CITIZENS FINANCIAL GROUP INC/RI - Quarter Report: 2019 June (Form 10-Q)

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, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From

(Not Applicable)

Commission File Number 001-36636

(Exact name of the registrant as specified in its charter)



Delaware		05-0412693
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

One Citizens Plaza, Providence, RI 02903

(Address of principal executive offices, including zip code)

(401) 456-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	CFG	New York Stock Exchange
Depositary Shares, representing 6.350% Non-Cumulative Perpetual Preferred Stock, Series D	CFG PrD	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

There were 447,086,518 shares of Registrant’s common stock ($0.01 par value) outstanding on August 1, 2019.





	Table of Contents


Glossary of Acronyms and Terms		3

Part I. Financial Information		5

Item 1. Financial Statements		51

Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 (unaudited)		52
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018		53
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018		54
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018		55
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2019 and 2018		57
Notes to the Consolidated Financial Statements (unaudited)		58

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		5

Item 3. Quantitative and Qualitative Disclosures about Market Risk		97

Item 4. Controls and Procedures		97


Part II. Other Information		97

Item 1. Legal Proceedings		97
Item 1A. Risk Factors		97
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		97
Item 6. Exhibits		98


Signature		99

CITIZENS FINANCIAL GROUP, INC.

GLOSSARY OF ACRONYMS AND TERMS

The following is a list of common acronyms and terms we regularly use in our financial reporting:



ACL		Allowance for Credit Losses
Acquisitions		Refers to acquisitions after second quarter 2018, including Franklin American Mortgage Company, Clarfeld Financial Advisors, LLC and Bowstring Advisors LLC
AFS		Available for Sale
ALLL		Allowance for Loan and Lease Losses
ALM		Asset and Liability Management
AOCI		Accumulated Other Comprehensive Income (Loss)
ATM		Automated Teller Machine
Board of Directors		The Board of Directors of Citizens Financial Group, Inc.
bps		Basis Points
CBNA		Citizens Bank, National Association
CCAR		Comprehensive Capital Analysis and Review
CCB		Capital Conservation Buffer
CCMI		Citizens Capital Markets, Inc.
CET1		Common Equity Tier 1
CET1 capital ratio		Common Equity Tier 1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
Citizens, CFG, the Company, we, us, or our		Citizens Financial Group, Inc. and its Subsidiaries
CLTV		Combined Loan to Value
Dodd-Frank Act		The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EGRRCPA		Economic Growth, Regulatory Relief and Consumer Protection Act
EPS		Earnings Per Share
Exchange Act		The Securities Exchange Act of 1934
FAMC		Franklin American Mortgage Company
FAMC acquisition		The August 1, 2018 acquisition of Franklin American Mortgage Company
Fannie Mae (FNMA)		Federal National Mortgage Association
FDIC		Federal Deposit Insurance Corporation
FHLB		Federal Home Loan Bank
FICO		Fair Isaac Corporation (credit rating)
FRB		Board of Governors of the Federal Reserve System and, as applicable, Federal Reserve Bank(s)
Freddie Mac (FHLMC)		Federal Home Loan Mortgage Corporation
FTP		Funds Transfer Pricing
GAAP		Accounting Principles Generally Accepted in the United States of America
Ginnie Mae (GNMA)		Government National Mortgage Association
GSE		Government Sponsored Entity
HTM		Held To Maturity
LCR		Liquidity Coverage Ratio
LHFS		Loans Held for Sale
LIBOR		London Interbank Offered Rate
LIHTC		Low Income Housing Tax Credit
LTV		Loan to Value
MBS		Mortgage-Backed Securities
Mid-Atlantic		District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia
Midwest		Illinois, Indiana, Michigan, and Ohio

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
OCC		Office of the Comptroller of the Currency
OCI		Other Comprehensive Income (Loss)
Parent Company		Citizens Financial Group, Inc. (the Parent Company of Citizens Bank, National Association and other subsidiaries)
ROTCE		Return on Average Tangible Common Equity
RPA		Risk Participation Agreement
SBA		Small Business Administration
SEC		United States Securities and Exchange Commission
SVaR		Stressed Value at Risk
TDR		Troubled Debt Restructuring
Tier 1 capital ratio		Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
Tier 1 leverage ratio		Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by quarterly adjusted average assets as defined under the U.S. Basel III Standardized approach
Total capital ratio		Total capital, which includes Common Equity Tier 1 capital, tier 1 capital and allowance for credit losses and qualifying subordinated debt that qualifies as tier 2 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach
VaR		Value at Risk
VIE		Variable Interest Entities

CITIZENS FINANCIAL GROUP, INC.

PART I. FINANCIAL INFORMATION

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



		Page
Forward-Looking Statements		6
Introduction		7
Financial Performance		8
Selected Consolidated Financial Data		11
Results of Operations		13
Net Interest Income		13
Noninterest Income		17
Noninterest Expense		18
Provision for Credit Losses		19
Income Tax Expense		20
Business Operating Segments		21
Analysis of Financial Condition		28
Securities		28
Loans and Leases		29
Allowance for Credit Losses and Nonperforming Assets		29
Deposits		32
Borrowed Funds		33
Capital and Regulatory Matters		34
Liquidity		38
Off-Balance Sheet Arrangements		41
Critical Accounting Estimates		41
Risk Governance		42
Market Risk		42
Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations		47

CITIZENS FINANCIAL GROUP, INC.

FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:


•	Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense;


•	The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment;


•	Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals;


•	Our ability to meet heightened supervisory requirements and expectations;


•	Liabilities and business restrictions resulting from litigation and regulatory investigations;


•	Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms;


•	The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;


•	Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;


•	The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;


•	Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;


•	A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and


•	Management’s ability to identify and manage these and other risks.

In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.

More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2018.

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 $162.7 billion in assets as of June 30, 2019. 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 2,900 ATMs and approximately 1,100 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.

The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Item 1 of this Form 10-Q, as well as other information contained in this document and our Annual Report on Form 10-K for the year ended December 31, 2018.

Key Performance Metrics Used by Management and Non-GAAP Financial Measures

As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and statement of operations, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally.

The primary line items we use in our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense, net income and net income available to common stockholders. The primary line items we use in our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives.

We consider various measures when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including:


•	Return on average common equity, which we define as annualized net income available to common stockholders divided by average common equity;


•	Return on average tangible common equity, which we define as annualized net income available to common stockholders divided by average common equity excluding average goodwill (net of related deferred tax liability) and average other intangibles;


•	Return on average total assets, which we define as annualized net income divided by average total assets;


•	Return on average total tangible assets, which we define as annualized net income divided by average total assets excluding average goodwill (net of related deferred tax liability) and average other intangibles;


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


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


•	Net interest margin, which we calculate by dividing annualized net interest income for the period by average total interest-earning assets, is a key measure that we use to evaluate our net interest income; and


•	Common equity tier 1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

This document contains non-GAAP financial measures denoted as “Underlying” results. Underlying results for any given reporting period exclude certain items that may occur in that period which Management does not consider indicative of the Company’s on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by our Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and accordingly, are useful to consider in addition to our GAAP financial results.

Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.

Non-GAAP measures are denoted throughout the MD&A by the use of the term Underlying and/or are followed by an asterisk (*). For additional information regarding our non-GAAP financial measures and reconciliations, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” included in this Report.

FINANCIAL PERFORMANCE

Second Quarter 2019 compared with Second Quarter 2018 - Key Highlights

Second quarter 2019 net income of $453 million increased 7% from $425 million in second quarter 2018, with earnings per diluted common share of $0.95, up 8% from $0.88 per diluted common share in second quarter 2018. Second quarter 2019 ROTCE of 12.8% compared to 12.9% in second quarter 2018.

There were $5 million after-tax, or $0.01 per diluted common share, of notable items recorded in second quarter 2019 tied to integration costs associated with Acquisitions. There were no notable items recorded in second quarter 2018.



	Three Months Ended June 30,
	2019								2018
(in millions)	Noninterest expense		Income tax expense			Net Income			Noninterest expense		Income tax expense		Net Income
Reported results (GAAP):		$951		$127			$453			$875		$124		$425
Less notable items:
Total integration costs	7		(2		)	(5		)	—		—		—
Underlying results* (non-GAAP)		$944		$129			$458			$875		$124		$425

* 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 $435 million increased $10 million, or 2%, compared to $425 million in second quarter 2018, driven by 8% revenue growth, with 4% growth in net interest income and 19% growth in noninterest income.


◦	On an Underlying basis,* net income available to common stockholders of $440 million increased $15 million, or 4%, from second quarter 2018.


•	Total revenue of $1.6 billion increased $119 million, or 8%, from second quarter 2018, reflecting strength in noninterest income and increased net interest income.


◦	Net interest income of $1.2 billion increased $45 million, or 4%, compared to $1.1 billion in second quarter 2018, driven by growth in interest earning assets and stable net interest margin.


◦	Net interest margin of 3.20% remained stable compared to second quarter 2018, reflecting higher interest-earning asset yields given higher short-term interest rates and continued mix shift towards higher-yielding assets, offset by an increase in funding costs tied to higher rates and growth.


–	Net interest margin on a fully taxable-equivalent basis of 3.21% decreased by one basis point, compared to 3.22% in second quarter 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS


–	Average loans and leases of $117.8 billion increased $4.9 billion, or 4%, from $112.9 billion in second quarter 2018, reflecting a $3.3 billion increase in commercial loans and leases and a $1.6 billion increase in retail loans.


–	Average deposits of $123.2 billion increased $8.0 billion, or 7%, from $115.1 billion in second quarter 2018, reflecting growth in term deposits, savings and checking with interest, partially offset by a reduction in money market accounts and demand deposits.


◦	Noninterest income of $462 million increased $74 million, or 19%, from second quarter 2018, driven by growth in mortgage banking fees, capital market fees, trust and investment services fees and card fees.


•	Noninterest expense of $951 million increased $76 million, or 9%, compared to $875 million in second quarter 2018, reflecting the impact of our investments in growth initiatives, partially offset by lower other operating expense, largely tied to a reduction in FDIC insurance and advertising expense.


◦	On an Underlying basis,* noninterest expense increased $69 million, or 8%, from second quarter 2018.


•	The efficiency ratio increased to 58.4% from 58.0% in second quarter 2018, and operating leverage declined 1% from second quarter 2018, both primarily driven by the impact of notable items and Acquisitions.


◦	On an Underlying basis,* the efficiency ratio of 58.0% remained stable with second quarter 2018, despite a 38 basis point drag related to Acquisitions.


◦	On an Underlying basis,* operating leverage was stable despite a 68 basis point drag related to Acquisitions.


•	Provision for credit losses of $97 million increased $12 million, or 14%, from $85 million in second quarter 2018, reflecting 4% average loan growth, continued seasoning in retail growth portfolios and several idiosyncratic losses in commercial, with key metrics continuing to reflect strong credit quality.


•	ROTCE of 12.8% decreased slightly from 12.9% in second quarter 2018 as an approximately 50 basis point drag from higher equity value, given the benefit on securities valuations from lower long-term rates, offset the benefit of profitability growth.


◦	On an Underlying basis,* ROTCE of 12.9% was stable with second quarter 2018.


•	Tangible book value per common share of $30.88 increased 12% from second quarter 2018. Fully diluted average common shares outstanding decreased 6%, or 26.8 million shares, over the same period.

First Half 2019 compared with First Half 2018 - Key Highlights

Net income of $892 million increased 10% from $813 million in the first half of 2018, with earnings per diluted common share of $1.86, up 13% from $1.65 per diluted common share over the first half of 2018. ROTCE of 12.9% improved from 12.3% in the first half of 2018.

There were $9 million after-tax, or $0.02 per diluted common share, of notable items in the first half of 2019 tied to integration costs related to Acquisitions. There were no notable items in the first half of 2018.



	Six Months Ended June 30,
	2019								2018
(in millions)	Noninterest expense		Income tax expense			Net Income			Noninterest expense		Income tax expense		Net Income
Reported results (GAAP)		$1,888		$254			$892			$1,758		$237		$813
Less notable items:
Total integration costs	12		(3		)	(9		)	—		—		—
Underlying results* (non-GAAP)		$1,876		$257			$901			$1,758		$237		$813


•	Net income available to common stockholders of $859 million increased $53 million, or 7%, compared to $806 million in the first half of 2018. Earnings per diluted common share increased $0.21, or 13%, from the first half of 2018.


◦	On an Underlying basis,* net income available to common stockholders of $868 million increased by 8%, led by 8% revenue growth with 5% growth in net interest income.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS


◦	On an Underlying basis,* earnings per diluted common share of $1.88 increased $0.23, or 14%, from the first half of 2018.


•	Total revenue of $3.2 billion increased $245 million, or 8%, from the first half of 2018, driven by strong net interest and noninterest income growth.


◦	Net interest income of $2.3 billion increased $114 million, or 5%, compared to $2.2 billion in the first half of 2018, driven by higher loan yields and 5% average loan growth.


◦	Net interest margin of 3.22% increased two basis points from 3.20% in the first half of 2018, driven by higher interest-earning asset yields given higher short-term interest rates and continued mix shift toward more attractive risk-adjusted return portfolios.


–	Net interest margin on a fully taxable-equivalent basis of 3.23% increased by two basis points, compared to 3.21% in the first half of 2018.


–	Average loans and leases of $117.7 billion increased $5.7 billion, or 5%, from $112.0 billion in the first half of 2018, reflecting a $4.2 billion increase in commercial loans and leases and a $1.5 billion increase in retail loans.


–	Average deposits of $121.8 billion increased $7.5 billion, or 7%, from $114.3 billion in the first half of 2018, reflecting growth in term deposits, regular savings and checking with interest.


◦	Noninterest income of $890 million increased $131 million, or 17%, from the first half of 2018, driven by growth in mortgage banking fees, capital market fees, trust and investment services fees and foreign exchange and interest rate products fees.


•	Noninterest expense of $1.9 billion increased $130 million, or 7%, from $1.8 billion in the first half of 2018, reflecting the impact of our investments in growth initiatives, partially offset by lower other operating expense.


◦	On an Underlying basis,* noninterest expense increased 7% from the first half of 2018.


•	Operating leverage for the first half of 2019 was 1%. The efficiency ratio decreased by 47 basis points to 58.7% compared to the first half of 2018, and ROTCE improved 55 basis points to 12.9%.


◦	On an Underlying basis,* operating leverage was 1.5%, the efficiency ratio improved 83 basis points from 59.2% in the first half of 2018 and ROTCE increased 68 basis points from 12.3%.


•	Provision for credit losses of $182 million increased $19 million, or 12%, from $163 million for the first half of 2018, reflecting 5% average loan growth, continued seasoning in retail growth portfolios and several idiosyncratic losses in commercial.


•	Tangible book value per common share of $30.88 increased 12% from the first half of 2018. Fully diluted average common shares outstanding decreased 6%, or 26.8 million shares, over the same period.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SELECTED CONSOLIDATED FINANCIAL DATA

The summary Consolidated Operating Data for the three and six months ended June 30, 2019 and 2018 and the summary Consolidated Balance Sheet data as of June 30, 2019 and December 31, 2018 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1 — Financial Statements of this Report. Our historical results are not necessarily indicative of the results expected for any future period.



	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in millions, except per share amounts)	2019			2018			2019			2018
OPERATING DATA:
Net interest income		$1,166			$1,121			$2,326			$2,212
Noninterest income	462			388			890			759
Total revenue	1,628			1,509			3,216			2,971
Provision for credit losses	97			85			182			163
Noninterest expense	951			875			1,888			1,758
Income before income tax expense	580			549			1,146			1,050
Income tax expense	127			124			254			237
Net income		$453			$425			$892			$813
Net income available to common stockholders		$435			$425			$859			$806
Net income per common share - basic		$0.95			$0.88			$1.87			$1.66
Net income per common share - diluted		$0.95			$0.88			$1.86			$1.65
OTHER OPERATING DATA⁽¹⁾:
Return on average common equity	8.54		%	8.65		%	8.58		%	8.24		%
Return on average tangible common equity	12.75			12.93			12.87			12.32
Return on average total assets	1.13			1.11			1.12			1.08
Return on average total tangible assets	1.17			1.16			1.17			1.12
Efficiency ratio	58.41			57.95			58.70			59.17
Operating leverage⁽²⁾	(0.85		)	6.96			0.86			4.56
Net interest margin⁽³⁾	3.20			3.20			3.22			3.20
Effective income tax rate	21.86			22.58			22.14			22.55

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

⁽²⁾“Operating leverage” represents the period-over-period percent change in total revenue, less the period-over-period percent change in noninterest expense.

⁽³⁾ In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of

days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



(dollars in millions)	June 30, 2019			December 31, 2018
BALANCE SHEET DATA:
Total assets		$162,749			$160,518
Loans held for sale, at fair value	1,750			1,219
Other loans held for sale	455			101
Loans and leases	116,838			116,660
Allowance for loan and lease losses	(1,227		)	(1,242		)
Total securities	25,898			25,075
Goodwill	7,040			6,923
Total liabilities	140,732			139,701
Total deposits	124,004			119,575
Federal funds purchased and securities sold under agreements to repurchase	1,132			1,156
Other short-term borrowed funds⁽¹⁾	309			161
Long-term borrowed funds⁽¹⁾	11,538			15,925
Total stockholders’ equity	22,017			20,817
OTHER BALANCE SHEET DATA:
Asset Quality Ratios:
Allowance for loan and lease losses as a percentage of loans and leases	1.05		%	1.06		%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases	159.43			155.99
Nonperforming loans and leases as a percentage of loans and leases	0.66			0.68
Capital Ratios:
CET1 capital ratio⁽²⁾	10.5		%	10.6		%
Tier 1 capital ratio	11.3			11.3
Total capital ratio	13.4			13.3
Tier 1 leverage ratio	10.1			10.0

⁽¹⁾ Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.

⁽²⁾ See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Market Risk — Non-Trading Risk,” included in this Report and “—Risk Governance” as described in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 June 30,
	2019							2018							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		$1,229			$7	2.16	%		$1,801			$8	1.77	%		($572	)	39 bps
Taxable investment securities	25,620			164		2.56		25,197			165		2.62		423			(6	)
Non-taxable investment securities	5			—		2.60		6			—		2.60		(1		)	—
Total investment securities	25,625			164		2.56		25,203			165		2.62		422			(6	)
Commercial	41,755			471		4.45		39,399			405		4.07		2,356			38
Commercial real estate	13,379			166		4.91		12,071			134		4.39		1,308			52
Leases	2,745			19		2.89		3,073			21		2.69		(328		)	20
Total commercial loans and leases	57,879			656		4.48		54,543			560		4.06		3,336			42
Residential mortgages	19,232			176		3.65		17,488			156		3.57		1,744			8
Home equity loans	971			14		6.01		1,252			18		5.91		(281		)	10
Home equity lines of credit	12,332			158		5.15		13,112			144		4.40		(780		)	75
Home equity loans serviced by others	359			7		7.67		480			9		7.23		(121		)	44
Home equity lines of credit serviced by others	92			1		5.27		130			1		3.62		(38		)	165
Automobile	11,984			125		4.19		12,657			113		3.60		(673		)	59
Education	9,235			137		5.97		8,374			119		5.71		861			26
Credit cards	2,041			52		10.26		1,854			50		10.74		187			(48	)
Other retail	3,658			66		7.11		2,966			60		8.10		692			(99	)
Total retail loans	59,904			736		4.92		58,313			670		4.61		1,591			31
Total loans and leases	117,783			1,392		4.71		112,856			1,230		4.34		4,927			37
Loans held for sale, at fair value	1,528			15		3.93		470			5		4.15		1,058			(22	)
Other loans held for sale	158			2		5.67		195			3		6.38		(37		)	(71	)
Interest-earning assets	146,323			1,580		4.30		140,525			1,411		4.00		5,798			30
Allowance for loan and lease losses	(1,247		)					(1,246		)					(1		)
Goodwill	7,040							6,887							153
Other noninterest-earning assets	9,373							7,087							2,286
Total assets		$161,489							$153,253							$8,236
Liabilities and Stockholders’ Equity
Checking with interest		$23,919			$57	0.96	%		$22,185			$34	0.61	%		$1,734		35 bps
Money market accounts	35,228			114		1.30		36,396			79		0.87		(1,168		)	43
Regular savings	13,324			21		0.62		9,889			1		0.05		3,435			57
Term deposits	22,292			116		2.09		17,838			67		1.50		4,454			59
Total interest-bearing deposits	94,763			308		1.30		86,308			181		0.84		8,455			46
Federal funds purchased and securities sold under agreements to repurchase ⁽¹⁾	818			3		1.76		504			1		0.73		314			103
Other short-term borrowed funds ⁽²⁾	45			1		2.66		191			1		1.90		(146		)	76
Long-term borrowed funds ⁽²⁾	12,386			102		3.30		14,880			107		2.86		(2,494		)	44
Total borrowed funds	13,249			106		3.20		15,575			109		2.78		(2,326		)	42
Total interest-bearing liabilities	108,012			414		1.54		101,883			290		1.14		6,129			40
Demand deposits	28,389							28,834							(445		)
Other liabilities	3,536							2,433							1,103
Total liabilities	139,937							133,150							6,787
Stockholders’ equity	21,552							20,103							1,449
Total liabilities and stockholders’ equity		$161,489							$153,253							$8,236
Interest rate spread						2.77	%						2.87	%				(10)
Net interest income and net interest margin⁽³⁾					$1,166	3.20	%					$1,121	3.20	%				—
Net interest income and net interest margin, FTE⁽⁴⁾					$1,172	3.21	%					$1,127	3.22	%				(1) bps
Memo: Total deposits (interest-bearing and demand)		$123,152			$308	1.00	%		$115,142			$181	0.63	%		$8,010		37 bps

⁽¹⁾Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs.

⁽²⁾ Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.

⁽³⁾ In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of

days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.

⁽⁴⁾ Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. In the fully taxable-equivalent presentation of net interest income and net interest margin, interest income on tax-exempt assets is increased to make it fully equivalent to interest income earned on taxable assets. The FTE impact is predominantly attributable to commercial loans for the periods presented.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Quarter-To-Date Results: Net interest income of $1.2 billion increased $45 million, or 4%, from second quarter 2018, given 4% growth in interest-earning assets and stable net interest margin.

Net interest margin of 3.20% was stable with second quarter 2018, reflecting higher interest-earning asset yields given higher short-term interest rates and continued mix shift toward more attractive risk-adjusted return portfolios. These results were offset by higher funding costs and the impact of lower long-term rates on securities premium amortization. Net interest margin on an FTE basis of 3.21% was also stable compared to 3.22% in second quarter 2018. Average interest-earning asset yields of 4.30% increased 30 basis points from 4.00% in second quarter 2018, and average interest-bearing liability costs of 1.54% increased 40 basis points from 1.14% in second quarter 2018.

Average interest-earning assets of $146.3 billion in second quarter 2019 increased $5.8 billion, or 4%, from second quarter 2018, driven by a $4.9 billion, or 4% increase in loans and leases. Commercial loans and leases increased $3.3 billion, or 6%, while retail loans increased $1.6 billion, or 3%. Results also reflected a $1.0 billion increase in loans held for sale, primarily driven by the impact of the FAMC acquisition. Commercial loan results reflected strength in commercial and industrial loans, driven by geographic, product and client-focused expansion strategies as well as strength in commercial real estate, partially offset by planned reductions in commercial leases. Retail loan growth was driven by mortgage, unsecured and education finance, partially offset by a planned reduction in auto and lower home equity.

Second quarter 2019 average deposits of $123.2 billion increased $8.0 billion, or 7%, from second quarter 2018, reflecting growth in term, savings and checking with interest. These results were partially offset by a decline in money market accounts and demand deposits.

