CITIZENS FINANCIAL GROUP INC/RI - Annual Report: 2019 (Form 10-K)

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•	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;

•	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.

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i.	are no longer subject to any LCR requirement (or in certain cases, are subject to reduced requirements),

iii.	remain eligible to opt-out of the requirement to recognize most elements of Accumulated Other Comprehensive Income in regulatory capital,

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•	4.0% tier 1 capital to total average consolidated assets as defined under U.S. Basel III Standardized approach (known as the “leverage ratio”).

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i.	the arrangements should provide employees with incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk;

ii.	the arrangements should be compatible with effective controls and risk management; and

iii.	the arrangements should be supported by strong corporate governance.

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i.	restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and

ii.

a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.

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•	The Parent Company may be compelled to contribute capital to CBNA, including by engaging in a public offering to raise such capital. Furthermore, any extensions of credit from the Parent Company to CBNA that are included in CBNA’s capital would be subordinate in right of payment to depositors and certain other indebtedness of CBNA.

•	In the event of a bank holding company’s bankruptcy, any commitment that the bank holding company had been required to make to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

•	In the event of impairment of the capital stock of CBNA, the Parent Company, as CBNA’s stockholder, could be required to pay such deficiency.

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•	quarterly variations in our results of operations or the quarterly financial results of companies perceived to be similar to us;

•	changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

•	our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;

•	fluctuations in the market valuations of companies perceived by investors to be comparable to us;

•	future sales of our common stock;

•	additions or departures of members of our senior management or other key personnel;

•	changes in industry conditions or perceptions; and

•	changes in applicable laws, rules or regulations and other dynamics.

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•	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;

•	Efficiency ratio, which we define as the ratio of total noninterest expense to the sum of net interest income and total noninterest income. The efficiency ratio helps us to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to income. A decrease in the efficiency ratio represents improvement;

•	Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense; and

•	CET1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach.

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•	Net income available to common stockholders of $1.7 billion increased $26 million, or 2%, compared to 2018. Earnings per diluted common share increased $0.29, or 8%, from 2018.

◦	On an Underlying basis,* net income available to common stockholders of $1.7 billion increased by 2% led by 6% revenue growth reflecting 17% growth in noninterest income and 2% growth in net interest income, partially offset by 6% growth in noninterest expense and 21% increase in provision for credit losses.

◦	On an Underlying basis,* earnings per diluted common share of $3.84 increased $0.28, or 8%, from $3.56 for the year ended 2018.

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•	Total revenue of $6.5 billion increased $363 million, or 6%, from 2018, driven by a 2% increase in net interest income    and an 18% increase in noninterest income.

◦	Net interest income of $4.6 billion increased $82 million, or 2%, compared to $4.5 billion in 2018, as the benefit of 4% growth in average interest-earning assets was partially offset by the impact of a reduction in net interest margin, given the challenging yield-curve environment.

◦

Net interest margin of 3.14% decreased 7 basis points from 3.21% in 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates.

–	Net interest margin on a fully taxable-equivalent basis of 3.16% decreased by 6 basis points, compared to 3.22% in 2018 given the challenging yield-curve environment.

–	Average loans and leases of $117.9 billion increased $4.4 billion, or 4%, from $113.5 billion in 2018, reflecting a 5% increase in commercial loans and leases and a 3% increase in retail loans.

–	Average deposits of $123.3 billion increased $7.4 billion, or 6%, from $115.9 billion in 2018, largely reflecting growth in savings, term deposits and checking with interest.

◦	Noninterest income of $1.9 billion increased $281 million, or 18%, from 2018, with record results in mortgage banking, capital markets fees, and trust and investment services fees, which included the impact of Acquisitions, along with higher foreign exchange and interest rate products and card fees.

•	Noninterest expense of $3.8 billion increased $228 million, or 6%, compared to $3.6 billion in 2018, reflecting higher salaries and employee benefits, outside services, and equipment and software expense, driven by the impact of Acquisitions, partially offset by lower other operating expense largely tied to a reduction in FDIC insurance.

◦	On an Underlying basis,* noninterest expense increased 6% from 2018.

•	The efficiency ratio of 59.3% compared to 59.1% in 2018, and ROTCE of 12.6% compared to 12.9%.

◦	The Underlying efficiency ratio of 58.2% compared to 58.1% in 2018.

◦	Underlying ROTCE of 12.8% compares with 13.1% and reflected an approximate 50 basis point drag from higher tangible common equity value, given the positive impact of lower long-term rates on securities valuations.

•	Provision for credit losses of $393 million increased $67 million, or 21%, from $326 million in 2018, reflecting 4% average loan growth, stable credit quality, as well as a small number of uncorrelated losses in commercial, and continued seasoning in retail growth portfolios.

•	Tangible book value per common of $32.08 increased 12% from 2018. Fully diluted average common shares outstanding decreased by 29.2 million shares, or 6% over the same period.

