALYSIS OF FINANCIAL CONDITION
Securities
Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns. The following table presents our securities AFS and HTM:
 
March 31, 2018
 
December 31, 2017
 
 
(in millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Change in Fair Value
Debt Securities Available for Sale, At Fair Value:(1)
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other

$12

 

$12

 

$12

 

$12

 

$—

 
%
State and political subdivisions
6

 
6

 
6

 
6

 

 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
20,257

 
19,654

 
20,065

 
19,828

 
(174
)
 
(1
)
Other/non-agency
288

 
286

 
311

 
311

 
(25
)
 
(8
)
Total mortgage-backed securities
20,545

 
19,940

 
20,376

 
20,139

 
(199
)
 
(1
)
   Total debt securities available for sale, at fair value

$20,563

 

$19,958

 

$20,394

 

$20,157

 

($199
)
 
(1
%)
Debt Securities Held to Maturity:(1)
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities

$3,747

 

$3,622

 

$3,853

 

$3,814

 

($192
)
 
(5
%)
Other/non-agency
808

 
817

 
832

 
854

 
(37
)
 
(4
)
Total mortgage-backed securities
4,555

 
4,439

 
4,685

 
4,668

 
(229
)
 
(5
)
   Total debt securities held to maturity

$4,555

 

$4,439

 

$4,685

 

$4,668

 

($229
)
 
(5
)
   Total debt securities available for sale and held to maturity

$25,118

 

$24,397

 

$25,079

 

$24,825

 

($428
)
 
(2
%)
Equity Securities:(1)
 
 
 
 
 
 
 
 
 
 
 
Equity securities, at fair value

$172

 

$172

 

$169

 

$169

 

$3

 
2
%
Equity securities, at cost
748

 
748

 
722

 
722

 
26

 
4

   Total equity securities

$920

 

$920

 

$891

 

$891

 

$29

 
3
%
(1)As of January 1, 2018, we adopted ASU 2016-01, Financial Instruments, Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet.

As of March 31, 2018, the fair value of the AFS and HTM debt securities portfolio decreased $428 million to $24.4 billion, compared with $24.8 billion as of December 31, 2017. The decline in fair value of the AFS debt portfolio of $199 million was attributable to an increase in net unrealized losses on mortgage-backed securities of $368 million due to higher interest rates over the period. This was partially offset by a net reinvestment of proceeds from maturities and paydowns of $169 million. The decline in the fair value of the HTM debt portfolio of $229 million was attributable to net principal paydowns of $130 million, which were not reinvested in the HTM portfolio as well as a $99 million increase in net unrealized losses on mortgage-backed securities due to higher interest rates over the period.

As of March 31, 2018, the portfolio’s average effective duration was 4.4 years compared with 3.9 years as of December 31, 2017, as higher long-term rates drove a decrease in securities prepayment speeds. We manage the securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our 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 government-sponsored entity-issued mortgage-backed securities represent 95% of the fair value of the debt securities portfolio holdings. The portfolio composition is also dominated by holdings backed by mortgages to facilitate our ability to pledge them to the FHLBs, which has become increasingly important due to the enhanced liquidity

22

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

requirements of the liquidity coverage ratio and the liquidity stress test. For further discussion of the liquidity coverage ratios, see “Regulation and Supervision — Liquidity Standards” in Part I — Business, included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Loans and Leases
Our loans and leases are disclosed in portfolio segments and classes. Our loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential mortgages, home equity loans, home equity lines of credit, home equity loans serviced by others, home equity lines of credit serviced by others, automobile, education, credit cards and other retail. Our SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others, which we service a portion of internally. The following table shows the composition of loans and leases, including non-core loans, as of:
(in millions)
March 31, 2018
 
December 31, 2017
 
Change
 
 Percent
Commercial