Average borrowed funds of $13.2 billion decreased $2.3 billion, or 15%, from second quarter 2018, driven by a $2.5 billion decrease in long-term borrowings reflecting improved funding mix from deposit growth, partially offset by an increase in federal funds purchased and repurchase agreements. Total borrowed funds costs of $106 million decreased $3 million from second quarter 2018. The total borrowed funds cost of 3.20% increased 42 basis points from 2.78% in second quarter 2018 due to an increase in short-term rates and a mix shift to long-term senior debt.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the major components of net interest income and net interest margin:



	Six Months Ended June 30,
	2019							2018							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		$1,362			$15	2.18	%		$1,622			$14	1.70	%		($260	)	48 bps
Taxable investment securities	25,379			330		2.60		25,315			333		2.63		64			(3	)
Non-taxable investment securities	5			—		2.60		6			—		2.60		(1		)	—
Total investment securities	25,384			330		2.60		25,321			333		2.63		63			(3	)
Commercial	41,659			931		4.44		38,683			762		3.92		2,976			52
Commercial real estate	13,325			331		4.94		11,812			253		4.25		1,513			69
Leases	2,809			40		2.87		3,093			41		2.65		(284		)	22
Total commercial loans and leases	57,793			1,302		4.48		53,588			1,056		3.92		4,205			56
Residential mortgages	19,163			351		3.66		17,326			309		3.56		1,837			10
Home equity loans	1,005			30		6.03		1,297			37		5.83		(292		)	20
Home equity lines of credit	12,441			317		5.14		13,232			282		4.30		(791		)	84
Home equity loans serviced by others	372			14		7.71		500			18		7.28		(128		)	43
Home equity lines of credit serviced by others	95			2		5.11		136			2		3.81		(41		)	130
Automobile	12,026			245		4.12		12,835			225		3.53		(809		)	59
Education	9,153			271		5.98		8,329			233		5.65		824			33
Credit cards	2,020			105		10.51		1,841			98		10.72		179			(21	)
Other retail	3,648			136		7.47		2,906			116		8.04		742			(57	)
Total retail loans	59,923			1,471		4.94		58,402			1,320		4.55		1,521			39
Total loans and leases	117,716			2,773		4.72		111,990			2,376		4.25		5,726			47
Loans held for sale, at fair value	1,283			26		4.09		445			9		4.01		838			8
Other loans held for sale	175			6		6.41		225			7		6.29		(50		)	12
Interest-earning assets	145,920			3,150		4.32		139,603			2,739		3.93		6,317			39
Allowance for loan and lease losses	(1,245		)					(1,241		)					(4		)
Goodwill	7,029							6,887							142
Other noninterest-earning assets	9,251							7,144							2,107
Total assets		$160,955							$152,393							$8,562
Liabilities and Stockholders’ Equity:
Checking with interest		$23,456			$109	0.94	%		$21,927			$60	0.55	%		$1,529		39 bps
Money market accounts	35,218			224		1.28		36,738			144		0.79		(1,520		)	49
Regular savings	12,977			38		0.59		9,759			2		0.05		3,218			54
Term deposits	21,713			224		2.08		17,174			120		1.41		4,539			67
Total interest-bearing deposits	93,364			595		1.28		85,598			326		0.77		7,766			51
Federal funds purchased and securities sold under agreements to repurchase ⁽¹⁾	729			5		1.54		574			2		0.70		155			84
Other short-term borrowed funds ⁽²⁾	52			1		2.71		388			3		1.73		(336		)	98
Long-term borrowed funds ⁽²⁾	13,555			223		3.28		14,662			196		2.66		(1,107		)	62
Total borrowed funds	14,336			229		3.19		15,624			201		2.57		(1,288		)	62
Total interest-bearing liabilities	107,700			824		1.54		101,222			527		1.05		6,478			49
Demand deposits	28,426							28,690							(264		)
Other liabilities	3,560							2,440							1,120
Total liabilities	139,686							132,352							7,334
Stockholders’ equity	21,269							20,041							1,228
Total liabilities and stockholders’ equity		$160,955							$152,393							$8,562
Interest rate spread						2.78	%						2.88	%				(10)
Net interest income and net interest margin⁽³⁾					$2,326	3.22	%					$2,212	3.20	%				2 bps
Net interest income and net interest margin, FTE⁽⁴⁾					$2,338	3.23	%					$2,223	3.21	%				2 bps
Memo: Total deposits (interest-bearing and demand)		$121,790			$595	0.98	%		$114,288			$326	0.57	%		$7,502		41 bps

⁽³⁾ In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of

days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Year-To-Date Results: Net interest income of $2.3 billion increased $114 million, reflecting 5% average interest-earning asset growth and a two basis point increase in net interest margin.

Net interest margin of 3.22% increased two basis points compared to 3.20% in the first half of 2018, driven by higher interest-earning asset yields given higher short-term interest rates and continued mix shift toward more attractive risk-adjusted return portfolios. These results were partially offset by higher funding costs and the impact of lower long-term rates on securities premium amortization. Net interest margin on an FTE basis of 3.23% also increased two basis points compared to 3.21% in the first half of 2018. Average interest-earning asset yields of 4.32% increased 39 basis points from 3.93% in the first half of 2018, while average interest-bearing liability costs of 1.54% increased 49 basis points from 1.05% in the first half of 2018.

Average interest-earning assets of $145.9 billion increased $6.3 billion, or 5%, from the first half of 2018, driven by a $4.2 billion increase in average commercial loans and leases and a $1.5 billion increase in average retail loans, partially offset by a $197 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by commercial and commercial real estate. Retail loan growth was driven by residential mortgage, education, credit cards and other retail.

Average deposits of $121.8 billion increased $7.5 billion from the first half of 2018, reflecting growth in term deposits, checking with interest, and savings. Total interest-bearing deposit costs of $595 million increased $269 million, or 83%, from $326 million in the first half of 2018, primarily due to rising rates.

Average total borrowed funds of $14.3 billion decreased $1.3 billion from the first half of 2018, reflecting a decrease in other short-term borrowed funds and a decrease in long-term borrowed funds, partially offset by an increase in federal funds purchased and repurchase agreements. Total borrowed funds costs of $229 million increased $28 million from the first half of 2018. The total borrowed funds cost of 3.19% increased 62 basis points from 2.57% in the first half of 2018 due to an increase in short-term rates and a mix shift to long-term senior debt.

Noninterest Income

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the significant components of our noninterest income:



	Three Months Ended June 30,									Six Months Ended June 30,
(in millions)	2019		2018		Change			Percent		2019		2018		Change			Percent
Service charges and fees		$126		$127		($1	)	(1	%)		$249		$251		($2	)	(1	%)
Card fees	64		60		4			7		123		121		2			2
Capital markets fees	57		48		9			19		111		87		24			28
Trust and investment services fees	53		43		10			23		100		83		17			20
Mortgage banking fees	62		27		35			130		105		52		53			102
Letter of credit and loan fees	33		32		1			3		66		62		4			6
Foreign exchange and interest rate products	35		34		1			3		71		61		10			16
Securities gains, net	4		2		2			100		12		10		2			20
Other income ⁽¹⁾	28		15		13			87		53		32		21			66
Noninterest income		$462		$388		$74		19	%		$890		$759		$131		17	%

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

Quarter-To-Date Results: Noninterest income increased $74 million from second quarter 2018, driven by increased mortgage banking fees, trust and investment fees, capital market fees, and card fees, including the impact of Acquisitions.

Year-To-Date Results: Noninterest income increased $131 million from the first half of 2018, driven by higher mortgage banking fees and higher trust and investment services fees driven by acquisitions. Strength in capital markets fees and foreign exchange and interest rate products revenues, reflected the benefit of investments to broaden and enhance our capabilities. Other income reflected higher leasing income and asset dispositions tied to balance sheet optimization and efficiency initiatives.

Noninterest Expense

The following table presents the significant components of our noninterest expense:



	Three Months Ended June 30,									Six Months Ended June 30,
(in millions)	2019		2018		Change			Percent		2019		2018		Change			Percent
Salaries and employee benefits		$507		$453		$54		12	%		$1,016		$923		$93		10	%
Equipment and software expense⁽¹⁾	126		110		16			15		251		223		28			13
Outside services	118		106		12			11		228		205		23			11
Occupancy	82		79		3			4		165		160		5			3
Other operating expense	118		127		(9		)	(7	)	228		247		(19		)	(8	)
Noninterest expense		$951		$875		$76		9	%		$1,888		$1,758		$130		7	%

⁽¹⁾In the first quarter of 2019, we combined our presentation of equipment expense and amortization of software into equipment and software expense. Prior periods have been adjusted to conform with the current period presentation.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Quarter-To-Date Results: Noninterest expense increased $76 million from second quarter 2018, driven by an increase in salaries and employee benefits, which included the impact of annual merit increases, revenue based incentives and a severance charge, as well as an increase in equipment and software expense. These results reflected the impact of investments in growth initiatives, partially offset by lower other operating expense, largely tied to a reduction in FDIC insurance and advertising expense. Underlying noninterest expense* increased $69 million, or 8%.

Year-To-Date Results: Noninterest expense increased $130 million, or 7%, from the first half of 2018 reflecting an increase in salaries and employee benefits given the impact of annual merit increases, revenue-based incentives and investments in growth initiatives. First half 2019 results included an increase in equipment and software expense, which also reflected investments in growth initiatives. These increases were partially offset by a decrease in other operating expense tied to a reduction in FDIC insurance premiums. Underlying noninterest expense* increased $118 million, or 7%.

Provision for Credit Losses

The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ACL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.

Quarter-To-Date Results: The provision for credit losses increased $12 million from second quarter 2018, due to 4% average loan growth, continued expected seasoning in retail growth portfolios and several idiosyncratic losses in commercial, with key credit metrics continuing to reflect strong credit quality and a $9 million ACL release in second quarter 2019 compared to a $9 million ACL build in second quarter 2018. Second quarter net charge-offs of $106 million were $30 million higher than second quarter 2018, reflecting a small number of idiosyncratic losses in commercial and expected seasoning in retail growth portfolios.

Year-To-Date Results: The provision for credit losses increased $19 million from the first half of 2018, largely related to 5% average loan growth, several idiosyncratic commercial losses and expected seasoning in retail growth portfolios, partially offset by continued improvement in underlying credit quality. In the first half of 2019, results reflected a $13 million ACL release, compared to a $17 million ACL build in the first half of 2018. Net charge-offs for the first half of 2019 of $195 million were $49 million higher than the first half of 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Income Tax Expense

Quarter-To-Date Results: Income tax expense increased $3 million from second quarter 2018. The effective income tax rate in second quarter 2019 decreased 72 basis points to 21.9% from second quarter 2018, driven by second quarter 2019 net discrete income tax benefits of $5 million.

Year-To-Date Results: Income tax expense increased $17 million from the first half of 2018. The effective income tax rate in the first half of 2019 decreased to 22.1% from 22.6% in the first half of 2018, driven by a reduction in non-deductible FDIC premiums.

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 June 30, 2019
(dollars in millions)	Consumer Banking			Commercial Banking			Other⁽⁴⁾			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
Loans and leases (period-end)⁽¹⁾		$62,959			$54,068			$2,016			$119,043
Average Balances:
Total assets		$65,485			$56,135			$39,869			$161,489
Total loans and leases⁽¹⁾	62,678			54,653			2,138			119,469
Deposits	85,660			30,273			7,219			123,152
Interest-earning assets	62,731			54,950			28,642			146,323
Key Performance Metrics:
Net interest margin⁽²⁾⁽³⁾	5.11		%	2.71		%	NM			3.20		%
Efficiency ratio	66.43			41.58			NM			58.41
Loans-to-deposits ratio (average balances)	71.57			179.49			NM			95.64
Return on average total tangible assets⁽²⁾	1.31			1.54			NM			1.17

⁽¹⁾Includes LHFS.

⁽²⁾Ratios for the three and six months ended June 30, 2019 and 2018 are presented on an annualized basis.

⁽³⁾ In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior period have been adjusted to conform with the current period presentation.

⁽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, expenses and 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.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of and for the Three Months Ended June 30, 2018
(dollars in millions)	Consumer Banking			Commercial Banking			Other⁽⁵⁾			Consolidated
Net interest income		$759			$376			($14	)		$1,121
Noninterest income	228			140			20			388
Total revenue	987			516			6			1,509
Noninterest expense	658			200			17			875
Profit (loss) before provision for credit losses	329			316			(11		)	634
Provision for credit losses	66			9			10			85
Income (loss) before income tax expense (benefit)	263			307			(21		)	549
Income tax expense (benefit)	66			70			(12		)	124
Net income (loss)		$197			$237			($9	)		$425
Loans and leases (period-end)⁽¹⁾		$60,175			$51,503			$2,439			$114,117
Average Balances:
Total assets		$61,232			$52,170			$39,851			$153,253
Total loans and leases⁽¹⁾	59,830			51,202			2,489			113,521
Deposits	77,402			30,214			7,526			115,142
Interest-earning assets	59,880			51,404			29,241			140,525
Key Performance Metrics:
Net interest margin⁽²⁾⁽³⁾	5.08		%	2.93		%	NM			3.20		%
Efficiency ratio	66.68			38.80			NM			57.95
Loans-to-deposits ratio (average balances)⁽⁴⁾	76.92			168.23			NM			98.01
Return on average total tangible assets⁽²⁾	1.29			1.82			NM			1.16

⁽¹⁾Includes LHFS.

⁽²⁾Ratios for the three and six months ended June 30, 2019 and 2018 are presented on an annualized basis.

⁽⁴⁾ We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.

⁽⁵⁾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, expenses and 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.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of and for the Six Months Ended June 30, 2019
(dollars in millions)	Consumer Banking			Commercial Banking			Other⁽⁴⁾			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
Loans and leases (period-end)⁽¹⁾		$62,959			$54,068			$2,016			$119,043
Average Balances:
Total assets		$65,247			$55,884			$39,824			$160,955
Total loans and leases⁽¹⁾	62,422			54,545			2,207			119,174
Deposits	84,123			30,050			7,617			121,790
Interest-earning assets	62,475			54,838			28,607			145,920
Key Performance Metrics:
Net interest margin⁽²⁾⁽³⁾	5.12		%	2.73		%	NM			3.22		%
Efficiency ratio	67.01			40.84			NM			58.70
Loans-to-deposits ratio (average balances)	72.89			180.35			NM			96.65
Return on average total tangible assets⁽²⁾	1.29			1.60			NM			1.17

⁽¹⁾Includes LHFS.

⁽²⁾Ratios for the three and six months ended June 30, 2019 and 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, expenses and 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.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of and for the Six Months Ended June 30, 2018
(dollars in millions)	Consumer Banking			Commercial Banking			Other⁽⁵⁾			Consolidated
Net interest income		$1,492			$733			($13	)		$2,212
Noninterest income	450			265			44			759
Total revenue	1,942			998			31			2,971
Noninterest expense	1,314			408			36			1,758
Profit (loss) before provision for credit losses	628			590			(5		)	1,213
Provision for credit losses	138			5			20			163
Income (loss) before income tax expense (benefit)	490			585			(25		)	1,050
Income tax expense (benefit)	123			133			(19		)	237
Net income (loss)		$367			$452			($6	)		$813
Loans and leases (period-end)⁽¹⁾		$60,175			$51,503			$2,439			$114,117
Average Balances:
Total assets		$61,290			$51,286			$39,817			$152,393
Total loans and leases⁽¹⁾	59,886			50,249			2,525			112,660
Deposits	76,414			30,488			7,386			114,288
Interest-earning assets	59,937			50,447			29,219			139,603
Key Performance Metrics
Net interest margin⁽²⁾⁽³⁾	5.02		%	2.93		%	NM			3.20		%
Efficiency ratio	67.68			40.86			NM			59.17
Loans-to-deposits ratio (average balances)⁽⁴⁾	78.01			163.52			NM			97.99
Return on average total tangible assets⁽²⁾	1.21			1.78			NM			1.12

⁽¹⁾Includes LHFS.

⁽²⁾Ratios for the three and six months ended June 30, 2019 and 2018 are presented on an annualized basis.

We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and related revenues, provision for credit losses and expenses. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets not directly allocated to a business operating segment, community development, non-core assets (including legacy Royal Bank of Scotland Group plc aircraft loan and leasing), and other unallocated assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense. In addition, Other includes goodwill not directly allocated to a business operating segment and any associated goodwill impairment charges. For impairment testing purposes, we allocate all goodwill to our Consumer Banking and/or Commercial Banking reporting units. There have been no significant changes in our methodologies used to allocate items to our business operating segments as described in “—Results of Operations — Business Operating Segments” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Consumer Banking



	As of and for the Three Months Ended June 30,											As of and for the Six Months Ended June 30,
(dollars in millions)	2019			2018			Change			Percent		2019			2018			Change			Percent
Net interest income		$799			$759			$40		5	%		$1,587			$1,492			$95		6	%
Noninterest income	277			228			49			21		524			450			74			16
Total revenue	1,076			987			89			9		2,111			1,942			169			9
Noninterest expense	715			658			57			9		1,415			1,314			101			8
Profit before provision for credit losses	361			329			32			10		696			628			68			11
Provision for credit losses	78			66			12			18		145			138			7			5
Income before income tax expense	283			263			20			8		551			490			61			12
Income tax expense	70			66			4			6		136			123			13			11
Net income		$213			$197			$16		8			$415			$367			$48		13
Loans (period-end)⁽¹⁾		$62,959			$60,175			$2,784		5			$62,959			$60,175			$2,784		5	%
Average Balances:
Total assets		$65,485			$61,232			$4,253		7	%		$65,247			$61,290			$3,957		6	%
Total loans and leases⁽¹⁾	62,678			59,830			2,848			5		62,422			59,886			2,536			4
Deposits	85,660			77,402			8,258			11		84,123			76,414			7,709			10
Interest-earning assets	62,731			59,880			2,851			5		62,475			59,937			2,538			4
Key Performance Metrics:
Net interest margin⁽²⁾	5.11		%	5.08		%	3		bps			5.12		%	5.02		%	10		bps
Efficiency ratio	66.43			66.68			(25		) bps			67.01			67.68			(67		) bps
Loans-to-deposits ratio (average balances)⁽³⁾	71.57			76.92			(535		) bps			72.89			78.01			(512		) bps
Return on average total tangible assets⁽²⁾	1.31			1.29			2		bps			1.29			1.21			8		bps

⁽¹⁾ Includes LHFS.

⁽²⁾Ratios for the three and six months ended June 30, 2019 and 2018 are presented on an annualized basis.

⁽³⁾ We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.

Quarter-To-Date Results: Consumer Banking net interest income increased $40 million, or 5%, from second quarter 2018, driven by the benefit of a $2.8 billion increase in average loans led by residential mortgage, unsecured personal and education loans. Noninterest income increased $49 million from second quarter 2018, driven by higher mortgage banking fees and higher trust and investment fees including the impact of Acquisitions. Noninterest expense increased $57 million, or 9%, from second quarter 2018, reflecting higher salaries and benefits and outside services including the impact of Acquisitions. Provision for credit losses of $78 million increased $12 million, or 18%, reflecting higher net charge-offs due to seasoning in growth portfolios.

Year-To-Date Results: Consumer Banking net interest income increased $95 million, or 6%, from the first half of 2018, driven by the benefit of a $2.5 billion increase in average loans led by residential mortgage, unsecured personal and education loans. Noninterest income increased $74 million from the first half of 2018, driven by higher mortgage banking fees and higher trust and investment fees including the impact of Acquisitions. Noninterest expense increased $101 million, or 8%, from the first half of 2018, reflecting higher salaries and benefits and outside services including the impact of Acquisitions. Provision for credit losses of $145 million increased $7 million, or 5%, reflecting higher net charge-offs due to seasoning in growth portfolios.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Commercial Banking



	As of and for the Three Months Ended June 30,											As of and for the Six Months Ended June 30,
(dollars in millions)	2019			2018			Change			Percent		2019			2018			Change			Percent
Net interest income		$371			$376			($5	)	(1	%)		$743			$733			$10		1	%
Noninterest income	149			140			9			6		299			265			34			13
Total revenue	520			516			4			1		1,042			998			44			4
Noninterest expense	217			200			17			9		426			408			18			4
Profit before provision for credit losses	303			316			(13		)	(4	)	616			590			26			4
Provision for credit losses	25			9			16			178		46			5			41			NM
Income before income tax expense	278			307			(29		)	(9	)	570			585			(15		)	(3	)
Income tax expense	62			70			(8		)	(11	)	127			133			(6		)	(5	)
Net income		$216			$237			($21	)	(9	)		$443			$452			($9	)	(2	)
Loans and leases (period-end)⁽¹⁾		$54,068			$51,503			$2,565		5			$54,068			$51,503			$2,565		5	%
Average Balances:
Total assets		$56,135			$52,170			$3,965		8	%		$55,884			$51,286			$4,598		9	%
Total loans and leases⁽¹⁾	54,653			51,202			3,451			7		54,545			50,249			4,296			9
Deposits	30,273			30,214			59			—		30,050			30,488			(438		)	(1	)
Interest-earning assets	54,950			51,404			3,546			7		54,838			50,447			4,391			9
Key Performance Metrics:
Net interest margin⁽²⁾	2.71		%	2.93		%	(22		) bps			2.73		%	2.93		%	(20		) bps
Efficiency ratio	41.58			38.80			278		bps			40.84			40.86			(2		) bps
Loans-to-deposits ratio (average balances)⁽³⁾	179.49			168.23			1,126		bps			180.35			163.52			1,683		bps
Return on average total tangible assets⁽²⁾	1.54			1.82			(28		) bps			1.60			1.78			(18		) bps

⁽¹⁾ Includes LHFS.

⁽²⁾Ratios for the three and six months ended June 30, 2019 and 2018 are presented on an annualized basis.

Quarter-To-Date Results: Commercial Banking net interest income of $371 million decreased $5 million, or 1%, from $376 million in second quarter 2018, driven by higher deposit costs and mix. Noninterest income of $149 million increased $9 million, or 6%, from $140 million in second quarter 2018, reflecting higher capital market fees, foreign exchange and interest rate product fees and letter of credit and loan fees. Noninterest expense of $217 million increased $17 million, or 9%, from $200 million in second quarter 2018, largely driven by the impact of increased headcount due to strategic initiatives and higher indirect expenses. Provision for credit losses increased $16 million from second quarter 2018 due to higher net charge-offs.

Year-To-Date Results: Commercial Banking net interest income of $743 million increased $10 million, or 1%, from $733 million in the first half of 2018, reflecting a $4.3 billion increase in average loans and leases, partially offset by higher deposit costs and mix. Noninterest income of $299 million increased $34 million, or 13%, from $265 million in the first half of 2018, reflecting higher capital market, interest rate product, and capital markets fees. Noninterest expense of $426 million increased $18 million, from $408 million in the first half of 2018, driven by higher salaries and employee benefit expense. Provision for credit losses of $46 million increased $41 million from the first half of 2018, driven by higher net charge-offs.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other



	As of and for the Three Months Ended June 30,											As of and for the Six Months Ended June 30,
(in millions)	2019			2018			Change			Percent		2019			2018			Change			Percent
Net interest income		($4	)		($14	)		$10		71	%		($4	)		($13	)		$9		69	%
Noninterest income	36			20			16			80		67			44			23			52
Total revenue	32			6			26			NM		63			31			32			103
Noninterest expense	19			17			2			12		47			36			11			31
Profit (loss) before provision for credit losses	13			(11		)	24			NM		16			(5		)	21			NM
Provision for credit losses	(6		)	10			(16		)	NM		(9		)	20			(29		)	NM
Income (loss) before income tax benefit	19			(21		)	40			NM		25			(25		)	50			NM
Income tax benefit	(5		)	(12		)	7			58		(9		)	(19		)	10			53
Net income (loss)		$24			($9	)		$33		NM			$34			($6	)		$40		NM
Loans and leases (period-end)⁽¹⁾		$2,016			$2,439			($423	)	(17	)		$2,016			$2,439			($423	)	(17	%)
Average Balances:
Total assets		$39,869			$39,851			$18		—	%		$39,824			$39,817			$7		—	%
Total loans and leases⁽¹⁾	2,138			2,489			(351		)	(14	)	2,207			2,525			(318		)	(13	)
Deposits	7,219			7,526			(307		)	(4	)	7,617			7,386			231			3
Interest-earning assets	28,642			29,241			(599		)	(2	)	28,607			29,219			(612		)	(2	)

⁽¹⁾ Includes LHFS.