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•	Declared quarterly common stock dividends of $0.32 per share for the first and second quarters of 2019, and $0.36 per share for the third and fourth quarters of 2019, aggregating to $617 million;

•	Declared semi-annual dividends of $27.50 per share on the 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock, aggregating to $14 million;

•	Declared semi-annual dividends of $30.00 per share on the 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, aggregating to $18 million;

•	Declared quarterly dividends of $15.94 per share on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $19 million;

•	Issued $300 million, or 12,000,000 depository shares, of 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock (the “Series D Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, with net proceeds of $293 million;

•	Declared quarterly dividends of $11.82 per share in the first quarter of 2019 and $15.88 per share in the second, third, and fourth quarters of 2019 on the Series D Preferred Stock, aggregating to $18 million;

•	Issued $450 million, or 18,000,000 depository shares, of 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock (the “Series E Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, with net proceeds of $437 million;

•	Declared a quarterly dividend of $9.44 per share in fourth quarter 2019 on the Series E Preferred Stock, aggregating to $4 million; and

•	Repurchased $1.2 billion of our outstanding common stock

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•	Core deposits continued to be our primary source of funding and our consolidated year-end loans-to-deposits ratio, which excludes LHFS, was 95.0%;

•	Our cash position (which is defined as cash balance held at the FRB) totaled $2.1 billion;

•	Contingent liquidity was $28.5 billion, consisting of unencumbered high-quality liquid securities of $19.2 billion, unused FHLB capacity of $7.2 billion, and our cash position of $2.1 billion. Asset liquidity (a component of contingent liquidity) was $21.3 billion, consisting of our cash position of $2.1 billion and unencumbered high-quality liquid securities of $19.2 billion;

•	Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $12.4 billion. Use of this borrowing capacity would be considered only during exigent circumstances; and

•	For a summary of our sources and uses of cash by type of activity for the years ended December 31, 2019 and 2018, see the Consolidated Statements of Cash Flows in Item 8.

•	Current liquidity sources and capacities, including cash at the FRBs, free and liquid securities and available and secured FHLB borrowing capacity;

•	Liquidity stress sources, including idiosyncratic, systemic and combined stresses, in addition to evolving regulatory requirements; and

•	Current and prospective exposures, including secured and unsecured wholesale funding and spot and cumulative cash-flow gaps across a variety of horizons.

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•	Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities;

•	Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar instruments; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by market data for substantially the full term of the asset or liability; and

•	Level 3. Unobservable inputs that are supported by little or no market information and that are significant to the fair value measurement.

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•	We tested the effectiveness of controls over the (i) PD risk rating models, (ii) reviews of individual loans and the assignment of PD and LGD ratings, (iii) estimation of additional overlays and the qualitative component and (iv) the overall calculation of the commercial loan ALLL and reserve for unfunded commitments.

•	We used our credit specialists to assist us in evaluating the reasonableness of the PD risk rating models.

•	We evaluated the relevance of the historical loss rates and data used in the determination of the ALLL and reserve for unfunded commitments.

•	We evaluated the accuracy of the PD and LGD ratings assigned to a sample of individual loans within the commercial portfolio.

•	We evaluated the appropriateness and relevance of the qualitative factors and related quantitative measures included in the qualitative component.

•	We tested the accuracy and evaluated the relevance of the historical loss data in the statistical analysis of prior charge-off rates used in determining the qualitative component.

•	We evaluated the reasonableness of the Company’s assessment and determination of the qualitative factors and related impact on the estimation of the qualitative component.

•	We tested the arithmetic accuracy of the calculation of the qualitative component.

•	We tested the arithmetic accuracy of the calculation of the commercial loan ALLL and reserve for unfunded commitments.

•	We evaluated the reasonableness of the Company’s commercial ALLL and reserve for unfunded commitments methodology and models by comparing actual loan losses to those amounts previously estimated by the Company.

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•	We tested the effectiveness of management’s controls covering the disclosure of the expected impact of the adoption of ASC 326, including controls covering accounting policy decisions, key assumptions and judgments, loss estimation modeling methodologies and the calculation of the expected credit losses.

•	We evaluated the appropriateness of the accounting policy decisions and disclosure of the estimated impact of the ASC 326 adoption.

•	We, with the assistance of our credit specialists, evaluated the reasonableness of the key assumptions and judgments, losses estimation modeling methodologies and calculated expected credit losses.

•	We tested the arithmetic accuracy of the calculation of the expected credit losses.

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•	Loans modified in a TDR that are determined to be collateral-dependent.

•	Loans to borrowers who have experienced an event (e.g., bankruptcy) that suggests a loss is either known or highly certain.

◦	Residential real estate and auto loans are charged down to the net realizable value within 60 days of receiving notification of the bankruptcy filing, or when the loan becomes 60 days past due if repayment is likely to occur.

◦	Credit card loans are fully charged off within 60 days of receiving notification of the bankruptcy filing or other event.

◦	Education loans are generally charged off when the loan becomes 60 days past due after receiving notification of a bankruptcy.

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•	Auto loans are written down to net realizable value upon repossession of the collateral.

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•	Marketing Rights - During 2003, Citizens entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania.

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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.

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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 89 counterparties. RPAs generally have terms ranging from one year to five years; however, certain outstanding agreements have terms as long as ten years.

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•	Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities.

•	Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by market data for substantially the full term of the asset or liability.

•	Level 3. Unobservable inputs that are supported by little or no market information and that are significant to the fair value measurement.

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•	Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements;

•	Consolidated Balance Sheets as of December 31, 2019 and 2018;

•	Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017;

•	Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017;

•	Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017;

•	Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017; and

•	Notes to Consolidated Financial Statements.

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101

The following materials from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements*

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

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