Quarter-To-Date Results: Other net interest income increased $10 million from second quarter 2018 driven by FTP, partially offset by higher funding and swap costs and non core run-off. Noninterest income was up $16 million primarily due to higher leasing income. Results also reflected an ACL release of $9 million in second quarter 2019, compared to an ACL build of $9 million in second quarter 2018.

Year-To-Date Results: Other net interest income increased $9 million from the first half of 2018 driven by FTP, partially offset by higher funding and swap costs and non-core run-off. Results also reflected an ACL release of $13 million in the first half of 2019, compared to an ACL build of $17 million in the first half of 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

ANALYSIS OF FINANCIAL CONDITION

Securities

Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving returns that align with our overall portfolio management strategy. The following table presents our securities AFS and HTM:



	June 30, 2019				December 31, 2018
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Change in Fair Value
U.S. Treasury and other		$90		$90		$24		$24		$66		275	%
State and political subdivisions	5		5		5		5		—			—
Mortgage-backed securities, at fair value:
Federal agencies and U.S. government sponsored entities	20,688		20,708		20,211		19,634		1,074			5
Other/non-agency	871		895		236		232		663			286
Total mortgage-backed securities	21,559		21,603		20,447		19,866		1,737			9
Total debt securities available for sale, at fair value		$21,654		$21,698		$20,476		$19,895		$1,803		9	%
Mortgage-backed securities, at cost:
Federal agencies and U.S. government sponsored entities		$3,447		$3,441		$3,425		$3,293		$148		4	%
Other/non-agency	—		—		740		748		(748		)	(100	)
Total mortgage-backed securities	3,447		3,441		4,165		4,041		(600		)	(15	)
Total debt securities held to maturity		$3,447		$3,441		$4,165		$4,041		($600	)	(15	)%
Total debt securities available for sale and held to maturity		$25,101		$25,139		$24,641		$23,936		$1,203		5	%
Equity securities, at fair value		$47		$47		$181		$181		($134	)	(74	%)
Equity securities, at cost	706		706		834		834		(128		)	(15	)
Total equity securities		$753		$753		$1,015		$1,015		($262	)	(26	%)

The fair value of the AFS debt portfolio of $21.7 billion at June 30, 2019 increased $1.8 billion from $19.9 billion at December 31, 2018 due to lower period-end interest rates that decreased net unrealized losses on mortgage-backed securities by $625 million, net portfolio additions, and securities transferred from HTM to AFS upon the adoption of ASU 2017–12, Targeted Improvements to Accounting for Hedging Activities. The decline in the fair value of the HTM debt portfolio of $600 million was primarily attributable to securities transferred from HTM to AFS upon the adoption of ASU 2017–12, partially offset by a transfer of $192 million of securities from AFS to HTM. For further detail see Note 1 "Basis of Presentation" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report.

As of June 30, 2019, the portfolio’s average effective duration was 3.3 years compared with 4.4 years as of December 31, 2018, as lower long-term rates drove an increase in both actual and projected securities prepayment speeds. We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within risk appetite in the context of the broader interest rate risk in the banking book framework and limits.

The securities portfolio includes high-quality, highly-liquid investments reflecting our ongoing commitment to maintaining appropriate contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 96% of the fair value of the debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge them to the FHLB for collateral purposes. For further discussion of the liquidity coverage ratios, see “Regulation and Supervision — Liquidity Standards” in Part I — Business, included in our Annual Report on Form 10-K for the year ended December 31, 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Loans and Leases

Our loans and leases are disclosed in portfolio segments and classes as reflected below.



(in millions)	June 30, 2019		December 31, 2018		Change			Percent
Commercial⁽¹⁾		$41,156		$40,857		$299		1	%
Commercial real estate	13,123		13,023		100			1
Leases	2,684		2,903		(219		)	(8	)
Total commercial loans and leases	56,963		56,783		180			—
Residential mortgages	19,192		18,978		214			1
Home equity loans	938		1,073		(135		)	(13	)
Home equity lines of credit	12,266		12,710		(444		)	(3	)
Home equity loans serviced by others	348		399		(51		)	(13	)
Home equity lines of credit serviced by others	88		104		(16		)	(15	)
Automobile	12,000		12,106		(106		)	(1	)
Education	9,305		8,900		405			5
Credit cards	2,046		1,991		55			3
Other retail	3,692		3,616		76			2
Total retail loans⁽²⁾	59,875		59,877		(2		)	—
Total loans and leases⁽³⁾		$116,838		$116,660		$178		—	%

⁽¹⁾SBA loans we service for others of $18 million are not included above. These loans represent the government guaranteed portion of SBA loans sold to outside investors as of June 30, 2019. There were no SBA loans we serviced for others at December 31, 2018.

⁽²⁾Mortgage loans we service for others of $72.5 billion and $69.6 billion at June 30, 2019 and December 31, 2018, respectively, are not included above.

⁽³⁾ LHFS totaling $2.2 billion and $1.3 billion at June 30, 2019 and December 31, 2018, respectively, are not included above.

Strength in commercial loans, driven by geographic, product and client-focused expansion strategies as well as strength in commercial real estate drove an increase in total loans and leases of $178 million from $116.7 billion as of December 31, 2018, partially offset by planned reductions in commercial leases. Retail loans were relatively stable, as growth in education, residential mortgage, other retail and credit card were offset by execution against planned reductions in auto and run-off in the home equity portfolio.

Allowance for Credit Losses and Nonperforming Assets

The ACL, which consists of an ALLL and a reserve for unfunded lending commitments, is created through charges to the provision for credit losses in order to provide appropriate reserves to absorb future estimated credit losses in accordance with GAAP. For further information on our processes to determine our ACL, see “—Critical Accounting Estimates — Allowance for Credit Losses” and Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018 and Note 4 "Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report.

The ACL totaled $1.3 billion at June 30, 2019 and December 31, 2018. The ALLL represented 1.05% of loans and leases and 159% of nonperforming loans and leases as of June 30, 2019, compared with 1.06% and 156%, as of December 31, 2018, respectively. As of June 30, 2019, there were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s reserves.

Overall credit quality has remained strong in the first half of 2019. Nonperforming loans and leases of $770 million as of June 30, 2019 decreased $27 million from December 31, 2018, reflecting a $45 million decrease in retail nonperforming loans driven by a decrease in real estate secured portfolios. Second quarter 2019 net charge-offs of $106 million increased $30 million, or 39%, from $76 million in second quarter 2018. Second quarter 2019 annualized net charge-offs of 36 basis points of average loans and leases was up nine basis points from second quarter 2018. First half of 2019 net charge-offs of $195 million increased $49 million, or 34%, from $146 million in the first half of 2018. First half of 2019 annualized net charge-offs of 33 basis points of average loans and leases was up seven basis points from the first half of 2018.

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

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

states in which we have a physical presence where our local delivery model provides for strong client connectivity. Additionally, we also do business in certain specialized industry sectors on a national basis.

For commercial loans and leases, we utilize regulatory classification ratings to monitor credit quality. For more information on regulatory classification ratings, see “—Allowance for Credit Losses and Nonperforming Assets — Commercial Loan Asset Quality” in our Annual Report on Form 10-K for the year ended December 31, 2018. See Note 4 "Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report.

As of June 30, 2019, nonperforming commercial loans and leases of $219 million increased $18 million from $201 million as of December 31, 2018. Total commercial nonperforming loans were 0.4% of the commercial loan portfolio as of June 30, 2019 and December 31, 2018. Total commercial loan and lease net charge-offs of $33 million and $57 million for second quarter and the first half of 2019, respectively, compared to net charge-offs of $12 million and $9 million for second quarter and the first half of 2018, respectively. The commercial loan and lease portfolio’s annualized net charge-off rate of 23 and 20 basis points for the three and six months ended June 30, 2019, respectively, compared to a net charge-off rate of nine and three basis points for the three and six months ended June 30, 2018.

The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:



	June 30, 2019
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$39,011		$1,174		$770		$201		$41,156
Commercial real estate	12,705		377		38		3		13,123
Leases	2,578		46		43		17		2,684
Total commercial loans and leases		$54,294		$1,597		$851		$221		$56,963



	December 31, 2018
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$38,600		$1,231		$828		$198		$40,857
Commercial real estate	12,523		412		82		6		13,023
Leases	2,823		39		41		—		2,903
Total commercial loans and leases		$53,946		$1,682		$951		$204		$56,783

Total commercial criticized loans and leases of $2.7 billion at June 30, 2019 were compared to $2.8 billion at December 31, 2018. Commercial real estate criticized balances of $418 million, or 3.2% of the commercial real estate portfolio, decreased from $500 million, or 3.8%, as of December 31, 2018. Commercial real estate accounted for 15.7% of total criticized loans as of June 30, 2019, compared to 17.6% as of December 31, 2018.

Retail Loan Asset Quality

For retail loans, we primarily utilize payment and delinquency status to regularly review and monitor credit quality trends. Historical experience indicates that the longer a loan is past due, the greater the likelihood of future credit loss. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-Atlantic and Midwest regions, although we have continued to lend selectively in areas outside the footprint primarily in the auto finance, education lending and unsecured portfolios.

The following tables present asset quality metrics for the retail loan portfolio:



	June 30, 2019		December 31, 2018
Average refreshed FICO for total portfolio	765		763
CLTV ratio for secured real estate⁽¹⁾	59	%	58	%
Nonperforming retail loans as a percentage of total retail	0.92		1.00

⁽¹⁾ The real estate secured portfolio CLTV is calculated as the mortgage and second lien loan balance divided by the most recently available value of the property.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	Three Months Ended June 30,											Six Months Ended June 30,
(dollars in millions)	2019			2018			Change			Percent		2019			2018			Change		Percent
Net charge-offs		$73			$64			$9		14	%		$138			$137			$1	1	%
Annualized net charge-off rate	0.49		%	0.44		%	5		bps			0.47		%	0.47		%	—

Retail net charge-off rate increased to 0.49% for second quarter 2019, an increase of five basis points from second quarter 2018, driven by continued seasoning in the unsecured portfolios. Retail asset quality was stable with a net charge-off rate of 0.47% for the first half of 2019 and 2018.

Troubled Debt Restructurings

TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower experiencing financial hardship that we would not otherwise make. TDRs typically result from our loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Our loan modifications are handled on a case by case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our borrower’s financial needs. The types of concessions include interest rate reductions, term extensions, principal forgiveness and other modifications to the structure of the loan that fall outside our lending policy. Depending on the specific facts and circumstances of the customer, restructuring can involve loans moving to nonaccrual, remaining on nonaccrual, or remaining on accrual status.

As of June 30, 2019, $686 million of retail loans were classified as TDRs, compared with $723 million as of December 31, 2018. As of June 30, 2019, $169 million of retail TDRs were in nonaccrual status with 49% current with payments, an improvement compared to $181 million in nonaccrual status with 49% current on payments at December 31, 2018. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated for impairment and loans, once classified as TDRs, remain classified as TDRs until paid off, sold or refinanced at market terms.

For additional information regarding TDRs, see “—Critical Accounting Estimates — Allowance for Credit Losses,” and Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018 and Note 4 "Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report.

The following tables present retail TDRs by loan class, including delinquency status for accruing TDRs and TDRs in nonaccrual:



	June 30, 2019
			As a % of Accruing Retail TDRs
(dollars in millions)	Accruing		30-89 Days Past Due		90+ Days Past Due		Nonaccruing		Total
Residential mortgages		$103	1.0	%	1.5	%		$44		$147
Home equity loans	75		0.5		—		21		96
Home equity lines of credit	141		0.7		—		60		201
Home equity loans serviced by others	27		0.3		—		9		36
Home equity lines of credit serviced by others	3		—		—		4		7
Automobile	14		0.2		—		8		22
Education	123		0.8		0.5		21		144
Credit cards	25		0.5		—		2		27
Other retail	6		—		—		—		6
Total		$517	4.0	%	2.0	%		$169		$686

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	December 31, 2018
			As a % of Accruing Retail TDRs
(dollars in millions)	Accruing		30-89 Days Past Due		90+ Days Past Due		Nonaccruing		Total
Residential mortgages		$111	3.0	%	1.6	%		$44		$155
Home equity loans	85		0.7		—		25		110
Home equity lines of credit	138		0.9		—		64		202
Home equity loans serviced by others	31		0.3		—		10		41
Home equity lines of credit serviced by others	3		—		—		5		8
Automobile	13		0.2		—		10		23
Education	131		0.9		0.3		22		153
Credit cards	24		0.4		—		1		25
Other retail	6		—		—		—		6
Total		$542	6.4	%	1.9	%		$181		$723

Non-Core Assets



(in millions)	June 30, 2019		December 31, 2018		Change			Percent
Commercial		$8		$72		($64	)	(89	%)
Commercial real estate	12		14		(2		)	(14	)
Leases	533		670		(137		)	(20	)
Total commercial loans and leases	553		756		(203		)	(27	)
Residential mortgages	101		110		(9		)	(8	)
Home equity loans	27		31		(4		)	(13	)
Home equity lines of credit	17		21		(4		)	(19	)
Home equity loans serviced by others	348		399		(51		)	(13	)
Home equity lines of credit serviced by others	88		104		(16		)	(15	)
Education	192		210		(18		)	(9	)
Total retail loans	773		875		(102		)	(12	)
Total non-core loans and leases	1,326		1,631		(305		)	(19	)
Other assets	79		96		(17		)	(18	)
Total non-core assets		$1,405		$1,727		($322	)	(19	%)

Non-core assets are primarily liquidating loan and lease portfolios inconsistent with our strategic priorities, generally as a result of geographic location, industry, product type or risk level and are included in Other.

Deposits

The table below presents the major components of our deposits:



(in millions)	June 30, 2019		December 31, 2018		Change			Percent
Demand		$28,192		$29,458		($1,266	)	(4	%)
Checking with interest	25,021		23,067		1,954			8
Regular savings	13,495		12,007		1,488			12
Money market accounts	35,329		35,701		(372		)	(1	)
Term deposits	21,967		19,342		2,625			14
Total deposits		$124,004		$119,575		$4,429		4	%

Total deposits as of June 30, 2019 increased $4.4 billion, or 4%, to $124.0 billion, from $119.6 billion as of December 31, 2018. Citizens Access^®, our digital platform, attracted $5.4 billion of deposits through second quarter 2019, up from $3.0 billion as of December 31, 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Borrowed Funds

Total borrowed funds as of June 30, 2019 decreased $4.3 billion from December 31, 2018, reflecting a $5.3 billion decrease in long-term FHLB advances given improved funding mix, partially offset by a net $856 million increase in senior debt.

Short-term borrowed funds

A summary of our short-term borrowed funds is presented below:



(in millions)	June 30, 2019		December 31, 2018		Change			Percent
Federal funds purchased		$840		$820		$20		2	%
Securities sold under agreements to repurchase	292		336		(44		)	(13	)
Other short-term borrowed funds ⁽¹⁾	309		161		148			92
Total short-term borrowed funds		$1,441		$1,317		$124		9	%

The net increase in other short-term borrowed funds of $148 million resulted from an increase in short-term FHLB advances.

Our advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $7.4 billion and $13.0 billion at June 30, 2019 and December 31, 2018, respectively. Our remaining available FHLB borrowing capacity was $9.0 billion and $4.8 billion at June 30, 2019 and December 31, 2018, respectively. We can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At June 30, 2019, our unused secured borrowing capacity was approximately $42.8 billion, which included unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

Key data related to short-term borrowed funds is presented below:



	As of and for the Three Months Ended June 30,						As of and for the Six Months Ended June 30,						As of and for the Year Ended December 31,
(dollars in millions)	2019			2018			2019			2018			2018
Weighted-average interest rate at period-end:⁽¹⁾
Federal funds purchased and securities sold under agreements to repurchase	1.93		%	—		%	1.93		%	—		%	1.72		%
Other short-term borrowed funds	2.47			3.22			2.47			3.22			2.73
Maximum amount outstanding at any month-end during the period:
Federal funds purchased and securities sold under agreements to repurchase⁽²⁾		$1,499			$1,045			$1,499			$1,045			$1,282
Other short-term borrowed funds	508			1,110			511			1,110			1,110
Average amount outstanding during the period:
Federal funds purchased and securities sold under agreements to repurchase⁽²⁾		$818			$504			$729			$574			$654
Other short-term borrowed funds	45			191			52			388			467
Weighted-average interest rate during the period:⁽¹⁾
Federal funds purchased and securities sold under agreements to repurchase	1.76		%	0.71		%	1.54		%	0.68		%	0.92		%
Other short-term borrowed funds	2.66			1.90			2.71			1.73			2.10

⁽¹⁾Rates exclude certain hedging costs.

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

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Long-term borrowed funds

A summary of our long-term borrowed funds is presented below:



(in millions)	June 30, 2019		December 31, 2018
Parent Company:
2.375% fixed-rate senior unsecured debt, due July 2021		$349		$349
4.150% fixed-rate subordinated debt, due September 2022	348		348
3.750% fixed-rate subordinated debt, due July 2024	250		250
4.023% fixed-rate subordinated debt, due October 2024	42		42
4.350% fixed-rate subordinated debt, due August 2025	249		249
4.300% fixed-rate subordinated debt, due December 2025	750		749
Banking and Other Subsidiaries:
2.500% senior unsecured notes, due March 2019 ⁽¹⁾	—		748
2.450% senior unsecured notes, due December 2019 ⁽¹⁾	747		744
2.250% senior unsecured notes, due March 2020 ⁽¹⁾	698		691
3.060% floating-rate senior unsecured notes, due March 2020 ^{(1) (2)}	300		300
3.091% floating-rate senior unsecured notes, due May 2020 ^{(1) (2)}	250		250
2.200% senior unsecured notes, due May 2020 ⁽¹⁾	499		499
2.250% senior unsecured notes, due October 2020 ⁽¹⁾	748		738
2.550% senior unsecured notes, due May 2021 ⁽¹⁾	986		964
3.250% senior unsecured notes, due February 2022 ⁽¹⁾	711		—
3.248% floating-rate senior unsecured notes, due February 2022 ^{(1) (2)}	299		—
3.331% floating-rate senior unsecured notes, due May 2022 ^{(1) (2)}	250		249
2.650% senior unsecured notes, due May 2022 ⁽¹⁾	500		487
3.700% senior unsecured notes, due March 2023⁽¹⁾	517		502
3.280% floating-rate senior unsecured notes, due March 2023 ^{(1) (2)}	249		249
3.750% senior unsecured notes, due February 2026 ⁽¹⁾	521		—
Federal Home Loan Bank advances, 2.575% weighted average rate, due through 2038	2,258		7,508
Other	17		9
Total long-term borrowed funds ⁽³⁾		$11,538		$15,925

⁽¹⁾Issued under CBNA’s Global Bank Note Program.

⁽²⁾Rate disclosed reflects the floating rate as of June 30, 2019.

⁽³⁾ Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.

Long-term borrowed funds as of June 30, 2019 decreased $4.4 billion from December 31, 2018, reflecting a decrease of $5.3 billion in long-term FHLB borrowings, partially offset by senior unsecured notes issued by CBNA during the first half of 2019.

The Parent Company’s long-term borrowed funds as of June 30, 2019 and December 31, 2018 included principal balances of $2.0 billion for each period, respectively, and unamortized deferred issuance costs and/or discounts of ($4) million and ($5) million, respectively. The banking and other subsidiaries’ long-term borrowed funds as of June 30, 2019 and December 31, 2018 included principal balances of $9.5 billion and $14.0 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($17) million and ($14) million, respectively, and hedging basis adjustments of $43 million and ($66) million, respectively. See Note 9 "Derivatives" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report for further information about our hedging of certain long-term borrowed funds.

CAPITAL AND REGULATORY MATTERS

As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. The current operating environment reflects heightened regulatory expectations around many regulations including consumer compliance, the Bank Secrecy Act, anti-money laundering compliance,

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

and increased internal audit activities. For more information, see “Regulation and Supervision” in Part I, Item 1 — Business included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Dodd-Frank Act

The Dodd-Frank Act regulates many aspects of the financial services industry and addresses among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, derivatives and securities markets, restrictions on an insured bank’s transactions with its affiliates, lending limits and mortgage lending practices.

In light of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) amendments to the Dodd Frank Act and subsequent tailoring Notices of Proposed Rulemaking, the FRB provided us relief in a February 5, 2019 letter from all regulatory requirements, including disclosure requirements, related to supervisory stress testing and company-run stress testing for the 2019 stress test cycle and provided related relief from certain capital planning and regulatory reporting requirements that would otherwise apply in the 2019 stress test cycle. In addition, we were not required to submit a capital plan to the FRB for 2019 or participate in the 2019 CCAR. We remain subject to the requirement to develop and maintain an annual capital plan that is reviewed and approved by our Board of Directors (or one of its committees) and the FRB has not objected to our maximum planned capital actions for the period beginning July 1, 2019 and ending June 30, 2020. During this four-quarter period ending June 30, 2020, the FRB has not objected to capital distributions up to the amount that would have allowed us to remain above all minimum capital requirements in 2018 CCAR, adjusted for any changes in our regulatory capital ratios since the FRB acted on our 2018 capital plan.

Under Section 165 of the Dodd-Frank Act, as amended by EGRRCPA, a bank holding company with total consolidated assets of $100 billion or more, such as us, must currently submit a periodic resolution plan to the FRB and FDIC providing for the company’s strategy for rapid and orderly resolution in the event of its material financial distress or failure. On May 14, 2019, the FRB and the FDIC published a joint Notice of Proposed Rulemaking to modify the Resolution Plan Rule that would, among other things, adjust the scope of application, submission timeframe, and plan content requirements. Until the FRB and FDIC adopt the proposal in the form of a final rule, the current Resolution Plan Rule continues to apply, including the next submission date, which is December 31, 2019 for us. However, on July 26, 2019, the FRB and FDIC jointly announced the extension of the next resolution plan submission date for 15 domestic banks, including us, from December 31, 2019, to July 1, 2021, or such other date that may be specified when the FRB and FDIC adopt the final rule.

Under the Federal Deposit Insurance Act, the FDIC has separately implemented a resolution planning rule that currently requires insured depository institutions of $50 billion or more in total assets, such as CBNA, to periodically submit a resolution plan. CBNA submitted its most recent resolution plan to the FDIC in July 2018. On April 22, 2019, the FDIC published an Advance Notice of Proposed Rulemaking concerning how to tailor and improve its rule requiring certain insured depository institutions to submit resolution plans.

On June 27, 2019, our Board of Directors authorized common share repurchases of up to $1.275 billion over the four-quarter period beginning July 1, 2019. The timing and exact amount of future share repurchases will depend on various factors, including capital position, financial performance and market conditions.

For additional discussion of the Dodd-Frank Act and EGRRCPA requirements and their related application, see “Regulation and Supervision” in Part 1, Item 1 - Business and “—Capital and Regulatory Matters” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

Capital Framework

Under the current U.S. Basel III capital framework, we and our banking subsidiary must meet the following specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and tier 1 leverage ratio of 4.0%.

In July 2019, the FRB and the other federal banking regulators jointly announced the finalization of a proposal to simplify regulatory capital treatment for MSRs, certain deferred tax assets arising from temporary differences (“DTAs”) and investments in the capital of unconsolidated financial institutions, pursuant to EGRRCPA. Effective for us on April 1, 2020, the final rule will result in a change to the individual CET1 deduction threshold for these assets from 10% to 25%, elimination of the aggregate deduction threshold for these assets of 15%, assignment of a 250% risk weight for any MSRs or DTAs not deducted from CET1 capital, and assignment of an exposure category risk weight for investments in the capital of unconsolidated financial institutions not deducted from CET1 capital.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

A capital conservation buffer (“CCB”) is imposed on top of the following three minimum risk-based capital ratios: CET1 capital, tier 1 capital and total capital. As of January 1, 2019, the CCB reached its fully phased-in level of 2.5%. On April 10, 2018, the FRB issued a proposal designed to create a single, integrated capital requirement by combining the quantitative assessment of firms’ capital plans with the CCB requirement. If adopted, the proposal would change the way in which the minimum risk capital ratios are calculated by replacing the current static 2.5% CCB with a stress capital buffer requirement.

For additional discussion of the U.S. Basel III capital framework and its related application, see “Regulation and Supervision” in Part 1, Item 1 - Business included in our Annual Report on Form 10-K for the year ended December 31, 2018. The table below presents our actual regulatory capital ratios under the U.S. Basel III Standardized rules:



	Actual				Required Minimum plus Required CCB for Non-Leverage Ratios⁽¹⁾⁽²⁾
(in millions, except ratio data)	Amount		Ratio
June 30, 2019
CET1 capital		$14,629	10.5	%	7.0	%
Tier 1 capital	15,762		11.3		8.5
Total capital	18,582		13.4		10.5
Tier 1 leverage	15,762		10.1		4.0
Risk-weighted assets	138,879
Quarterly adjusted average assets	155,956
December 31, 2018
CET1 capital		$14,485	10.6	%	6.4	%
Tier 1 capital	15,325		11.3		7.9
Total capital	18,157		13.3		9.9
Tier 1 leverage	15,325		10.0		4.0
Risk-weighted assets	136,202
Quarterly adjusted average assets	153,026

⁽¹⁾Required “Minimum Capital ratio” for 2019 and 2018 are: Common equity tier 1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%.

⁽²⁾“Minimum Capital ratio” includes capital conservation buffer of 2.500% for 2019 and 1.875% for 2018; N/A to Tier 1 leverage.

At June 30, 2019, our CET1 capital, tier 1 capital and total capital ratios were 10.5%, 11.3% and 13.4%, respectively, as compared with 10.6%, 11.3%, and 13.3%, respectively, as of December 31, 2018. The CET1 capital ratio decreased as $2.7 billion of risk-weighted asset (“RWA”) growth, the impact of the capital actions described in “—Capital Transactions” below, and an increase in goodwill and intangibles related to Acquisitions, were partially offset by net income for the six months ended June 30, 2019. The tier 1 capital ratio increased as the changes in the CET1 capital ratio were more than offset by the issuance of preferred stock as described further in “—Capital Transactions” below. The total capital ratio increased due to the changes in CET1 and tier 1 capital ratios. At June 30, 2019, our CET1 capital, tier 1 capital and total capital ratios were 353 basis points, 285 basis points and 288 basis points, respectively, above their regulatory minimums plus the capital conservation buffer. All ratios remained well above the U.S. Basel III minima.

Regulatory Capital Ratios and Capital Composition

CET1 capital under U.S. Basel III Standardized rules totaled $14.6 billion at June 30, 2019, and increased $144 million from $14.5 billion at December 31, 2018, as net income for the six months ended June 30, 2019 was partially offset by the impact of common share repurchases, dividends and an increase in goodwill and intangibles related to Acquisitions. Tier 1 capital at June 30, 2019 totaled $15.8 billion, reflecting a $437 million increase from $15.3 billion at December 31, 2018, driven by the changes in CET1 capital and the issuance of preferred stock. At June 30, 2019, we had $1.1 billion of fixed-to-floating non-cumulative perpetual preferred stock issued and outstanding, an increase of $293 million from $840 million at December 31, 2018, given the first quarter 2019 issuance of 300,000 shares of Series D Preferred Stock that qualified as additional tier 1 capital. Total capital of $18.6 billion at June 30, 2019, increased $425 million from December 31, 2018, driven by the changes in CET1 and tier 1 capital.

RWA totaled $138.9 billion at June 30, 2019, based on U.S. Basel III Standardized rules, up $2.7 billion from December 31, 2018. The increase was driven by loans held for sale, the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842), higher derivative valuations, and growth in multi-family and education loans and commercial commitments. The increases were partially offset by a decrease in commercial loans and run-off in the home equity portfolio.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

As of June 30, 2019, the tier 1 leverage ratio was 10.1%, reflecting an increase of 10 basis points from 10.0% at December 31, 2018. The increase was driven by the change in tier 1 capital level noted above, partially offset by a $2.9 billion increase in quarterly adjusted average assets.

The following table presents our capital composition under the U.S. Basel III capital framework:



(in millions)	June 30, 2019			December 31, 2018
Total common stockholders’ equity		$20,884			$19,977
Exclusions:⁽¹⁾
Net unrealized losses recorded in accumulated other comprehensive income, net of tax:
Debt and equity securities	25			490
Derivatives	6			143
Unamortized net periodic benefit costs	457			463
Deductions:
Goodwill	(7,040		)	(6,923		)
Deferred tax liability associated with goodwill	371			366
Other intangible assets	(74		)	(31		)
Total common equity tier 1	14,629			14,485
Qualifying preferred stock	1,133			840
Total tier 1 capital	15,762			15,325
Qualifying subordinated debt⁽²⁾	1,500			1,499
Allowance for loan and lease losses	1,227			1,242
Allowance for credit losses for off-balance sheet exposure	93			91
Total capital		$18,582			$18,157

⁽¹⁾As a U.S. Basel III Standardized approach institution, we selected the one-time election to opt-out of the requirements to include all the components of AOCI.

⁽²⁾ As of June 30, 2019 and December 31, 2018, the amount of non-qualifying subordinated debt excluded from regulatory capital was $139 million.

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” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

Capital Transactions

The following capital actions were completed by the Company during the six months ended June 30, 2019:


•	Issued $300 million, or 300,000 shares, of 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock (the “Series D Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, with net proceeds of $292 million;


•	Declared quarterly common stock dividends of $0.32 per share for first and second quarters of 2019, aggregating to $297 million;


•	Declared a semi-annual dividend of $27.50 per share on the 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock, aggregating to $7 million;


•	Declared a semi-annual dividend of $30.00 per share on the 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, aggregating to $9 million;


•	Declared quarterly dividends of $15.94 per share for the first and second quarters of 2019 on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $9 million;


•	Declared quarterly dividends of $11.82 per share for the first quarter of 2019 and $15.88 per share for the second quarter of 2019 on the 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, aggregating to $8 million; and


•	Repurchased $320 million of our outstanding common stock.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Banking Subsidiary Capital

The following table presents our banking subsidiary’s capital ratios under U.S. Basel III Standardized rules:



	June 30, 2019				December 31, 2018
(dollars in millions, except ratio data)	Amount		Ratio		Amount		Ratio
Citizens Bank, National Association
CET1 capital		$15,166	10.9	%		$11,994	10.6	%
Tier 1 capital	15,166		10.9		11,994		10.6
Total capital	17,611		12.7		14,252		12.5
Tier 1 leverage	15,166		9.7		11,994		9.9
Risk-weighted assets	138,569				113,610
Quarterly adjusted average assets	155,590				121,686

CBNA’s CET1 capital totaled $15.2 billion at June 30, 2019, up $3.2 billion from $12.0 billion at December 31, 2018. The increase was primarily driven by the net impact of the merger of Citizens Bank of Pennsylvania (“CBPA”) into CBNA effective January 2, 2019, and net income for the six months ended June 30, 2019. The increase was partially offset by dividend payments to the Parent Company and an increase in goodwill and intangibles related to Acquisitions. Total capital was $17.6 billion at June 30, 2019, an increase of $3.4 billion from $14.3 billion at December 31, 2018, driven by the change in CET1 capital and an increase in ACL, primarily attributable to the merger.

CBNA’s RWA totaled $138.6 billion at June 30, 2019, an increase of $25.0 billion from December 31, 2018, driven by approximately $22 billion resulting from the merger of CBPA into CBNA. In addition, the increase in RWA was driven by loans held for sale, the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842), higher derivative valuations and growth in multifamily loans, education loans and commercial commitments. The increases were partially offset by a decrease in commercial loans and run-off in the home equity portfolio.

As of June 30, 2019, CBNA’s tier 1 leverage ratio decreased 11 basis points to 9.7% from 9.9% at December 31, 2018, primarily driven by a $33.9 billion increase in quarterly adjusted average assets that drove a 240 basis point decline in the ratio, partially offset by a $3.2 billion increase in tier 1 capital that drove a 229 basis point increase in the ratio. These movements were primarily attributable to the merger of CBPA into CBNA.

LIQUIDITY

Liquidity is defined as our ability to meet our cash-flow and collateral obligations in a timely manner, at a reasonable cost. An institution must maintain operating liquidity to meet its expected daily and forecasted cash-flow requirements, as well as contingent liquidity to meet unexpected (stress scenario) funding requirements. As noted earlier, reflecting the importance of meeting all unexpected and stress-scenario funding requirements, we identify and manage contingent liquidity (consisting of cash balances at the FRB, unencumbered high-quality and liquid securities, and unused FHLB borrowing capacity). Separately, we also identify and manage asset liquidity as a subset of contingent liquidity (consisting of cash balances at the FRB and unencumbered high-quality securities). We consider the effective and prudent management of liquidity to be fundamental to our health and strength. We manage liquidity at the consolidated enterprise level and at each material legal entity, including at the Parent Company and CBNA level.

Parent Company Liquidity

Our Parent Company’s primary sources of cash are (i) dividends and interest received from CBNA as a result of investing in bank equity and subordinated debt and (ii) externally issued preferred stock and senior and subordinated debt. Uses of cash include the following: (i) routine cash flow requirements as a bank holding company, including periodic share repurchases and payments of dividends, interest and expenses; (ii) needs of subsidiaries, including CBNA, for additional equity and, as required, its need for debt financing; and (iii) support for extraordinary funding requirements when necessary. To the extent that the Parent Company has relied on wholesale borrowings, uses also include payments of related principal and interest.

On January 29, 2019, the Parent Company issued $300 million, or 12,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (equivalent to $25

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

per depositary share). For further information, see Note 11 "Stockholders’ Equity" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report.

On July 25, 2019, the Parent Company issued $500 million in seven-year 2.850% fixed-rate senior notes.

During the three months ended June 30, 2019 and 2018, the Parent Company declared and paid dividends on common stock of $148 million and $107 million, respectively. During the three months ended June 30, 2019, the Parent Company declared dividends on preferred stock of $18 million. No dividends were declared on preferred stock during the three months ended June 30, 2018. During the six months ended June 30, 2019 and 2018, the Parent Company declared and paid dividends on common stock of $297 million and $215 million, respectively, and declared dividends on preferred stock of $33 million and $7 million, respectively.

During three months ended June 30, 2019 and 2018, the Parent Company repurchased $120 million and $150 million of its outstanding common stock, respectively. During six months ended June 30, 2019 and 2018, the Parent Company repurchased $320 million and $325 million of its outstanding common stock, respectively.

Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $1.2 billion as of June 30, 2019 compared with $911 million as of December 31, 2018. The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At June 30, 2019, the Parent Company’s double-leverage ratio was 97.9%.

CBNA Liquidity

In the ordinary course of business, the liquidity of CBNA is managed by matching sources and uses of cash. The primary sources of bank liquidity include (i) deposits from our consumer and commercial customers; (ii) payments of principal and interest on loans and debt securities; and (iii) wholesale borrowings, as needed, and as described under “—Liquidity Risk Management and Governance.” The primary uses of bank liquidity include (i) withdrawals and maturities of deposits; (ii) payment of interest on deposits; (iii) funding of loans and related commitments; and (iv) funding of securities purchases. To the extent that CBNA has relied on wholesale borrowings, uses also include payments of related principal and interest. For further information on CBNA’s outstanding debt, see Note 8 "Borrowed Funds" to our Consolidated Financial Statements in Part I, Item 1— Financial Statements and Supplementary Data, of this Report.

As CBNA’s major businesses involve taking deposits and making loans, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and for loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary.

On February 14, 2019, CBNA issued $1.5 billion in senior notes, consisting of $700 million in three-year fixed-rate notes, $300 million in three-year floating-rate notes, and $500 million in seven-year fixed-rate notes.

Liquidity Risk

We define liquidity risk as the risk that an entity will be unable to meet its payment obligations in a timely manner, at a reasonable cost. Liquidity risk can arise due to contingent liquidity risk and/or funding liquidity risk.

Contingent liquidity risk is the risk that market conditions may reduce an entity’s ability to liquidate, pledge and/or finance certain assets and thereby substantially reduce the liquidity value of such assets. Drivers of contingent liquidity risk include general market disruptions as well as specific issues regarding the credit quality and/or valuation of a security or loan, issuer or borrower and/or asset class.

Funding liquidity risk is the risk that market conditions and/or entity-specific events may reduce an entity’s ability to raise funds from depositors and/or wholesale market counterparties. Drivers of funding liquidity risk may be idiosyncratic or systemic, reflecting impediments to operations and/or damaged market confidence.

Factors Affecting Liquidity

Given the composition of assets and borrowing sources, contingent liquidity risk at CBNA would be materially affected by such events as deterioration of financing markets for high-quality securities (e.g., mortgage-backed securities and other instruments issued by the GNMA, FNMA and the FHLMC), by any inability of the FHLBs to provide collateralized advances and/or by a refusal of the FRB to act as lender of last resort in systemic stress.

Similarly, given the structure of its balance sheet, the funding liquidity risk of CBNA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our contingent liquidity risk and our funding liquidity risk to be relatively modest.

An additional variable affecting our access to unsecured wholesale market funds and to large denomination (i.e., uninsured) customer deposits is the credit ratings assigned by such agencies as Moody’s, Standard & Poor’s and Fitch. The following table presents our credit ratings:



	June 30, 2019
	Moody’s	Standard and Poor’s	Fitch
	Moody’s	Standard and Poor’s	Fitch
Citizens Financial Group, Inc.:
Long-term issuer	NR	BBB+	BBB+
Short-term issuer	NR	A-2	F2
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	F2
Long-term deposits	A1	NR	A-
Short-term deposits	P-1	NR	F2
NR = Not rated

On July 31, 2019, Fitch announced an upgrade to CFG’s short-term issuer default rating from F2 to F1, an upgrade to CBNA’s short-term issuer default rating from F2 to F1, and an upgrade to CBNA’s short-term deposit rating from F2 to F1.

Changes in our public credit ratings could affect both the cost and availability of our wholesale funding. As a result, and in order to maintain a conservative funding profile, our banking subsidiary continues to minimize reliance on unsecured wholesale funding. At June 30, 2019, our wholesale funding consisted primarily of secured borrowings from the FHLBs collateralized by high-quality residential mortgages, and term debt issued by the Parent Company and CBNA.

Existing and evolving regulatory liquidity requirements, such as the LCR, represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB, the OCC, and the FDIC regularly evaluate our liquidity as part of the overall supervisory process. In addition we are subject to existing and evolving regulatory liquidity requirements, some of which are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. For further discussion, see “Regulation and Supervision — Financial Regulatory Reform” and “—Liquidity Requirements” in Part I, Item 1 — Business, of our Annual Report on Form 10-K for the year ended December 31, 2018.

The LCR was developed to ensure banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. We are designated as a modified LCR financial institution under the final rule published by U.S. federal banking regulators and were compliant beginning in January 2017. We remain fully compliant with the LCR as of June 30, 2019.

Liquidity Risk Management and Governance

Liquidity risk is measured and managed by the Funding and Liquidity unit within our Treasury unit in accordance with policy guidelines promulgated by our Board and the Asset Liability Committee. In managing liquidity risk, the Funding and Liquidity unit delivers regular and comprehensive reporting, including current levels versus threshold limits for a broad set of liquidity metrics and early warning indicators, explanatory commentary relating to emerging risk trends and, as appropriate, recommended remedial strategies.

Our Funding and Liquidity unit’s primary goal is to deliver and otherwise maintain prudent levels of operating liquidity (to support expected and projected funding requirements), and contingent liquidity (to support unexpected 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.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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, 2019:


•	Core deposits continued to be our primary source of funding and our consolidated period end loan-to-deposit ratio, which excludes loans held for sale, was 94.2%;


•	Our cash position (which is defined as cash balance held at the FRB) totaled $2.0 billion;


•	Contingent liquidity was $31.3 billion, consisting of unencumbered high-quality liquid securities of $20.3 billion, unused FHLB capacity of $9.0 billion, and our cash position of $2.0 billion. Asset liquidity (a component of contingent liquidity) was $22.3 billion consisting of our cash position of $2.0 billion and unencumbered high-quality liquid securities of $20.3 billion;


•	Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $13.5 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 six months ended June 30, 2019 and 2018, see the Consolidated Statements of Cash Flows in Part I, Item 1 — Financial Statements, included in this Report.

The Funding and Liquidity unit monitors a variety of liquidity and funding metrics and early warning indicators and metrics, including specific risk thresholds limits. These monitoring tools are broadly classified as follows:


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


•	Liquidity stress sources, including idiosyncratic, systemic and combined stresses, in addition to evolving regulatory requirements such as the LCR; 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. See Note 12 "Commitments and Contingencies" to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this Report.



(in millions)	June 30, 2019		December 31, 2018		Change			Percent
Commitments to extend credit		$70,217		$69,553		$664		1	%
Letters of credit	2,252		2,125		127			6
Marketing rights	35		37		(2		)	(5	)
Risk participation agreements	41		19		22			116
Loans sold with recourse	23		5		18			NM
Total		$72,568		$71,739		$829		1	%

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

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

and the fair value of MSRs. For additional information regarding these accounting estimates and their related application, see “—Critical Accounting Estimates” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018. No material changes were made to these critical accounting policies or estimates during the six months ended June 30, 2019.

RISK GOVERNANCE

We are committed to maintaining a strong, integrated, and proactive approach to the management of all risks to which we are exposed in pursuit of our business objectives. A key aspect of our Board’s responsibility as the main decision making body is setting our risk appetite to ensure that the levels of risk that we are willing to accept in the attainment of our strategic business and financial objectives are clearly understood.

To enable our Board to carry out its objectives, it has delegated authority for risk management activities, as well as governance and oversight of those activities, to a number of Board and executive management level risk committees. The Executive Risk Committee (“ERC”), chaired by the Chief Risk Officer, is responsible for oversight of risk across the enterprise and actively considers our inherent material risks, analyzes our overall risk profile and seeks confirmation that the risks are being appropriately identified, assessed and mitigated. Reporting to the ERC are the following additional committees covering specific areas of risk: Compliance and Operational Risk Committee, Model Risk Committee, Credit Policy Committee, Asset Liability Committee, Business Initiatives Review Committee, and the Conduct and Ethics Committee.

There have been no significant changes in our risk governance practices, risk framework, risk appetite, or credit risk as described in “—Risk Governance” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

MARKET RISK

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Modest market risk arises from trading activities that serve customer needs, including hedging of interest rate and foreign exchange risk. As described below, more material market risk arises from our non-trading banking activities, such as loan origination and deposit-gathering. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. We actively manage both trading and non-trading market risks.

Non-Trading Risk

We are exposed to market risk as a result of non-trading banking activities. This market risk is substantially composed of interest rate risk, as we have no direct currency or commodity risk and de minimis 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” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

The table below reports net interest income exposures against a variety of interest rate scenarios. Our policies involve measuring exposures as a percentage change in net interest income over the next year due to either instantaneous or gradual parallel changes in rates relative to the market implied forward yield curve. As the following table illustrates, our balance sheet is asset sensitive; net interest income would benefit from an increase in interest rates, while exposure to a decline in interest rates is within limit. While an instantaneous and severe shift in interest rates was used in this analysis, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The table below presents the sensitivity of net interest income to various parallel yield curve shifts from the market implied forward yield curve:



	Estimated % Change in Net Interest Income over 12 Months
Basis points	June 30, 2019		December 31, 2018
Instantaneous Change in Interest Rates
+200	8.5	%	9.5	%
+100	4.2		4.8
-100	(5.4	)	(4.5	)
Gradual Change in Interest Rates
+200	2.9		4.9
+100	1.2		2.5
-100	(2.3	)	(1.1	)

Given broad expectations the FRB would cut interest rates, we reduced asset sensitivity to mitigate the potential impact of declining rates. Asset sensitivity against a 200 basis point gradual increase in rates was 2.9% at June 30, 2019, a decrease from 4.9% at December 31, 2018. Additionally, we have reduced our short-term interest rate exposure (six months and under) to approximately 25%, with the remainder in the intermediate to long tenors of the curve. The risk position can be affected by changes in interest rates which impact the repricing sensitivity or beta of the deposit base as well as the cash flows on prepayable assets. The risk position is managed within our risk limits, and long term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding.

We use a valuation measure of exposure to structural interest rate risk, Economic Value of Equity (“EVE”), as a supplement to net interest income simulations. EVE complements net interest income simulation analysis as it estimates risk exposure over a long-term horizon. EVE measures the extent to which the economic value of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. The change in value is expressed as a percentage of regulatory capital.

We use interest rate swap contracts to manage the interest rate exposure to variability in the interest cash flows on our floating-rate assets and floating-rate wholesale funding, and to hedge market risk on fixed-rate capital markets debt issuances. The table below summarizes the related hedging activities.



	June 30, 2019										December 31, 2018
						Weighted Average									Weighted Average
(dollars in millions)	Notional Amount		Fair Value			Maturity (Years)	Receive Rate		Pay Rate		Notional Amount		Fair Value		Maturity (Years)	Receive Rate		Pay Rate
Cash flow - receive fixed/pay variable - conventional ALM		$14,850		($3	)	1.9	1.8	%	2.4	%		$8,100		$3	2.2	1.7	%	2.5	%
Fair value - receive fixed/pay variable - conventional debt	4,650		(1		)	2.5	2.0		2.5		3,450		2		2.4	1.8		2.7
Cash flow - pay fixed/receive variable - conventional ALM	4,750		1			4.40	2.4		1.7		500		—		—	2.4		1.3
Fair value - pay fixed/receive variable - conventional ALM	846		—			4.60	2.5		2.3		—		—		—	—		—
Total portfolio swaps		$25,096		($3	)	2.6	2.0	%	2.3	%		$12,050		$5	2.2	1.8	%	2.5	%
Floors - conventional ALM⁽¹⁾		$7,000		$—		—	—		—			$7,000		$—	0.5

⁽¹⁾ Conventional ALM floors, which matured in July 2019, do not have a receive rate or pay rate, but rather a strike price on the option.

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 a formal committee meeting.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Mortgage Servicing Rights

We have market risk associated with the value of MSRs, which are impacted by various types of inherent risks, including risks related to duration, basis, convexity, volatility and yield curve. We have elected to account for the MSRs acquired from FAMC or originated after December 31, 2018 at fair value while maintaining a lower of cost or market approach on our non-FAMC MSRs originated before December 31, 2018.

As part of our overall risk management strategy relative to the fair market value of the MSRs acquired from FAMC or originated after December 31, 2018, we enter into various free-standing derivatives, such as interest rate swaps, interest rate swaptions, interest rate futures, and forward contracts to purchase mortgage-backed securities to economically hedge the changes in fair value. As of June 30, 2019, the fair value of these MSRs was $531 million and the total notional amount of related derivative contracts was $11.5 billion. Gains and losses on MSRs and the related derivatives used for hedging are included in mortgage banking fees on the Consolidated Statements of Operations.

As of June 30, 2019 and December 31, 2018, our non-FAMC MSRs originated on or before December 31, 2018 had a book value of $189 million and $221 million, respectively, and were carried at the lower of cost or market. As of June 30, 2019 and December 31, 2018, these MSRs had a fair value of $193 million and $243 million, respectively, which exceeded the carrying value at those dates. Depending on the interest rate environment, economic hedges may be used to protect the market value of these MSRs.

As with our traded market risk based activities, earnings at-risk excludes the impact of MSRs. MSRs are captured under our single price risk management framework that is used for calculating a management value at risk that is consistent with the definition used by banking regulators, as defined below.

Trading Risk

We are exposed to market risk primarily through client facilitation activities including derivatives and foreign exchange products as well as underwriting and market making activities. Exposure is created as a result of changes in interest rates and related basis spreads and volatility, foreign exchange rates, and credit spreads on a select range of interest rates, foreign exchange, commodities, corporate bonds and secondary loan instruments. These trading activities are conducted through CBNA and CCMI. There have been no significant changes in our market risk governance, market risk measurement, or market risk practices including VaR, stressed VaR, sensitivity analysis, stress testing, or VaR model review and validation as described in “—Market Risk — Trading Risk” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Market Risk Regulatory Capital

The U.S. banking regulators’ “Market Risk Rule” covers the calculation of market risk capital and substantially modified the determination of market risk-weighted assets and implemented a more risk sensitive methodology for the risk inherent in certain trading positions categorized as “covered positions.” For the purposes of the Market Risk Rule, all of our client facing trades and associated hedges need to maintain a low risk profile to qualify, and do qualify, as “covered positions.” For the three months ended June 30, 2019 and 2018, we were not subject to the reporting threshold under the Market Risk Rule. As a result, the $634 million and $767 million of calculated market risk-weighted assets as of June 30, 2019 and 2018, respectively, were not included in our risk-weighted assets. As such, our covered trading activities were risk-weighted under U.S. Basel III Standardized credit risk rules. While not subject to the determination requirements of market risk-weighted assets, we nevertheless comply with the Market Risk Rule’s other requirements. The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR. 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, 2019								For the Three Months Ended June 30, 2018
Market Risk Category	Period End		Average		High		Low		Period End		Average		High		Low
Interest Rate		$1		$—		$1		$—		$2		$2		$2		$1
Foreign Exchange Currency Rate	—		—		—		—		—		—		—		—
Credit Spread	5		4		5		3		3		2		3		2
Commodity	—		—		—		—		—		—		—		—
General VaR	5		4		5		3		4		3		4		3
Specific Risk VaR	—		—		—		—		—		—		—		—
Total VaR		$5		$4		$5		$3		$4		$3		$4		$3
Stressed General VaR		$13		$9		$13		$7		$15		$13		$15		$10
Stressed Specific Risk VaR	—		—		—		—		—		—		—		—
Total Stressed VaR		$13		$9		$13		$7		$15		$13		$15		$10
Market Risk Regulatory Capital		$37								$47
Specific Risk Not Modeled Add-on	14								14
de Minimis Exposure Add-on	—								—
Total Market Risk Regulatory Capital		$51								$61
Market Risk-Weighted Assets		$634								$767
Market Risk-Weighted Assets (included in our FR Y-9C regulatory filing)		$—								$—

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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, and as approved by our banking regulators, for interest rate, credit spread, and foreign exchange positions. The following graph shows our daily net trading revenue and total internal, modeled VaR for the twelve months ended June 30, 2019.

Daily VaR Backtesting

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

KEY PERFORMANCE METRICS, NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS

For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Introduction — Key Performance Metrics Used by Management and Non-GAAP Financial Measures,” included in this Report. The following table presents computations of key performance metrics used throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:



		As of and for the Three Months Ended June 30,						As of and for the Six Months Ended June 30,
(in millions, except share, per share and ratio data)	Ref.	2019			2018			2019			2018
Total revenue (GAAP)	A		$1,628			$1,509			$3,216			$2,971
Noninterest expense (GAAP)	B	951			875			1,888			1,758
Net income (GAAP)	C	453			425			892			813
Net income available to common stockholders (GAAP)	D	435			425			859			806
Return on average common equity:
Average common equity (GAAP)	E		$20,420			$19,732			$20,182			$19,732
Return on average common equity	D/E	8.54		%	8.65		%	8.58		%	8.24		%
Return on average tangible common equity:
Average common equity (GAAP)	E		$20,420			$19,732			$20,182			$19,732
Less: Average goodwill (GAAP)		7,040			6,887			7,029			6,887
Less: Average other intangibles (GAAP)		80			2			69			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		370			357			369			356
Average tangible common equity	F		$13,670			$13,200			$13,453			$13,199
Return on average tangible common equity	D/F	12.75		%	12.93		%	12.87		%	12.32		%
Return on average total assets:
Average total assets (GAAP)	G		$161,489			$153,253			$160,955			$152,393
Return on average total assets	C/G	1.13		%	1.11		%	1.12		%	1.08		%
Return on average total tangible assets:
Average total assets (GAAP)	G		$161,489			$153,253			$160,955			$152,393
Less: Average goodwill (GAAP)		7,040			6,887			7,029			6,887
Less: Average other intangibles (GAAP)		80			2			69			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		370			357			369			356
Average tangible assets	H		$154,739			$146,721			$154,226			$145,860
Return on average total tangible assets	C/H	1.17		%	1.16		%	1.17		%	1.12		%
Efficiency ratio:
Efficiency ratio	B/A	58.41		%	57.95		%	58.70		%	59.17		%
Operating leverage:
Increase in total revenue		7.81		%	8.15		%	8.25		%	6.86		%
Increase in noninterest expense		8.66			1.19			7.39			2.30
Operating leverage		(0.85		)%	6.96		%	0.86		%	4.56		%
Effective income tax rate:
Income before income tax expense	I		$580			$549			$1,146			$1,050
Income tax expense	J	127			124			254			237
Effective income tax rate	J/I	21.86		%	22.58		%	22.14		%	22.55		%
Net income per average common share - basic and diluted:
Average common shares outstanding - basic (GAAP)	K	458,154,335			484,744,354			459,426,685			486,114,872
Average common shares outstanding - diluted (GAAP)	L	459,304,224			486,141,695			460,857,535			487,683,216
Net income per average common share - basic (GAAP)	D/K		$0.95			$0.88			$1.87			$1.66
Net income per average common share - diluted (GAAP)	D/L	0.95			0.88			1.86			1.65
Dividend payout ratio:
Cash dividends declared and paid per common share	M		$0.32			$0.22			$0.64			$0.44
Dividend payout ratio	M/(D/K)	34		%	25		%	34		%	27		%

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		As of and for the Three Months Ended June 30,
		2019											2018
(in millions, except ratio data)	Ref.	Consumer Banking			Commercial Banking			Other		Consolidated			Consumer Banking			Commercial Banking			Other			Consolidated
Net income (loss) available to common stockholders:
Net income (loss) (GAAP)	N		$213			$216			$24		$453			$197			$237			($9	)		$425
Less: Preferred stock dividends		—			—			18		18			—			—			—			—
Net income (loss) available to common stockholders	O		$213			$216			$6		$435			$197			$237			($9	)		$425
Efficiency ratio:
Total revenue (GAAP)	P		$1,076			$520			$32		$1,628			$987			$516			$6			$1,509
Noninterest expense (GAAP)	Q	715			217			19		951			658			200			17			875
Efficiency ratio	Q/P	66.43		%	41.58		%	NM		58.41		%	66.68		%	38.80		%	NM			57.95		%
Return on average total tangible assets:
Average total assets (GAAP)			$65,485			$56,135			$39,869		$161,489			$61,232			$52,170			$39,851			$153,253
Less: Average goodwill (GAAP)		119			45			6,876		7,040			—			11			6,876			6,887
Less: Average other intangibles (GAAP)		73			7			—		80			—			2			—			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			370		370			—			—			357			357
Average total tangible assets	R		$65,293			$56,083			$33,363		$154,739			$61,232			$52,157			$33,332			$146,721
Return on average total tangible assets	N/R	1.31		%	1.54		%	NM		1.17		%	1.29		%	1.82		%	NM			1.16		%



		As of and for the Six Months Ended June 30,
		2019											2018
(in millions, except ratio data)	Ref.	Consumer Banking			Commercial Banking			Other		Consolidated			Consumer Banking			Commercial Banking			Other			Consolidated
Net income (loss) available to common stockholders:
Net income (loss) (GAAP)	N		$415			$443			$34		$892			$367			$452			($6	)		$813
Less: Preferred stock dividends		—			—			33		33			—			—			7			7
Net income (loss) available to common stockholders	O		$415			$443			$1		$859			$367			$452			($13	)		$806
Efficiency ratio:
Total revenue (GAAP)	P		$2,111			$1,042			$63		$3,216			$1,942			$998			$31			$2,971
Noninterest expense (GAAP)	Q	1,415			426			47		1,888			1,314			408			36			1,758
Efficiency ratio	Q/P	67.01		%	40.84		%	NM		58.70		%	67.68		%	40.86		%	NM			59.17		%
Return on average total tangible assets:
Average total assets (GAAP)			$65,247			$55,884			$39,824		$160,955			$61,290			$51,286			$39,817			$152,393
Less: Average goodwill (GAAP)		119			34			6,876		7,029			—			11			6,876			6,887
Less: Average other intangibles (GAAP)		64			5			—		69			—			2			—			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			369		369			—			—			356			356
Average total tangible assets	R		$65,064			$55,845			$33,317		$154,226			$61,290			$51,273			$33,297			$145,860
Return on average total tangible assets	N/R	1.29		%	1.60		%	NM		1.17		%	1.21		%	1.78		%	NM			1.12		%

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents computations of non-GAAP financial measures representing our Underlying results used throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations”:



		As of and for the Three Months Ended June 30,						As of and for the Six Months Ended June 30,
(in millions, except share, per share and ratio data)	Ref.	2019			2018			2019			2018
Total revenue, Underlying:
Total revenue (GAAP)	A		$1,628			$1,509			$3,216			$2,971
Less: Notable items		—			—			—			—
Total revenue, Underlying (non-GAAP)	S		$1,628			$1,509			$3,216			$2,971
Noninterest expense, Underlying:
Noninterest expense (GAAP)	B		$951			$875			$1,888			$1,758
Less: Notable items		7			—			12			—
Noninterest expense, Underlying (non-GAAP)	T		$944			$875			$1,876			$1,758
Pre-provision profit:
Total revenue (GAAP)	A		$1,628			$1,509			$3,216			$2,971
Less: Noninterest expense (GAAP)	B	951			875			1,888			1,758
Pre-provision profit (GAAP)			$677			$634			$1,328			$1,213
Pre-provision profit, Underlying
Total revenue, Underlying (non-GAAP)	S		$1,628			$1,509			$3,216			$2,971
Less: Noninterest expense, Underlying (non-GAAP)	T	944			875			1,876			1,758
Pre-provision profit, Underlying (non-GAAP)			$684			$634			$1,340			$1,213
Income before income tax expense, Underlying:
Income before tax expense (GAAP)	I		$580			$549			$1,146			$1,050
Less: Notable items		(7		)	—			(12		)	—
Income before income tax expense, Underlying (non-GAAP)	U		$587			$549			$1,158			$1,050
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP)	J		$127			$124			$254			$237
Less: Notable items		(2		)	—			(3		)	—
Income tax expense, Underlying (non-GAAP)	V		$129			$124			$257			$237
Effective income tax rate (GAAP)	J/I	21.86		%	22.58		%	22.14		%	22.55		%
Effective income tax rate, Underlying (non-GAAP)	V/U	21.89			22.58			22.16			22.55
Net income, Underlying:
Net income (GAAP)	C		$453			$425			$892			$813
Add: Notable items, net of tax expense		5			—			9			—
Net income, Underlying (non-GAAP)	W		$458			$425			$901			$813

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		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.	2019			2018			2019			2018
Net income available to common stockholders, Underlying:
Net income available to common stockholders (GAAP)	D		$435			$425			$859			$806
Add: Notable items, net of tax expense		5			—			9			—
Net income available to common stockholders, Underlying (non-GAAP)	X		$440			$425			$868			$806
Return on average common equity and return on average common equity, Underlying:
Average common equity (GAAP)	E		$20,420			$19,732			$20,182			$19,732
Return on average common equity	D/E	8.54		%	8.65		%	8.58		%	8.24		%
Return on average common equity, Underlying (non-GAAP)	X/E	8.63			8.65			8.67			8.24
Return on average tangible common equity and return on average tangible common equity, Underlying:
Average common equity (GAAP)	E		$20,420			$19,732			$20,182			$19,732
Less: Average goodwill (GAAP)		7,040			6,887			7,029			6,887
Less: Average other intangibles (GAAP)		80			2			69			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		370			357			369			356
Average tangible common equity	F		$13,670			$13,200			$13,453			$13,199
Return on average tangible common equity	D/F	12.75		%	12.93		%	12.87		%	12.32		%
Return on average tangible common equity, Underlying (non-GAAP)	X/F	12.89			12.93			13.00			12.32
Return on average total assets and return on average total assets, Underlying:
Average total assets (GAAP)	G		$161,489			$153,253			$160,955			$152,393
Return on average total assets	C/G	1.13		%	1.11		%	1.12		%	1.08		%
Return on average total assets, Underlying (non-GAAP)	W/G	1.14			1.11			1.13			1.08
Return on average total tangible assets and return on average total tangible assets, Underlying:
Average total assets (GAAP)	G		$161,489			$153,253			$160,955			$152,393
Less: Average goodwill (GAAP)		7,040			6,887			7,029			6,887
Less: Average other intangibles (GAAP)		80			2			69			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		370			357			369			356
Average tangible assets	H		$154,739			$146,721			$154,226			$145,860
Return on average total tangible assets	C/H	1.17		%	1.16		%	1.17		%	1.12		%
Return on average total tangible assets, Underlying (non-GAAP)	W/H	1.19			1.16			1.18			1.12
Efficiency ratio and efficiency ratio, Underlying:
Efficiency ratio	B/A	58.41		%	57.95		%	58.70		%	59.17		%
Efficiency ratio, Underlying (non-GAAP)	T/S	58.02			57.95			58.34			59.17
Operating leverage and operating leverage, Underlying:
Increase in total revenue		7.81		%	8.15		%	8.25		%	6.86		%
Increase in noninterest expense		8.66			1.19			7.39			2.30
Operating leverage		(0.85		)%	6.96		%	0.86		%	4.56		%
Increase in total revenue, Underlying (non-GAAP)		7.81		%	7.29		%	8.25		%	6.43		%
Increase in noninterest expense, Underlying (non-GAAP)		7.93			3.01			6.73			3.22
Operating leverage, Underlying (non-GAAP)		(0.12		)%	4.28		%	1.52		%	3.21		%
Net income per average common share - basic and diluted and net income per average common share - basic and diluted, Underlying:
Average common shares outstanding - basic (GAAP)	K	458,154,335			484,744,354			459,426,685			486,114,872
Average common shares outstanding - diluted (GAAP)	L	459,304,224			486,141,695			460,857,535			487,683,216
Net income per average common share - basic (GAAP)	D/K		$0.95			$0.88			$1.87			$1.66
Net income per average common share - diluted (GAAP)	D/L	0.95			0.88			1.86			1.65
Net income per average common share - basic, Underlying (non-GAAP)	X/K	0.96			0.88			1.89			1.66
Net income per average common share - diluted, Underlying (non-GAAP)	X/L	0.96			0.88			1.88			1.65

CITIZENS FINANCIAL GROUP, INC.

FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS



		Page
Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 (unaudited)		52
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018		53
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018		54
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2019 and 2018		55
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2019 and 2018		57
Notes to Consolidated Financial Statements (unaudited)		58
Note 1 - Basis of Presentation		58
Note 2 - Securities		61
Note 3 - Loans and Leases		64
Note 4 - Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk		66
Note 5 - Mortgage Banking		75
Note 6 - Leases		77
Note 7 - Variable Interest Entities		79
Note 8 - Borrowed Funds		80
Note 9 - Derivatives		82
Note 10 - Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		85
Note 11 - Stockholders’ Equity		87
Note 12 - Commitments and Contingencies		88
Note 13 - Fair Value Measurements		90
Note 14 - Noninterest Income		94
Note 15 - Other Operating Expense		95
Note 16 - Earnings Per Share		95
Note 17 - Business Operating Segments		95

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in millions, except share data)	June 30, 2019			December 31, 2018
ASSETS:
Cash and due from banks		$996			$1,081
Interest-bearing cash and due from banks	2,039			2,993
Interest-bearing deposits in banks	186			148
Debt securities available for sale, at fair value (including $434 and $363 pledged to creditors, respectively)⁽¹⁾	21,698			19,895
Debt securities held to maturity (fair value of $3,441 and $4,041, respectively)	3,447			4,165
Equity securities, at fair value	47			181
Equity securities, at cost	706			834
Loans held for sale, at fair value	1,750			1,219
Other loans held for sale	455			101
Loans and leases	116,838			116,660
Less: Allowance for loan and lease losses	(1,227		)	(1,242		)
Net loans and leases	115,611			115,418
Derivative assets	833			317
Premises and equipment, net	740			791
Bank-owned life insurance	1,711			1,698
Goodwill	7,040			6,923
Due from broker	249			—
Other assets	5,241			4,754
TOTAL ASSETS		$162,749			$160,518
LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
Deposits:
Noninterest-bearing		$28,192			$29,458
Interest-bearing	95,812			90,117
Total deposits	124,004			119,575
Federal funds purchased and securities sold under agreements to repurchase	1,132			1,156
Other short-term borrowed funds	309			161
Derivative liabilities	106			292
Deferred taxes, net	767			573
Long-term borrowed funds	11,538			15,925
Due to broker	257			—
Other liabilities	2,619			2,019
TOTAL LIABILITIES	140,732			139,701
Contingencies (refer to Note 12)
STOCKHOLDERS’ EQUITY:
Preferred stock, $25.00 par value, 100,000,000 shares authorized	1,133			840
Common stock:
$0.01 par value, 1,000,000,000 shares authorized; 568,003,349 shares issued and 457,903,826 shares outstanding at June 30, 2019 and 566,819,863 shares issued and 466,007,984 shares outstanding at December 31, 2018	6			6
Additional paid-in capital	18,860			18,815
Retained earnings	5,959			5,385
Treasury stock, at cost, 110,099,523 and 100,811,879 shares at June 30, 2019 and December 31, 2018, respectively	(3,453		)	(3,133		)
Accumulated other comprehensive loss	(488		)	(1,096		)
TOTAL STOCKHOLDERS’ EQUITY		$22,017			$20,817
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$162,749			$160,518

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

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

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



	Three Months Ended June 30,					Six Months Ended June 30,
(in millions, except share and per share data)	2019		2018			2019			2018
INTEREST INCOME:
Interest and fees on loans and leases		$1,392		$1,230			$2,773			$2,376
Interest and fees on loans held for sale, at fair value	15		5			26			9
Interest and fees on other loans held for sale	2		3			6			7
Investment securities	164		165			330			333
Interest-bearing deposits in banks	7		8			15			14
Total interest income	1,580		1,411			3,150			2,739
INTEREST EXPENSE:
Deposits	308		181			595			326
Federal funds purchased and securities sold under agreements to repurchase	3		1			5			2
Other short-term borrowed funds	1		1			1			3
Long-term borrowed funds	102		107			223			196
Total interest expense	414		290			824			527
Net interest income	1,166		1,121			2,326			2,212
Provision for credit losses	97		85			182			163
Net interest income after provision for credit losses	1,069		1,036			2,144			2,049
NONINTEREST INCOME:
Service charges and fees	126		127			249			251
Card fees	64		60			123			121
Capital markets fees	57		48			111			87
Trust and investment services fees	53		43			100			83
Mortgage banking fees	62		27			105			52
Letter of credit and loan fees	33		32			66			62
Foreign exchange and interest rate products	35		34			71			61
Securities gains, net	4		2			12			10
Net impairment losses recognized in earnings on debt securities	—		(1		)	(1		)	(2		)
Other income	28		16			54			34
Total noninterest income	462		388			890			759
NONINTEREST EXPENSE:
Salaries and employee benefits	507		453			1,016			923
Equipment and software expense	126		110			251			223
Outside services	118		106			228			205
Occupancy	82		79			165			160
Other operating expense	118		127			228			247
Total noninterest expense	951		875			1,888			1,758
Income before income tax expense	580		549			1,146			1,050
Income tax expense	127		124			254			237
NET INCOME		$453		$425			$892			$813
Net income available to common stockholders		$435		$425			$859			$806
Weighted-average common shares outstanding:
Basic	458,154,335		484,744,354			459,426,685			486,114,872
Diluted	459,304,224		486,141,695			460,857,535			487,683,216
Per common share information:
Basic earnings		$0.95		$0.88			$1.87			$1.66
Diluted earnings	0.95		0.88			1.86			1.65

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

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018			2019			2018
Net income		$453			$425			$892			$813
Other comprehensive income (loss):
Net unrealized derivative instrument gains (losses) arising during the periods, net of income taxes of $23, ($4), $36 and ($22), respectively	68			(13		)	107			(65		)
Reclassification adjustment for net derivative losses included in net income, net of income taxes of $4, $3, $9 and $3, respectively	15			6			30			8
Net unrealized debt securities gains (losses) arising during the periods, net of income taxes of $72, ($19), $152 and ($105), respectively	221			(60		)	467			(332		)
Other-than-temporary impairment not recognized in earnings on debt securities, net of income taxes of $0, $1, $0 and $0, respectively	1			—			1			(1		)
Reclassification of net debt securities gains to net income, net of income taxes of ($1), $0, ($3) and ($2), respectively	(3		)	(1		)	(8		)	(6		)
Amortization of actuarial loss, net of income taxes of $1, $1, $3 and $2, respectively	3			3			6			6
Total other comprehensive income (loss), net of income taxes	305			(65		)	603			(390		)
Total comprehensive income		$758			$360			$1,495			$423

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

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)



	Preferred Stock			Common Stock				Additional Paid-in Capital		Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Loss			Total
(in millions)	Shares	Amount		Shares		Amount		Additional Paid-in Capital		Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Loss			Total
Balance at April 1, 2018	—		$247	488			$6		$18,797		$4,437			($2,283	)		($1,145	)		$20,059
Dividends to common stockholders	—	—		—		—		—		(107		)	—			—			(107		)
Preferred stock issued	1	296		—		—		—		—			—			—			296
Treasury stock purchased	—	—		(4	)	—		—		—			(150		)	—			(150		)
Share-based compensation plans	—	—		—		—		5		—			—			—			5
Employee stock purchase plan shares purchased	—	—		—		—		4		—			—			—			4
Total comprehensive income:
Net income	—	—		—		—		—		425			—			—			425
Other comprehensive loss	—	—		—		—		—		—			—			(65		)	(65		)
Total comprehensive income	—	—		—		—		—		425			—			(65		)	360
Balance at June 30, 2018	1		$543	484			$6		$18,806		$4,755			($2,433	)		($1,210	)		$20,467
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 income	—	—		—		—		—		—			—			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

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

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)



	Preferred Stock				Common Stock				Additional Paid-in Capital		Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Loss			Total
(in millions)	Shares	Amount			Shares		Amount
Balance at January 1, 2018	—		$247		491			$6		$18,781		$4,164			($2,108	)		($820	)		$20,270
Dividends to common stockholders	—	—			—		—		—		(215		)	—			—			(215		)
Dividends to preferred stockholders	—	—		—	—		—		—		(7		)	—			—			(7		)
Preferred stock issued	1	296			—		—		—		—			—			—			296
Treasury stock purchased	—	—			(8	)	—		—		—			(325		)	—			(325		)
Share-based compensation plans	—	—			1		—		18		—			—			—			18
Employee stock purchase plan shares purchased	—	—			—		—		7		—			—			—			7
Total comprehensive income:
Net income	—	—			—		—		—		813			—			—			813
Other comprehensive loss	—	—			—		—		—		—			—			(390		)	(390		)
Total comprehensive income	—	—			—		—		—		813			—			(390		)	423
Balance at June 30, 2018	1		$543		484			$6		$18,806		$4,755			($2,433	)		($1,210	)		$20,467
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 standards	—	—			—		—		—		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

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

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Six Months Ended June 30,
(in millions)	2019			2018
OPERATING ACTIVITIES
Net income		$892			$813
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	182			163
Originations of mortgage loans held for sale	(7,741		)	(1,345		)
Proceeds from sales of mortgage loans held for sale	7,148			1,325
Purchases of commercial loans held for sale	(1,076		)	(1,024		)
Proceeds from sales of commercial loans held for sale	1,198			1,039
Depreciation, amortization and accretion	275			243
Mortgage servicing rights valuation charge-off (recovery)	14			(3		)
Debt securities impairment	1			2
Deferred income taxes	(10		)	10
Share-based compensation	32			28
Net gain on sales of:
Debt securities	(16		)	(10		)
Premises and equipment	(7		)	—
(Increase) decrease in other assets	(236		)	283
Decrease in other liabilities	(79		)	(109		)
Net cash provided by operating activities	577			1,415
INVESTING ACTIVITIES
Investment securities:
Purchases of debt securities available for sale	(3,502		)	(2,343		)
Proceeds from maturities and paydowns of debt securities available for sale	1,625			1,636
Proceeds from sales of debt securities available for sale	1,250			273
Proceeds from maturities and paydowns of debt securities held to maturity	171			271
Purchases of equity securities, at fair value	(549		)	(80		)
Proceeds from sales of equity securities, at fair value	683			78
Purchases of equity securities, at cost	(258		)	(334		)
Proceeds from sales of equity securities, at cost	386			287
Net (increase) decrease in interest-bearing deposits in banks	(38		)	78
Purchases of mortgage servicing rights	—			(16		)
Acquisitions, net of cash acquired	(129		)	—
Net increase in loans and leases	(806		)	(2,992		)
Net increase in bank-owned life insurance	(13		)	(21		)
Premises and equipment:
Purchases	(41		)	(94		)
Proceeds from sales	31			—
Capitalization of software	(98		)	(116		)
Net cash used in investing activities	(1,288		)	(3,373		)
FINANCING ACTIVITIES
Net increase in deposits	4,429			1,984
Net decrease in federal funds purchased and securities sold under agreements to repurchase	(24		)	(489		)
Net increase (decrease) in other short-term borrowed funds	147			(2,356		)
Proceeds from issuance of long-term borrowed funds	4,500			11,500
Repayments of long-term borrowed funds	(9,005		)	(7,584		)
Treasury stock purchased	(320		)	(325		)
Net proceeds from issuance of preferred stock	293			296
Dividends declared and paid to common stockholders	(297		)	(215		)
Dividends declared and paid to preferred stockholders	(30		)	(7		)
Payments of employee tax withholding for share-based compensation	(21		)	(13		)
Net cash (used in) provided by financing activities	(328		)	2,791
(Decrease) increase in cash and cash equivalents ⁽¹⁾	(1,039		)	833
Cash and cash equivalents at beginning of period ⁽¹⁾	4,074			3,032
Cash and cash equivalents at end of period ⁽¹⁾		$3,035			$3,865

⁽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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

Basis of Presentation

The unaudited interim Consolidated Financial Statements, including the Notes thereto of Citizens Financial Group, Inc., have been prepared in accordance with GAAP interim reporting requirements, and therefore do not include all information and Notes included in the audited Consolidated Financial Statements in conformity with GAAP. These unaudited interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The Company’s principal business activity is banking, conducted through its banking subsidiary, Citizens Bank, National Association.

The unaudited interim Consolidated Financial Statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany transactions and balances have been eliminated. The Company has evaluated its unconsolidated entities and does not believe that any entity in which it has an interest, but does not currently consolidate, meets the requirements to be consolidated as a variable interest entity. The unaudited interim Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the ACL and the fair value of MSRs.

Significant Accounting Policies

For further information regarding the Company’s significant accounting policies, see Note 1 “Basis of Presentation” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.

Accounting Pronouncements Adopted in 2019



Pronouncement	Summary of Guidance	Effects on Financial Statements
Derivatives and Hedging Issued August 2017	• Reduces the complexity and operational burdens of the current hedge accounting model and portrays more clearly the effects of hedge accounting in the financial statements. • Modifies current requirements to facilitate the application of hedge accounting to partial-term hedges, hedges of prepayable financial instruments, and other strategies. Adoption of these optional changes would occur on a prospective basis. • Requires the effects of fair value hedges to be classified in the same income statement line as the earnings effect of the hedged item. Adoption of this change will occur on a prospective basis. • Requires all effects of cash flow hedges to be deferred in other comprehensive income until the hedged cash flows affect earnings. Periodic hedge ineffectiveness will no longer be recognized in earnings. Adoption of this change will occur on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.	• The Company adopted the new standard on January 1, 2019 under the modified retrospective method. • Adoption did not have a material impact on the Company’s Consolidated Financial Statements. • Required disclosures are included in Note 9 “Derivatives”.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Pronouncement	Summary of Guidance	Effects on Financial Statements
Leases Issued February 2016	• Requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with a lease term of greater than one year. • Requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests. • Requires that for finance leases, a lessee recognize interest expense on the lease liability separately from the amortization of the right-of-use asset in the Consolidated Statements of Operations, while for operating leases, such amounts should be recognized as a combined expense. • Requires expanded disclosures about the nature and terms of lease agreements. • Provides the option to adopt using either a modified cumulative-effect approach wherein the guidance is applied to all periods presented, or through a cumulative-effect adjustment beginning in the period of adoption. • Requires companies with land easements to assess whether the easement meets the definition of a lease before applying other accounting guidance.	• The Company adopted the new standard under the modified retrospective approach on January 1, 2019, which is applicable to both its leasing finance business as well as property and equipment leases in which Citizens is lessee. • Adoption resulted in a cumulative-effect adjustment of $12 million, net of taxes, to retained earnings related to leases in which Citizens is lessee. • Adoption resulted in the recognition of a right-of-use asset and corresponding lease liability of $734 million and $749 million, respectively in its Consolidated Balance Sheet for non-cancelable operating lease agreements. • Required lessor disclosures are included in Note 3 “Loans and Leases” and required lessee disclosures are included in Note 6 “Leases”.
Implementation Costs Incurred in a Cloud Computing Arrangement Issued August 2018	• Requires implementation costs incurred in a cloud computing arrangement that is a service contract be deferred and recognized over the term of the arrangement if those costs would be capitalized in a software licensing arrangement. • Requires amortization expense be presented in the same income statement line item as the related hosting service arrangement expense. • Permits adoption prospectively for all implementation costs incurred after adoption or retrospectively through a cumulative-effect adjustment as of the beginning of the first period presented.	• The Company prospectively adopted the new standard on January 1, 2019. • Adoption did not have a material impact on the Company’s Consolidated Financial Statements.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Pronouncements Pending Adoption



Pronouncement	Summary of Guidance	Effects on Financial Statements
Financial Instruments - Credit Losses Issued June 2016	• Replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost (including securities HTM), which will reflect management’s estimate of credit losses over the full remaining expected life of the financial assets. • Amends existing impairment guidance for securities AFS to incorporate an allowance, which will allow for reversals of impairment losses in the event that the credit of an issuer improves. • Requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.	• Required effective date: January 1, 2020. • A company-wide, cross-discipline governance structure is in place to implement the new standard. The Company is currently finalizing key interpretive issues, revising policies, procedures and related internal controls, and completing the development, configuration and validation of loss forecasting models to meet the requirements of the new guidance. The implementation team is also in the process of assessing forecast accuracy, qualitative factors, how the reasonable and supportable forecast period will be determined and documented, as well as the impacts of that decision in different parts of the credit cycle. • Analytical testing of the models was completed and parallel testing started in the second quarter of 2019. • The Company expects the standard will result in earlier recognition of credit losses and an overall increase in the ACL, as it will cover estimated credit losses over the full remaining expected life of loans and commitments and will consider future reasonable and supportable changes in macroeconomic conditions. Since the magnitude of the increase in the Company’s ACL will be impacted by economic conditions, forecasted economic conditions, credit quality and trends in the Company’s portfolio at the time of adoption, the quantitative impact cannot yet be reasonably estimated. • Based on the credit quality of our existing debt securities portfolio, the Company does not expect the allowance for credit losses for HTM and AFS debt securities to be significant.
Disclosure Requirements - Fair Value Measurements Issued August 2018	• Amends disclosure requirements on fair value measurements. • The guidance eliminates requirements for certain disclosures that are no longer considered relevant or cost beneficial, requires new disclosures and modifies existing disclosures that are expected to enhance the usefulness of the financial statements. • Prospective application is required for new disclosure requirements. • Retrospective application is required for all other amendments for all periods presented.	• Required effective date: January 1, 2020. Early adoption is permitted. The Company does not intend to adopt this guidance prior to the required effective date. • Adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 - SECURITIES

The following table presents the major components of securities at amortized cost and fair value:



	June 30, 2019									December 31, 2018
(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and other		$90		$—		$—			$90		$24		$—		$—			$24
State and political subdivisions	5		—		—			5		5		—		—			5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	20,688		163		(143		)	20,708		20,211		28		(605		)	19,634
Other/non-agency	871		28		(4		)	895		236		3		(7		)	232
Total mortgage-backed securities, at fair value	21,559		191		(147		)	21,603		20,447		31		(612		)	19,866
Total debt securities available for sale, at fair value		$21,654		$191		($147	)		$21,698		$20,476		$31		($612	)		$19,895
Federal agencies and U.S. government sponsored entities		$3,447		$18		($24	)		$3,441		$3,425		$—		($132	)		$3,293
Other/non-agency	—		—		—			—		740		8		—			748
Total mortgage-backed securities, at cost	3,447		18		(24		)	3,441		4,165		8		(132		)	4,041
Total debt securities held to maturity		$3,447		$18		($24	)		$3,441		$4,165		$8		($132	)		$4,041
Money market mutual fund investments		$47		$—		$—			$47		$181		$—		$—			$181
Total equity securities, at fair value		$47		$—		$—			$47		$181		$—		$—			$181
Federal Reserve Bank stock		$577		$—		$—			$577		$463		$—		$—			$463
Federal Home Loan Bank stock	121		—		—			121		364		—		—			364
Other equity securities	8		—		—			8		7		—		—			7
Total equity securities, at cost		$706		$—		$—			$706		$834		$—		$—			$834

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The amortized cost and fair value of debt securities by contractual maturity as of June 30, 2019 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.



	June 30, 2019
	Distribution of Maturities
(in millions)	1 Year or Less		1-5 Years		5-10 Years		After 10 Years		Total
Amortized cost:
U.S. Treasury and other		$90		$—		$—		$—		$90
State and political subdivisions	—		—		—		5		5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		221		1,717		18,750		20,688
Other/non-agency	5		2		—		864		871
Total debt securities available for sale	95		223		1,717		19,619		21,654
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		3,447		3,447
Total debt securities held to maturity	—		—		—		3,447		3,447
Total amortized cost of debt securities		$95		$223		$1,717		$23,066		$25,101

Fair value:
U.S. Treasury and other		$90		$—		$—		$—		$90
State and political subdivisions	—		—		—		5		5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		219		1,735		18,754		20,708
Other/non-agency	5		3		—		887		895
Total debt securities available for sale	95		222		1,735		19,646		21,698
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		3,441		3,441
Total debt securities held to maturity	—		—		—		3,441		3,441
Total fair value of debt securities		$95		$222		$1,735		$23,087		$25,139

Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $164 million and $165 million for the three months ended June 30, 2019 and 2018, respectively, and was $330 million and $333 million for the six months ended June 30, 2019 and 2018, respectively.

Realized gains and losses on securities are presented below:



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
Gains on sale of debt securities⁽¹⁾		$8		$2		$16		$10
Losses on sale of debt securities	—		—		—		—
Debt securities gains, net		$8		$2		$16		$10

⁽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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The amortized cost and fair value of debt securities pledged are presented below:



	June 30, 2019				December 31, 2018
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Pledged against repurchase agreements		$291		$293		$344		$338
Pledged against FHLB borrowed funds	—		—		745		752
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law	3,632		3,613		3,592		3,460

Citizens regularly enters into security repurchase agreements with unrelated counterparties, which involve the transfer of a security from one party to another, and a subsequent transfer of substantially the same security back to the original party. The Company’s repurchase agreements are typically short-term in nature and are accounted for as secured borrowed funds on the Company’s Consolidated Balance Sheets. Citizens recognized no offsetting of short-term receivables or payables as of June 30, 2019 or December 31, 2018. Citizens offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 9 "Derivatives."

Securitizations of mortgage loans retained in the investment portfolio were $13 million and $29 million for the three months ended June 30, 2019 and 2018, respectively, and $44 million and $55 million for the six months ended June 30, 2019 and 2018, respectively. These securitizations include a substantive guarantee by a third party. In 2019 the guarantors were FNMA, FHLMC, and GNMA. In 2018 the guarantors were FNMA and GNMA. The debt securities received from the guarantors are classified as AFS.

The following tables present mortgage-backed debt securities whose fair values are below carrying values, separated by the duration the securities have been in a continuous unrealized loss position:



	June 30, 2019
	Less than 12 Months						12 Months or Longer						Total
(dollars in millions)	Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities	19		$882		($1	)	349		$11,307		($166	)	368		$12,189		($167	)
Other/non-agency	—	—		—			7	41		(4		)	7	41		(4		)
Total	19		$882		($1	)	356		$11,348		($170	)	375		$12,230		($171	)



	December 31, 2018
	Less than 12 Months						12 Months or Longer						Total
(dollars in millions)	Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities	166		$4,881		($89	)	429		$15,124		($648	)	595		$20,005		($737	)
Other/non-agency	10	139		(1		)	11	72		(6		)	21	211		(7		)
Total	176		$5,020		($90	)	440		$15,196		($654	)	616		$20,216		($744	)

Citizens does not currently have the intent to sell these impaired debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to recovery of their amortized cost bases. Citizens has determined that credit losses are not expected to be incurred on the remaining agency and non-agency MBS identified with unrealized losses as of June 30, 2019. The unrealized losses on these debt securities reflect non-credit-related factors such as changing interest rates and market liquidity. Therefore, Citizens has determined that these debt securities are not other-than-temporarily impaired. Any subsequent increases in the valuation of impaired debt securities will not impact their recorded cost bases.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the cumulative credit-related losses recognized in earnings on the Company’s debt securities:



	Three Months Ended June 30,					Six Months Ended June 30,
(in millions)	2019			2018		2019			2018
Cumulative balance at beginning of period		$78			$80		$81			$80
Credit impairments recognized in earnings on debt securities that have been previously impaired	—			1		1			2
Reductions due to increases in cash flow expectations on impaired debt securities⁽¹⁾	—			—		—			(1		)
Reductions for securities sold or matured during the period	(21		)	—		(25		)	—
Cumulative balance at end of period		$57			$81		$57			$81

⁽¹⁾Reported in interest income from investment securities on the Consolidated Statements of Operations.

Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of June 30, 2019 and June 30, 2018 were $57 million and $81 million respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of June 30, 2019 and 2018. For the three months ended June 30, 2019, the Company did not incur any non-agency MBS credit-related other-than-temporary impairment losses in earnings. For the three months ended June 30, 2018, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $1 million. For the six months ended June 30, 2019 and 2018, the Company incurred non-agency MBS credit-related other-than-temporary impairment losses in earnings of $1 million and $2 million, respectively.

NOTE 3 - LOANS AND LEASES

The Company’s loans and leases are disclosed in portfolio segments and classes as reflected below.



(in millions)	June 30, 2019		December 31, 2018
Commercial⁽¹⁾		$41,156		$40,857
Commercial real estate	13,123		13,023
Leases	2,684		2,903
Total commercial loans and leases	56,963		56,783
Residential mortgages	19,192		18,978
Home equity loans	938		1,073
Home equity lines of credit	12,266		12,710
Home equity loans serviced by others	348		399
Home equity lines of credit serviced by others	88		104
Automobile	12,000		12,106
Education	9,305		8,900
Credit cards	2,046		1,991
Other retail	3,692		3,616
Total retail loans⁽²⁾	59,875		59,877
Total loans and leases⁽³⁾		$116,838		$116,660

⁽²⁾Mortgage loans we service for others of $72.5 billion and $69.6 billion at June 30, 2019 and December 31, 2018, respectively, are not included above.

⁽³⁾ LHFS totaling $2.2 billion and $1.3 billion at June 30, 2019 and December 31, 2018, respectively, are not included above.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table shows the composition of LHFS.



	June 30, 2019						December 31, 2018
(in millions)	Residential Mortgages⁽¹⁾		Commercial⁽²⁾		Total		Residential Mortgages⁽¹⁾		Commercial⁽²⁾		Total
Loans held for sale at fair value		$1,615		$135		$1,750		$967		$252		$1,219
Other loans held for sale	—		455		455		—		101		101

⁽¹⁾ Originated for sale.

⁽²⁾LHFS at fair value consist of loans managed by the Company’s commercial secondary loan desk. Other LHFS consist of commercial loans associated with the Company’s syndication business.

Loans pledged as collateral for FHLB borrowed funds, primarily residential mortgages and home equity loans, totaled $24.4 billion and $25.6 billion at June 30, 2019 and December 31, 2018, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, were primarily comprised of auto, commercial and commercial real estate loans, and totaled $18.6 billion and $16.8 billion at June 30, 2019 and December 31, 2018, respectively.

During the three months ended June 30, 2019 and 2018, the Company purchased $99 million and $223 million of education loans. During the six months ended June 30, 2019 and 2018, the Company purchased $300 million and $223 million of education loans, respectively.

The Company sold $492 million of residential mortgages during the three months ended June 30, 2019. 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 TDR sales. During the three and six months ended June 30, 2018 the Company had $353 million and $553 million of commercial loan sales, respectively.

Citizens is engaged in the leasing of equipment for commercial use, primarily focused on Fortune 1000 companies for large capital equipment acquisitions including aircraft and railcars, among other equipment. The Company determines if an arrangement is a lease and the related lease classification at inception. Lease terms predominantly range from three years to seven years and may include options to terminate the lease early or purchase the leased property prior to the end of the lease term. Certain lease agreements include rental payments based on an index or are adjusted periodically for inflation. The Company does not have lease agreements which contain lease and nonlease components.

A lessee is evaluated from a credit perspective using the same underwriting standards and procedures as for a loan borrower. A lessee is expected to make rental payments based on its cash flows and the viability of its operations. Leases are usually not evaluated as collateral-based transactions, and therefore the lessee’s overall financial strength is the most important credit evaluation factor.

The components of the net investment in direct finance leases, before ALLL, are presented below:



(in millions)	June 30, 2019
Total future minimum lease rentals		$1,823
Estimated residual value of leased equipment (non-guaranteed)	1,071
Initial direct costs	12
Unearned income	(244		)
Total leases		$2,662

Interest income on direct financing leases for the three months and six months ended June 30, 2019 was $20 million and $40 million, respectively, and is reported within interest and fees on loans and leases in the Consolidated Statements of Operations.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A maturity analysis of direct financing lease receivables at June 30, 2019 is presented below:



(in millions)
2019		$290
2020	458
2021	345
2022	266
2023	191
Thereafter	273
Total undiscounted future minimum lease rentals		$1,823

NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK

The ACL consists of the ALLL and the reserve for unfunded commitments. It is adjusted through a provision for credit losses that is charged to earnings, based on the Company’s quarterly evaluation of the loan and lease portfolio and related commitments, and is reduced by net charge-offs and the ALLL associated with sold loans. See Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018, for a detailed discussion of the ALLL reserve methodology and estimation techniques.

On a quarterly basis, the Company reviews and refines its estimate of the ACL, taking into consideration changes in portfolio size and composition, historical loss experience, internal risk ratings, current economic conditions, industry performance trends and other pertinent information. As of June 30, 2019, there were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and the reserve for unfunded lending commitments.

A summary of changes in the ACL is presented below:



	Three Months Ended 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
Total allowance for credit losses, end of period		$773			$547			$1,320			$773			$547			$1,320

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
(in millions)	Commercial			Retail			Total			Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$711			$535			$1,246			$685			$551			$1,236
Charge-offs	(14		)	(106		)	(120		)	(17		)	(219		)	(236		)
Recoveries	2			42			44			8			82			90
Net charge-offs	(12		)	(64		)	(76		)	(9		)	(137		)	(146		)
Provision charged to income	16			67			83			39			124			163
Allowance for loan and lease losses, end of period	715			538			1,253			715			538			1,253
Reserve for unfunded lending commitments, beginning of period	86			—			86			88			—			88
Provision for unfunded lending commitments	2			—			2			—			—			—
Reserve for unfunded lending commitments, end of period	88			—			88			88			—			88
Total allowance for credit losses, end of period		$803			$538			$1,341			$803			$538			$1,341

The recorded investment in loans and leases based on the Company’s evaluation methodology is presented below:



	June 30, 2019						December 31, 2018
(in millions)	Commercial		Retail		Total		Commercial		Retail		Total
Individually evaluated		$314		$686		$1,000		$391		$723		$1,114
Formula-based evaluation	56,649		59,189		115,838		56,392		59,154		115,546
Total loans and leases		$56,963		$59,875		$116,838		$56,783		$59,877		$116,660

A summary of the ACL by evaluation methodology is presented below:



	June 30, 2019						December 31, 2018
(in millions)	Commercial		Retail		Total		Commercial		Retail		Total
Individually evaluated		$34		$25		$59		$38		$26		$64
Formula-based evaluation	739		522		1,261		743		526		1,269
Allowance for credit losses		$773		$547		$1,320		$781		$552		$1,333

For commercial loans and leases, Citizens utilizes regulatory classification ratings to monitor credit quality. For additional information on regulatory classification ratings, see Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.

The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:



	June 30, 2019
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$39,011		$1,174		$770		$201		$41,156
Commercial real estate	12,705		377		38		3		13,123
Leases	2,578		46		43		17		2,684
Total commercial loans and leases		$54,294		$1,597		$851		$221		$56,963

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	December 31, 2018
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$38,600		$1,231		$828		$198		$40,857
Commercial real estate	12,523		412		82		6		13,023
Leases	2,823		39		41		—		2,903
Total commercial loans and leases		$53,946		$1,682		$951		$204		$56,783

The recorded investment in classes of retail loans, categorized by delinquency status is presented below:



	June 30, 2019
			Days Past Due
(in millions)	Current		1-29		30-59		60-89		90 or More		Total
Residential mortgages		$18,882		$129		$32		$15		$134		$19,192
Home equity loans	825		73		11		5		24		938
Home equity lines of credit	11,652		372		58		31		153		12,266
Home equity loans serviced by others	301		26		5		3		13		348
Home equity lines of credit serviced by others	60		14		2		1		11		88
Automobile	10,630		1,083		201		67		19		12,000
Education	9,089		166		25		13		12		9,305
Credit cards	1,935		67		15		9		20		2,046
Other retail	3,528		97		30		21		16		3,692
Total retail loans		$56,902		$2,027		$379		$165		$402		$59,875



	December 31, 2018
			Days Past Due
(in millions)	Current		1-29		30-59		60-89		90 or More		Total
Residential mortgages		$18,664		$131		$37		$13		$133		$18,978
Home equity loans	945		75		12		3		38		1,073
Home equity lines of credit	12,042		386		65		22		195		12,710
Home equity loans serviced by others	355		21		7		3		13		399
Home equity lines of credit serviced by others	79		15		2		1		7		104
Automobile	10,729		1,039		207		59		72		12,106
Education	8,694		159		23		13		11		8,900
Credit cards	1,894		53		14		10		20		1,991
Other retail	3,481		76		26		18		15		3,616
Total retail loans		$56,883		$1,955		$393		$142		$504		$59,877

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Nonperforming Assets

The following table presents nonperforming loans and leases and loans accruing and 90 days or more past due:



	Nonperforming				Accruing and 90 days or more past due
(in millions)	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Commercial		$198		$194		$4		$1
Commercial real estate	4		7		—		—
Leases	17		—		1		—
Total commercial loans and leases	219		201		5		1
Residential mortgages⁽¹⁾⁽²⁾	141		136		14		15
Home equity loans	38		50		—		—
Home equity lines of credit	210		231		—		—
Home equity loans serviced by others	16		17		—		—
Home equity lines of credit serviced by others	14		15		—		—
Automobile	62		81		—		—
Education	40		38		3		2
Credit card	20		20		—		—
Other retail	10		8		9		7
Total retail loans	551		596		26		24
Total		$770		$797		$31		$25

⁽¹⁾ Nonperforming balances exclude first lien residential mortgage loans which are accruing and 90 days or more past due that are 100% guaranteed by the Federal Housing Administration. These loans totaled $11 million and $12 million as of June 30, 2019 and December 31, 2018, respectively.

⁽²⁾Nonperforming balances exclude guaranteed residential mortgage loans sold to GNMA for which the Company has the right, but not the obligation, to repurchase. These loans totaled $158 million and $133 million as of June 30, 2019 and December 31, 2018, respectively, and are included in the Company’s Consolidated Balance Sheets.

Other nonperforming assets primarily consist of other real estate owned and are presented in other assets on the Consolidated Balance Sheets. Other real estate owned, net of valuation allowance, was $32 million and $34 million as of June 30, 2019 and December 31, 2018, respectively.

A summary of nonperforming loan and lease key performance indicators is presented below:



	June 30, 2019		December 31, 2018
Nonperforming commercial loans and leases as a percentage of total loans and leases	0.19	%	0.17	%
Nonperforming retail loans as a percentage of total loans and leases	0.47		0.51
Nonperforming loans and leases as a percentage of total loans and leases	0.66	%	0.68	%

Nonperforming commercial assets as a percentage of total assets	0.13	%	0.13	%
Nonperforming retail assets as a percentage of total assets	0.36		0.39
Nonperforming assets as a percentage of total assets	0.49	%	0.52	%

The recorded investment in mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process was $174 million and $172 million as of June 30, 2019 and December 31, 2018, respectively.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The aging of both accruing and nonaccruing loan and lease past due amounts is presented below:



	June 30, 2019								December 31, 2018
	Days Past Due								Days Past Due
(in millions)	30-59		60-89		90 or More		Total		30-59		60-89		90 or More		Total
Commercial		$12		$17		$51		$80		$85		$3		$78		$166
Commercial real estate	—		6		2		8		8		32		5		45
Leases	1		—		1		2		7		—		—		7
Total commercial loans and leases	13		23		54		90		100		35		83		218
Residential mortgages	32		15		134		181		37		13		133		183
Home equity loans	11		5		24		40		12		3		38		53
Home equity lines of credit	58		31		153		242		65		22		195		282
Home equity loans serviced by others	5		3		13		21		7		3		13		23
Home equity lines of credit serviced by others	2		1		11		14		2		1		7		10
Automobile	201		67		19		287		207		59		72		338
Education	25		13		12		50		23		13		11		47
Credit cards	15		9		20		44		14		10		20		44
Other retail	30		21		16		67		26		18		15		59
Total retail loans	379		165		402		946		393		142		504		1,039
Total		$392		$188		$456		$1,036		$493		$177		$587		$1,257

Impaired Loans

Impaired loans include nonaccruing larger balance (greater than $3 million carrying value), non-homogeneous commercial and commercial real estate loans, and restructured loans that are deemed TDRs. A summary of impaired loans by class is presented below:



	June 30, 2019
(in millions)	Impaired Loans With a Related Allowance		Allowance on Impaired Loans		Impaired Loans Without a Related Allowance		Unpaid Contractual Balance		Total Recorded Investment in Impaired Loans
Commercial		$170		$34		$118		$359		$288
Commercial real estate	—		—		26		26		26
Total commercial loans	170		34		144		385		314
Residential mortgages	25		2		122		192		147
Home equity loans	26		2		70		130		96
Home equity lines of credit	23		2		178		242		201
Home equity loans serviced by others	19		1		17		48		36
Home equity lines of credit serviced by others	1		—		6		10		7
Automobile	1		—		21		31		22
Education	121		9		23		144		144
Credit cards	26		8		1		27		27
Other retail	3		1		3		7		6
Total retail loans	245		25		441		831		686
Total		$415		$59		$585		$1,216		$1,000

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	December 31, 2018
(in millions)	Impaired Loans With a Related Allowance		Allowance on Impaired Loans		Impaired Loans Without a Related Allowance		Unpaid Contractual Balance		Total Recorded Investment in Impaired Loans
Commercial		$186		$31		$167		$450		$353
Commercial real estate	32		7		6		38		38
Total commercial loans	218		38		173		488		391
Residential mortgages	28		2		127		201		155
Home equity loans	34		3		76		148		110
Home equity lines of credit	21		1		181		244		202
Home equity loans serviced by others	22		1		19		54		41
Home equity lines of credit serviced by others	1		—		7		11		8
Automobile	1		—		22		31		23
Education	130		11		23		153		153
Credit cards	24		7		1		25		25
Other retail	4		1		2		8		6
Total retail loans	265		26		458		875		723
Total		$483		$64		$631		$1,363		$1,114

Additional information on impaired loans is presented below:



	Three Months Ended June 30,
	2019				2018
(in millions)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Commercial		$2		$310		$2		$332
Commercial real estate	1		27		—		36
Total commercial loans	3		337		2		368
Residential mortgages	2		145		2		152
Home equity loans	1		97		1		112
Home equity lines of credit	2		199		2		198
Home equity loans serviced by others	—		36		—		46
Home equity lines of credit serviced by others	—		7		—		9
Automobile	—		22		—		22
Education	2		145		2		165
Credit cards	1		25		1		24
Other retail	—		6		—		8
Total retail loans	8		682		8		736
Total		$11		$1,019		$10		$1,104

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Six Months Ended June 30,
	2019				2018
(in millions)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Commercial		$5		$304		$4		$311
Commercial real estate	1		27		—		32
Total commercial loans	6		331		4		343
Residential mortgages	3		142		3		149
Home equity loans	3		97		3		112
Home equity lines of credit	4		193		4		192
Home equity loans serviced by others	1		37		1		47
Home equity lines of credit serviced by others	—		7		—		9
Automobile	—		21		—		21
Education	4		145		4		165
Credit cards	1		24		1		23
Other retail	—		6		—		8
Total retail loans	16		672		16		726
Total		$22		$1,003		$20		$1,069

Troubled Debt Restructurings

TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower experiencing financial hardship that we would not otherwise make. For additional information on regulatory classification ratings, see Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.

The table below summarizes TDRs by class and total unfunded commitments:



(in millions)	June 30, 2019		December 31, 2018
Commercial		$253		$304
Retail	686		723
Unfunded commitments related to TDRs	70		30

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below summarizes how loans were modified during the three months and six months ended June 30, 2019 and 2018. The reported balances represent the post-modification outstanding recorded investment and can include loans that became TDRs during the period and were paid off in full, charged off, or sold prior to period end. Pre-modification balances for modified loans approximate the post-modification balances shown.



	Three Months Ended June 30, 2019
	Primary Modification Types
	Interest Rate Reduction¹			Maturity Extension²			Other³
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
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 loans	6	1		—	—		18	1
Home equity lines of credit	43	4		15	3		77	4
Home equity loans serviced by others	—	—		—	—		3	1
Home equity lines of credit serviced by others	—	—		—	—		2	—
Automobile	40	1		7	—		335	5
Education	—	—		—	—		13	1
Credit cards	941	5		—	—		141	—
Other retail	—	—		—	—		2	—
Total retail loans	1,039	13		32	4		623	17
Total	1,040		$13	40		$4	629		$64



	Three Months Ended June 30, 2018
	Primary Modification Types
	Interest Rate Reduction¹			Maturity Extension²			Other³
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial	4		$1	4		$—	17		$59
Commercial real estate	—	—		—	—		2	31
Total commercial loans	4	1		4	—		19	90
Residential mortgages	16	2		23	3		33	5
Home equity loans	11	1		1	—		34	1
Home equity lines of credit	13	1		47	6		113	7
Home equity loans serviced by others	—	—		—	—		8	—
Home equity lines of credit serviced by others	2	—		1	—		2	—
Automobile	41	1		16	—		309	5
Education	—	—		—	—		139	3
Credit cards	559	3		—	—		—	—
Other retail	—	—		—	—		—	—
Total retail loans	642	8		88	9		638	21
Total	646		$9	92		$9	657		$111

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Six Months Ended June 30, 2019
	Primary Modification Types
	Interest Rate Reduction¹			Maturity Extension²			Other³
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
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 loans	13	1		—	—		45	2
Home equity lines of credit	72	8		50	9		182	12
Home equity loans serviced by others	—	—		—	—		7	1
Home equity lines of credit serviced by others	—	—		—	—		4	—
Automobile	65	1		12	—		624	9
Education	—	—		—	—		80	3
Credit cards	1,557	9		—	—		141	—
Other retail	—	—		—	—		3	—
Total retail loans	1,720	23		83	12		1,148	36
Total	1,721		$23	96		$13	1,166		$123



	Six Months Ended June 30, 2018
	Primary Modification Types
	Interest Rate Reduction¹			Maturity Extension²			Other³
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial	5		$1	10		$1	35		$134
Commercial real estate	—	—		1	—		2	31
Total commercial loans	5	1		11	1		37	165
Residential mortgages	23	3		30	4		86	11
Home equity loans	22	2		1	—		66	3
Home equity lines of credit	28	2		89	11		206	14
Home equity loans serviced by others	1	—		—	—		15	—
Home equity lines of credit serviced by others	4	—		1	—		5	—
Automobile	77	2		33	1		578	9
Education	—	—		—	—		251	4
Credit cards	1,153	6		—	—		—	—
Other retail	1	—		—	—		4	—
Total retail loans	1,309	15		154	16		1,211	41
Total	1,314		$16	165		$17	1,248		$206

⁽¹⁾ Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.

⁽²⁾ Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).

⁽³⁾ Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forgiveness, and capitalizing arrearages. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification.

The net change to ALLL resulting from modifications of loans for the three months ended June 30, 2019 and 2018 was $2 million and $1 million, respectively. The net change to ALLL resulting from modifications of loans for the six months ended June 30, 2019 and 2018 was $4 million and $2 million, respectively. Charge-offs may also be recorded on TDRs. Citizens recorded $1 million of charge-offs resulting from the modification of loans in the three months ended June 30, 2019 and 2018, and $2 million in the six months ended June 30, 2019 and 2018.

A payment default refers to a loan that becomes 90 days or more past due under the modified terms. Loan data includes loans meeting the criteria that were paid off in full, charged off, or sold prior to June 30, 2019 and 2018. For commercial loans, recorded investment in TDRs that defaulted within 12 months of their modification date for the three months ended June 30, 2019 and 2018 were $1 million and $17 million, respectively, and $1 million and $20 million for the six months ended June 30, 2019 and 2018, respectively. For retail loans, there were $10 million and $10 million of loans which defaulted within 12 months of their restructuring date for the three months ended June 30, 2019 and 2018, respectively, and there were $19 million of loans which defaulted within 12 months of their restructuring date for the six months ended June 30, 2019 and 2018.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Concentrations of Credit Risk

Most of the Company’s lending activity is with customers located in the New England, Mid-Atlantic and Midwest regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of June 30, 2019 and December 31, 2018, Citizens had a significant amount of loans collateralized by residential and commercial real estate. There were no significant concentration risks within the commercial loan or retail loan portfolios. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which may not perform according to contractual agreements. The Company’s policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.

Certain loan products, including residential mortgages, home equity loans and lines of credit, and credit cards, have contractual features that may increase credit exposure to the Company in the event of an increase in interest rates or a decline in housing values. These products include loans that exceed 90% of the value of the underlying collateral (high LTV loans), interest-only and negative amortization residential mortgages, and loans with low introductory rates. Certain loans have more than one of these characteristics. The following tables present balances of loans with these characteristics:



	June 30, 2019
(in millions)	Residential Mortgages		Home Equity Loans and Lines of Credit		Home Equity Products Serviced by Others		Credit Cards		Total
High loan-to-value		$441		$78		$125		$—		$644
Interest-only/negative amortization	1,765		—		—		—		1,765
Low introductory rate	—		—		—		221		221
Multiple characteristics and other	3		—		—		—		3
Total		$2,209		$78		$125		$221		$2,633



	December 31, 2018
(in millions)	Residential Mortgages		Home Equity Loans and Lines of Credit		Home Equity Products Serviced by Others		Credit Cards		Education		Total
High loan-to-value		$318		$87		$148		$—		$—		$553
Interest-only/negative amortization	1,794		—		—		—		1		1,795
Low introductory rate	—		—		—		217		—		217
Multiple characteristics and other	1		—		—		—		—		1
Total		$2,113		$87		$148		$217		$1		$2,566

NOTE 5 - MORTGAGE BANKING

The Company sells residential mortgages to GSEs and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. The Company is obligated to subsequently repurchase a loan if the purchaser discovers a representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud that should have been identified in a loan file review.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 for the three and six months ended June 30, 2019 and 2018.



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
Residential mortgage loans sold with servicing retained		$4,229		$670		$7,148		$1,325
Gain on sales ⁽¹⁾	55		17		92		30
Contractually specified servicing, late and other ancillary fees⁽¹⁾	51		16		99		31

⁽¹⁾ Reported in mortgage banking fees on the Consolidated Statements of Operations.

In connection with the August 1, 2018 acquisition of FAMC, the Company began maintaining two separate classes of MSRs which, at the time of initial capitalization, were differentiated by how the risk associated with valuation changes of the MSRs was being managed. The acquired FAMC portfolio is accounted for under the fair value method while the Company’s MSR portfolio held before the FAMC acquisition is accounted for under the amortization method. Beginning January 1, 2019, all of the Company’s newly originated MSRs are accounted for under the fair value method. The Company implemented an active hedging strategy to manage the risk associated with changes in the value of the MSR portfolio accounted for under the fair value method, which includes the purchase of freestanding derivatives. Depending on the interest rate environment, economic hedges may be used to protect the market value of MSRs accounted for under the amortization method. Any changes in fair value during the period for MSRs carried under the fair value method, as well as amortization and impairment of MSRs under the amortization method, are recorded in mortgage banking fees in the Consolidated Statements of Operations.

The following table summarizes changes in MSRs recorded using the amortization method for the three and six months ended June 30, 2019 and 2018.



	As of and for the Three Months Ended June 30,						As of and for the Six Months Ended June 30,
(in millions)	2019			2018			2019			2018
Mortgage servicing rights:
Balance as of beginning of period		$212			$201			$221			$201
Amount capitalized	—			8			—			15
Purchases	—			16			—			16
Amortization	(9		)	(8		)	(18		)	(15		)
Carrying amount before valuation allowance	203			217			203			217
Valuation allowance for servicing assets:
Balance as of beginning of period	—			—			—			3
Valuation charge-offs (recoveries)	14			—			14			(3		)
Balance at end of period	14			—			14			—
Net carrying value of MSRs		$189			$217			$189			$217

The following table summarizes changes in MSRs recorded using the fair value method for the three months ended June 30, 2019. There were no MSRs recorded using the fair value method for the three or six months ended June 30, 2018.



(in millions)	As of and for the Three Months Ended June 30, 2019			As of and for the Six Months Ended June 30, 2019
Fair value as of beginning of the period		$563			$600
Amounts capitalized	57			92
Changes in unpaid principal balance during the period ⁽¹⁾	(31		)	(57		)
Changes in fair value during the period ⁽²⁾	(58		)	(104		)
Fair value at end of the period		$531			$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.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The fair value of MSRs is estimated by using the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, contractual servicing fee income, servicing costs, default rates, ancillary income, and other economic factors, which are determined based on current market interest rates. The valuation does not attempt to forecast or predict the future direction of interest rates.

The sensitivity analyses below present the impact to current fair value of an immediate 50 basis point and 100 basis point adverse change in key economic assumptions and the decline in fair value if the respective adverse change was realized. These sensitivities are hypothetical, with the effect of a variation in a particular assumption on the fair value of the MSRs calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in interest rates, which drive changes in prepayment rates, could result in changes in the discount rates), which may amplify or counteract the sensitivities. The primary risk inherent in the Company’s MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is dependent upon movements in market interest rates.

For MSRs under the amortization method, key economic assumptions used to estimate the fair value are presented below:



	June 30, 2019			December 31, 2018
	Actual	Decline in fair value due to		Actual	Decline in fair value due to
(dollars in millions)	Actual	Decline in fair value due to		Actual	Decline in fair value due to
Fair value	$193	50 bps adverse change	100 bps adverse change	$243	50 bps adverse change	100 bps adverse change
Weighted average life (in years)	5.5	50 bps adverse change	100 bps adverse change	6.5	50 bps adverse change	100 bps adverse change
Weighted average constant prepayment rate	11.6%	$29	$54	8.5%	$24	$56
Weighted average discount rate	9.3%	4	7	9.3%	5	9

For MSRs under the fair value method, key economic assumptions used to estimate the fair value are presented below:



	June 30, 2019			December 31, 2018
	Actual	Decline in fair value due to		Actual	Decline in fair value due to
(dollars in millions)	Actual	Decline in fair value due to		Actual	Decline in fair value due to
Fair value	$531	50 bps adverse change	100 bps adverse change	$600	50 bps adverse change	100 bps adverse change
Weighted average life (in years)	5.5	50 bps adverse change	100 bps adverse change	8.0	50 bps adverse change	100 bps adverse change
Weighted average constant prepayment rate	13.8%	$117	$241	8.2%	$68	$148
Weighted average option adjusted spread	434 bps	10	21	609 bps	13	26

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

NOTE 6 - LEASES

The Company determines if an arrangement is a lease at inception and records a right-of-use asset and a corresponding lease liability. A right-of-use asset represents the value of the Company’s contractual right to use an underlying leased asset and a lease liability represents the Company’s contractual obligation to make payments on the same underlying leased asset. Operating and finance lease right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the non-cancelable lease term. As most of the Company’s leases do not specify an implicit rate, the Company uses an incremental borrowing rate based on information available at the lease commencement date to determine the present value of the lease payments. The Company evaluates right-of-use assets for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

In its normal course of business, the Company leases both equipment and real estate, including office and branch space. Lease terms predominantly range from one year to ten years and may include options to extend the lease, terminate the lease, or purchase the underlying asset at the end of the lease. Certain lease agreements include rental payments based on an index or are adjusted periodically for inflation. The Company has lease

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

agreements that contain lease and non-lease components and for certain real estate leases, these components are accounted for as a single lease component.

Leases with an initial term of 12 months or less are not recorded on the Company’s Consolidated Balance Sheets and are recognized in occupancy expense in the Company’s Consolidated Statements of Operations on a straight-line basis over the remaining lease term. The Company may also enter into subleases with third parties for certain leased real estate properties that are no longer occupied.

The components of operating lease cost are presented below:



(in millions)	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Operating lease cost		$41			$81
Short-term lease cost	3			6
Variable lease cost	2			4
Sublease income	(1		)	(2		)
Total		$45			$89

Operating lease cost is recognized on a straight line basis over the lease term and recorded in occupancy expense on the Consolidated Statements of Operations.

Supplemental Consolidated Balance Sheet information related to the Company’s operating lease arrangements is presented below:



(in millions)	June 30, 2019		Affected Line Item in Consolidated Balance Sheets
Operating lease right-of-use assets		$732	Other assets
Operating lease liabilities	750		Other liabilities

Supplemental information related to the Company’s operating lease arrangements is presented below:



(in millions)	Six Months Ended June 30, 2019
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases		$80
Right-of-use assets in exchange for new operating lease liabilities	72

The weighted average remaining lease term and weighted average discount rate for operating leases is seven years and 3.23%, respectively.

At June 30, 2019, lease liabilities maturing under non-cancelable operating leases are presented below for the years ended December 31:



(in millions	Operating Leases
2019		$69
2020	160
2021	143
2022	118
2023	93
Thereafter	262
Total lease payments	845
Less interest	95
Present value of lease liabilities		$750

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 - VARIABLE INTEREST ENTITIES

Citizens is involved in various entities that are considered VIEs, including investments in limited partnerships that sponsor affordable housing projects, limited liability companies that sponsor renewable energy projects and lending to special purpose entities. Citizens’ maximum exposure to loss as a result of its involvement with these entities is limited to the balance sheet carrying amount of its equity investment and outstanding principal balance of loans to special purpose entities. A summary of these investments is presented below:



(in millions)	June 30, 2019		December 31, 2018
LIHTC investment included in other assets		$1,303		$1,236
LIHTC unfunded commitments included in other liabilities	659		673
Renewable energy investments included in other assets	311		319
Lending to special purpose entities included in loans and leases	848		613

Low Income Housing Tax Credit Partnerships

The purpose of the Company’s equity investments is to assist in achieving the goals of the Community Reinvestment Act and to earn an adequate return of capital. LIHTC partnerships are managed by unrelated general partners that have the power to direct the activities which most significantly affect the performance of the partnerships. Citizens is therefore not the primary beneficiary of any LIHTC partnerships. Accordingly, Citizens does not consolidate these VIEs and accounts for these investments in other assets on the Consolidated Balance Sheets.

Citizens applies the proportional amortization method to account for its LIHTC investments. Under the proportional amortization method, the Company applies a practical expedient and amortizes the initial cost of the investment in proportion to the tax credits received in the current period as compared to the total tax credits expected to be received over the life of the investment. The amortization and tax benefits are included as a component of income tax expense. The tax credits received are reported as a reduction of income tax expense (or an increase to income tax benefit) related to these transactions.

The following table presents information related to the Company’s affordable housing tax credit investments:



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
Tax credits included in income tax expense		$34		$26		$69		$51
Amortization expense included in income tax expense	35		28		72		55
Other tax benefits included in income tax expense	8		6		16		12

No LIHTC investment impairment losses were recognized during the three and six months ended June 30, 2019 and 2018, 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.

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, 2019 and December 31, 2018, the lending facilities had aggregate unpaid principal balances of $848 million and $613 million, respectively, and undrawn commitments to extend credit of $660 million and $584 million, respectively.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8 - BORROWED FUNDS

A summary of the Company’s short-term borrowed funds is presented below:



(in millions)	June 30, 2019		December 31, 2018
Federal funds purchased		$840		$820
Securities sold under agreements to repurchase	292		336
Other short-term borrowed funds	309		161
Total short-term borrowed funds		$1,441		$1,317

Key data related to short-term borrowed funds is presented below:



	As of and for the Three Months Ended June 30,						As of and for the Six Months Ended June 30,						As of and for the Year Ended December 31,
(dollars in millions)	2019			2018			2019			2018			2018
Weighted-average interest rate at period-end:⁽¹⁾
Federal funds purchased and securities sold under agreements to repurchase	1.93		%	—		%	1.93		%	—		%	1.72		%
Other short-term borrowed funds	2.47			3.22			2.47			3.22			2.73
Maximum amount outstanding at any month-end during the period:
Federal funds purchased and securities sold under agreements to repurchase⁽²⁾		$1,499			$1,045			$1,499			$1,045			$1,282
Other short-term borrowed funds	508			1,110			511			1,110			1,110
Average amount outstanding during the period:
Federal funds purchased and securities sold under agreements to repurchase⁽²⁾		$818			$504			$729			$574			$654
Other short-term borrowed funds	45			191			52			388			467
Weighted-average interest rate during the period:⁽¹⁾
Federal funds purchased and securities sold under agreements to repurchase	1.76		%	0.71		%	1.54		%	0.68		%	0.92		%
Other short-term borrowed funds	2.66			1.90			2.71			1.73			2.10

⁽¹⁾Rates exclude certain hedging costs.

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

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A summary of the Company’s long-term borrowed funds is presented below:



(in millions)	June 30, 2019		December 31, 2018
Parent Company:
2.375% fixed-rate senior unsecured debt, due July 2021		$349		$349
4.150% fixed-rate subordinated debt, due September 2022	348		348
3.750% fixed-rate subordinated debt, due July 2024	250		250
4.023% fixed-rate subordinated debt, due October 2024	42		42
4.350% fixed-rate subordinated debt, due August 2025	249		249
4.300% fixed-rate subordinated debt, due December 2025	750		749
Banking and Other Subsidiaries:
2.500% senior unsecured notes, due March 2019 ⁽¹⁾	—		748
2.450% senior unsecured notes, due December 2019 ⁽¹⁾	747		744
2.250% senior unsecured notes, due March 2020 ⁽¹⁾	698		691
3.060% floating-rate senior unsecured notes, due March 2020 ^{(1) (2)}	300		300
3.091% floating-rate senior unsecured notes, due May 2020 ^{(1) (2)}	250		250
2.200% senior unsecured notes, due May 2020 ⁽¹⁾	499		499
2.250% senior unsecured notes, due October 2020 ⁽¹⁾	748		738
2.550% senior unsecured notes, due May 2021 ⁽¹⁾	986		964
3.250% senior unsecured notes, due February 2022 ⁽¹⁾	711		—
3.248% floating-rate senior unsecured notes, due February 2022 ^{(1) (2)}	299		—
3.331% floating-rate senior unsecured notes, due May 2022 ^{(1) (2)}	250		249
2.650% senior unsecured notes, due May 2022 ⁽¹⁾	500		487
3.700% senior unsecured notes, due March 2023⁽¹⁾	517		502
3.280% floating-rate senior unsecured notes, due March 2023 ^{(1) (2)}	249		249
3.750% senior unsecured notes, due February 2026 ⁽¹⁾	521		—
Federal Home Loan Bank advances, 2.575% weighted average rate, due through 2038	2,258		7,508
Other	17		9
Total long-term borrowed funds		$11,538		$15,925

⁽¹⁾Issued under CBNA’s Global Bank Note Program.

⁽²⁾Rate disclosed reflects the floating rate as of June 30, 2019.

The Parent Company’s long-term borrowed funds as of June 30, 2019 and December 31, 2018 included principal balances of $2.0 billion for each period, respectively, and unamortized deferred issuance costs and/or discounts of ($4) million and ($5) million, respectively. The banking and other subsidiaries’ long-term borrowed funds as of June 30, 2019 and December 31, 2018 included principal balances of $9.5 billion and $14.0 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($17) million and ($14) million, respectively, and hedging basis adjustments of $43 million and ($66) million, respectively. See Note 9 "Derivatives" 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 $7.4 billion and $13.0 billion at June 30, 2019 and December 31, 2018, respectively. The Company’s available FHLB borrowing capacity was $9.0 billion and $4.8 billion at June 30, 2019 and December 31, 2018, respectively. Citizens can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At June 30, 2019, the Company’s unused secured borrowing capacity was approximately $42.8 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A summary of maturities for the Company’s long-term borrowed funds at June 30, 2019 is presented below:



(in millions)	Parent Company		Banking and Other Subsidiaries		Consolidated
Year
2019		$—		$747		$747
2020	—		4,748		4,748
2021	349		992		1,341
2022	348		1,766		2,114
2023	—		768		768
2024 and thereafter	1,291		529		1,820
Total		$1,988		$9,550		$11,538

NOTE 9 - DERIVATIVES

In the normal course of business, Citizens enters into a variety of derivative transactions in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. These transactions include interest rate swap contracts, interest rate options, foreign exchange contracts, residential loan commitment rate locks, interest rate future contracts, swaptions, forward commitments to sell to-be-announced mortgage securities (“TBAs”), forward sale contracts and purchase options. The Company monitors the results of each transaction to ensure that management’s intent is satisfied. The Company does not use derivatives for speculative purposes.

The Company’s derivative instruments are recognized on the Consolidated Balance Sheets at fair value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 13 "Fair Value Measurements" to the Company’s unaudited interim Consolidated Financial Statements in the Quarterly Report on Form 10-Q for the period ended March 31, 2019 and Note 19 “Fair Value Measurements” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.

The following table presents derivative instruments included on the Consolidated Balance Sheets in derivative assets and derivative liabilities:



	June 30, 2019								December 31, 2018
(in millions)	Notional Amount⁽¹⁾		Derivative Assets			Derivative Liabilities			Notional Amount⁽¹⁾		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate contracts		$25,096		$—			$3			$12,050		$5			$—
Derivatives not designated as hedging instruments:
Interest rate contracts	133,570		808			127			117,076		301			277
Foreign exchange contracts	13,431		132			116			9,866		129			113
Other contracts	8,040		29			34			3,555		14			25
Total derivatives not designated as hedging instruments			969			277					444			415
Gross derivative fair values			969			280					449			415
Less: Gross amounts offset in the Consolidated Balance Sheets ⁽²⁾			(83		)	(83		)			(87		)	(87		)
Less: Cash collateral applied ⁽²⁾			(53		)	(91		)			(45		)	(36		)
Total net derivative fair values presented in the Consolidated Balance Sheets				$833			$106					$317			$292

⁽¹⁾The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate contracts, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they do not measure the true economic risk of these contracts.

⁽²⁾Amounts represent the impact of enforceable master netting agreements that allow the Company to net settle positive and negative positions.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan. Citizens has certain derivative transactions which are designated as fair value or cash flow hedges, described as follows:

Derivatives Designated As Hedging Instruments

The Company’s institutional derivatives portfolio qualifies for hedge accounting treatment. This includes interest rate swaps that are designated as highly effective fair value and cash flow hedging relationships. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, Citizens monitors the effectiveness of its hedge relationships during the duration of the hedge relationship. The methods utilized to assess hedge effectiveness vary based on the type of item being hedged. The Company discontinues hedge accounting treatment when it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge and then reflects changes in fair value in earnings after termination of the hedge relationship.

Fair Value Hedges

Citizens has outstanding interest rate swap agreements to manage the interest rate exposure on its medium-term borrowings as well as certain fixed rate residential mortgages. The changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded in the same income statement line in the Consolidated Statements of Operations.

The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Operations:



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018			2019			2018			Affected Line Item in the Consolidated Statements of Operations
Change in fair value of interest rate swaps hedging borrowed funds		$64			$12			$104			($26	)	Interest expense - borrowed funds
Change in fair value of hedged long-term debt attributable to the risk being hedged	(64		)	(13		)	(103		)	24			Interest expense - borrowed funds
Change in fair value of interest rate swaps hedging fixed rate loans	(16		)	—			(16		)	—			Interest and fees on loans and leases
Change in fair value of hedged fixed rate loans attributable to the risk being hedged	16			—			16			—			Interest and fees on loans and leases

The following table reflects amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:



	June 30, 2019
(in millions)	Residential mortgages		Long-term borrowed funds
Carrying amount of the hedged assets		$975		$—
Carrying amount of the hedged liabilities	—		5,249
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items⁽¹⁾	16		43

⁽¹⁾The balance reported for long-term borrowed funds includes ($3) million of cumulative hedging adjustments recorded on discontinued fair value hedging relationships.

Cash Flow Hedges

Citizens has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets and liabilities. All of these swaps have been deemed as highly effective cash flow hedges. The entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is recorded in OCI and reclassified from OCI to current period earnings (interest income or interest expense) in the same period that the hedged item affects earnings. During the next 12 months, there are $11 million in pre-tax net losses on derivative instruments included in OCI expected to be reclassified to net interest income in the Consolidated Statements of Operations. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2019.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the three and six months ended June 30, 2019 and 2018, there were no gains or losses reclassified from OCI to current period earnings (other income) associated with the discontinuance of the Company’s cash flow hedges because it was probable that the original forecasted transaction would no longer occur by the end of the originally specified time period.

The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018⁽¹⁾			2019			2018⁽¹⁾
Amount of pre-tax net gains (losses) recognized in OCI		$91			($17	)		$143			($87	)
Amount of pre-tax net losses reclassified from OCI into interest income	(20		)	(13		)	(40		)	(19		)
Amount of pre-tax net gains reclassified from OCI into interest expense	1			4			1			8

⁽¹⁾For the three and six months ended June 30, 2018, the amount of pre-tax net gains (losses) recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and ineffectiveness was reported within noninterest income.

Derivatives Not Designated As Hedging Instruments

Economic Hedges

The Company’s customer derivatives are recorded on the Consolidated Balance Sheets at fair value. These include interest rate and foreign exchange derivative contracts that are designed to meet the hedging and financing needs of the Company’s customers. The mark-to-market gains and losses associated with the customer derivatives are mitigated by mark-to-market gains and losses on interest rate and foreign exchange derivative contracts transacted. Citizens also purchases interest rate floors primarily to hedge the exposure related to customer deposit products that have embedded minimum interest rate guarantees. Citizens utilizes interest rate floors in non-qualifying hedging relationships.

The Company’s residential loan derivatives (including residential loan commitments and forward sales contracts) are recorded on the Consolidated Balance Sheets at fair value. Citizens also uses derivatives to hedge the risk of changes in the fair value of its residential MSR portfolio. Certain residential MSRs are accounted for at fair value with changes in the fair value influenced primarily by changes in interest rates. Derivatives used to hedge the value of residential MSRs include TBAs, AFS securities, interest rate swaptions, interest rate futures and interest rate swaps.

The following table presents the effect of economic hedges on noninterest income:



	Amounts Recognized in Noninterest Income for the
	Three Months Ended June 30,						Six Months Ended June 30,						Affected Line Item in the Consolidated Statements of Operations
(in millions)	2019			2018			2019			2018
Economic hedge type:
Customer interest rate contracts		$425			($75	)		$654			($279	)	Foreign exchange and interest rate products
Customer foreign exchange contracts	(47		)	(68		)	(81		)	(57		)	Foreign exchange and interest rate products
Derivatives transactions to hedge interest rate risk	(410		)	90			(627		)	306			Foreign exchange and interest rate products
Derivatives transactions to hedge foreign exchange risk	54			92			94			75			Foreign exchange and interest rate products
Residential loan commitments	11			1			16			—			Mortgage banking fees
Forward sale contracts	(9		)	(2		)	(5		)	(2		)	Mortgage banking fees
Interest rate derivative contracts used to hedge residential MSRs	71			—			116			—			Mortgage banking fees
Total		$95			$38			$167			$43

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10 - RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in the balances, net of income taxes, of each component of AOCI:



	As of and for the Three Months Ended 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, 2018		($193	)		($514	)		($438	)		($1,145	)
Other comprehensive loss before reclassifications	(13		)	(60		)	—			(73		)
Other-than-temporary impairment not recognized in earnings on debt securities	—			—			—			—
Amounts reclassified to the Consolidated Statements of Operations	6			(1		)	3			8
Net other comprehensive (loss) income	(7		)	(61		)	3			(65		)
Balance at June 30, 2018		($200	)		($575	)		($435	)		($1,210	)
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	)



	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, 2018		($143	)		($236	)		($441	)		($820	)
Other comprehensive loss before reclassifications	(65		)	(332		)	—			(397		)
Other-than-temporary impairment not recognized in earnings on debt securities	—			(1		)	—			(1		)
Amounts reclassified to the Consolidated Statements of Operations	8			(6		)	6			8
Net other comprehensive (loss) income	(57		)	(339		)	6			(390		)
Balance at June 30, 2018		($200	)		($575	)		($435	)		($1,210	)
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 standards	—			5			—			5
Balance at June 30, 2019		($6	)		($25	)		($457	)		($488	)

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the amounts reclassified out of each component of AOCI and into the Consolidated Statements of Operations:



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018			2019			2018
Details about AOCI Components													Affected Line Item in the Consolidated Statements of Operations
Reclassification adjustment for net derivative losses included in net income:		($20	)		($13	)		($40	)		($19	)	Interest income
	1			4			1			8			Interest expense
	(19		)	(9		)	(39		)	(11		)	Income before income tax expense
	(4		)	(3		)	(9		)	(3		)	Income tax expense
		($15	)		($6	)		($30	)		($8	)	Net income
Reclassification of net debt securities gains to net income:		$4			$2			$12			$10		Securities gains, net
	—			(1		)	(1		)	(2		)	Net debt securities impairment losses recognized in earnings
	4			1			11			8			Income before income tax expense
	1			—			3			2			Income tax expense
		$3			$1			$8			$6		Net income
Reclassification of changes related to the employee benefit plan:		($4	)		($4	)		($9	)		($8	)	Other operating expense
	(4		)	(4		)	(9		)	(8		)	Income before income tax expense
	(1		)	(1		)	(3		)	(2		)	Income tax expense
		($3	)		($3	)		($6	)		($6	)	Net income
Total reclassification losses		($15	)		($8	)		($28	)		($8	)	Net income

The following table presents the effects on net income of the amounts reclassified out of AOCI:



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
Net interest income (includes ($19),($9), ($39) and ($11) of AOCI reclassifications, respectively)		$1,166		$1,121		$2,326		$2,212
Provision for credit losses	97		85		182		163
Noninterest income (includes $4, $1, $11 and $8 of AOCI reclassifications, respectively)	462		388		890		759
Noninterest expense (includes $4, $4, $9 and $8 of AOCI reclassifications, respectively)	951		875		1,888		1,758
Income before income tax expense	580		549		1,146		1,050
Income tax expense (includes ($4), ($4), ($9) and ($3) income tax net expense from reclassification items, respectively)	127		124		254		237
Net income		$453		$425		$892		$813

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11 - STOCKHOLDERS’ EQUITY

Preferred Stock

The following table summarizes the Company’s preferred stock:



			June 30, 2019			December 31, 2018
(in millions, except per share and share data)	Liquidation value per share		Preferred Shares		Carrying Amount	Preferred Shares	Carrying Amount
Authorized ($25 par value)			100,000,000			100,000,000
Issued and outstanding:
Series A	$1,000		250,000		$247	250,000	$247
Series B	1,000		300,000		296	300,000	296
Series C	1,000		300,000		297	300,000	297
Series D	1,000	⁽¹⁾	300,000	⁽²⁾	293	—	—
Total			1,150,000		$1,133	850,000	$840

⁽¹⁾Equivalent to $25 per depositary share.

⁽²⁾Represented by 12,000,000 depositary shares each representing a 1/40th interest in the Series D Preferred Stock.

The following table provides information related to the Company’s preferred stock outstanding as of June 30, 2019:



(in millions, except share data)
Preferred Stock⁽¹⁾	Issue Date	Number of Shares Outstanding	Dividend Dates⁽²⁾	Annual Per Share Dividend Rate	Optional Redemption Date⁽³⁾
Series A	April 6, 2015	250,000	Semi-annually beginning October 6, 2015 until April 6, 2020	5.500% until April 6, 2020	April 6, 2020
			Quarterly beginning July 6, 2020	3 Mo. LIBOR plus 3.960% beginning April 6, 2020
Series B	May 24, 2018	300,000	Semi-annually beginning January 6, 2019 until July 6, 2023	6.000% until July 6, 2023	July 6, 2023
			Quarterly beginning October 6, 2023	3 Mo. LIBOR plus 3.003% beginning July 6, 2023
Series C	October 25, 2018	300,000	Quarterly beginning January 6, 2019 until April 6, 2024	6.375% until April 6, 2024	April 6, 2024
			Quarterly beginning July 6, 2024	3 Mo. LIBOR plus 3.157% beginning April 6, 2024
Series D	January 29, 2019	300,000⁽⁴⁾	Quarterly beginning April 6, 2019 until April 6, 2024	6.350% until April 6, 2024	April 6, 2024
			Quarterly beginning July 6, 2024	3 Mo. LIBOR plus 3.642% beginning April 6, 2024

⁽¹⁾ All outstanding series are non-cumulative fixed-to-floating rate perpetual preferred stock. Except in limited circumstances, the preferred stock does not have voting rights.

⁽²⁾ Dividends are payable when, and if, declared by the Company’s Board of Directors or an authorized committee thereof.

⁽³⁾ Redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after the date stated, or in whole but not in part, at any time within 90 days following a regulatory capital treatment event a as defined in the applicable certificate of designations, in each case at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share for the Series D Preferred Stock), plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Under current rules, any redemption is subject to approval by the FRB.

⁽⁴⁾Represented by 12,000,000 depositary shares each representing a 1/40th interest in the Series D Preferred Stock.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 2019						Three Months Ended June 30, 2018
(in millions, except per share data)	Dividends Declared per Share		Dividends Declared		Dividends Paid		Dividends Declared per Share		Dividends Declared		Dividends Paid
Common stock		$0.32		$148		$148		$0.22		$107		$107
Preferred stock
Series A		$—		$—		$7		$—		$—		$7
Series B	30.00		9		—		—		—		—
Series C	15.94		4		5		—		—		—
Series D	15.88		5		3		—		—		—
Total preferred stock				$18		$15				$—		$7



	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
(in millions, except per share data)	Dividends Declared per Share		Dividends Declared		Dividends Paid		Dividends Declared per Share		Dividends Declared		Dividends Paid
Common stock		$0.64		$297		$297		$0.44		$215		$215
Preferred stock
Series A		$27.50		$7		$7		$27.50		$7		$7
Series B	30.00		9		11		—		—		—
Series C	31.88		9		9		—		—		—
Series D	27.70		8		3		—		—		—
Total preferred stock				$33		$30				$7		$7

Treasury Stock

During the six months ended June 30, 2019, the Company repurchased $320 million, or 9,287,644 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 “Commitments and Contingencies” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.



(in millions)	June 30, 2019		December 31, 2018
Commitments to extend credit		$70,217		$69,553
Letters of credit	2,252		2,125
Marketing rights	35		37
Risk participation agreements	41		19
Loans sold with recourse	23		5
Total		$72,568		$71,739

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to customers in accordance with conditions contractually agreed upon in advance. Generally, the commitments have fixed expiration dates or termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.

In first quarter 2019, the Company entered into an agreement to purchase education loans on a quarterly basis beginning with first quarter 2019 and ending with fourth quarter 2019. The total minimum and maximum amount of the aggregate purchase principal balance of loans under the terms of the agreement are $600 million and $1.0 billion, respectively, and the remaining maximum principal purchase commitment is $700 million as

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

of June 30, 2019.

The Company’s commercial loan trading desk provides ongoing secondary market support and liquidity to its clients. Unsettled loan trades (i.e., loan purchase contracts) represent firm commitments to purchase loans from a third party at an agreed-upon price. Principal amounts associated with unsettled commercial loan trades are off-balance sheet commitments until delivery of the loans has taken place. The principal balances of unsettled commercial loan trade purchases and sales were $106 million and $114 million, respectively, at June 30, 2019 and $68 million and $161 million, respectively, at December 31, 2018.

Letters of Credit

Letters of credit in the table above reflect commercial, standby financial and standby performance letters of credit. Standby letters of credit, both financial and performance, are issued by the Company for its customers. They are used as conditional guarantees of payment to a third party in the event the customer either fails to make specific payments (financial) or fails to complete a specific project (performance). The Company’s exposure to credit loss in the event of counterparty nonperformance in connection with the above instruments is represented by the contractual amount of those instruments, net of the value of collateral held. Generally, letters of credit are collateralized by cash, accounts receivable, inventory or investment securities. Credit risk associated with letters of credit is considered in determining the appropriate amounts of reserves for unfunded commitments. Standby letters of credit and commercial letters of credit are issued for terms of up to ten years and one year, respectively.

Other Commitments

Citizens has additional off-balance sheet arrangements that are summarized below:


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

•

Loans sold with recourse - Citizens is an originator and servicer of residential mortgages and routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales, the Company makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of those representations and warranties. The Company also sells the government guaranteed portion of certain SBA loans to outside investors, for which it retains the servicing rights.

•

Risk Participation Agreements - RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. The current amount of credit exposure is spread out over 83 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

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

of loss can be reasonably estimated. In many proceedings, however, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.

Based on information currently available, the advice of legal counsel and other advisers, and established reserves, management believes that the aggregate liabilities, if any, potentially arising from these proceedings will not have a materially adverse effect on the Company’s unaudited interim Consolidated Financial Statements.

NOTE 13 - FAIR VALUE MEASUREMENTS

Citizens measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Citizens also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this Note for assets and liabilities that are not required to be reported at fair value in the financial statements.

Fair Value Option

Citizens elected to account for residential mortgage LHFS and certain commercial and commercial real estate LHFS at fair value. For these LHFS, the aggregate fair value approximates the aggregate unpaid principal balance. For more information on the election of the fair value option for these assets see Note 19 “Fair Value Measurements,” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.

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)	2019		2018			2019		2018		Affected Line Item in the Consolidated Statements of Operations
Residential mortgage loans held for sale, at fair value		$10		$4			$9		$1	Mortgage banking fees
Commercial and commercial real estate loans held for sale, at fair value	1		(1		)	4		—		Other income

Recurring Fair Value Measurements

Citizens utilizes a variety of valuation techniques to measure its assets and liabilities at fair value on a recurring basis. For more information on the valuation techniques utilized to measure recurring fair value see Note 13 “Fair Value Measurements,” to the Company’s unaudited interim Consolidated Financial Statements in the Quarterly Report on Form 10-Q for the three months ended March 31, 2019.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at June 30, 2019:



(in millions)	Total		Level 1		Level 2		Level 3
Debt securities available for sale:
Mortgage-backed securities		$21,603		$—		$21,603		$—
State and political subdivisions	5		—		5		—
U.S. Treasury and other	90		90		—		—
Total debt securities available for sale	21,698		90		21,608		—
Loans held for sale, at fair value:
Residential loans held for sale	1,615		—		1,615		—
Commercial loans held for sale	135		—		135		—
Total loans held for sale, at fair value	1,750		—		1,750		—
Mortgage servicing rights	531		—		—		531
Derivative assets:
Interest rate contracts	808		—		808		—
Foreign exchange contracts	132		—		132		—
Other contracts	29		—		4		25
Total derivative assets	969		—		944		25
Equity securities, at fair value:
Money market mutual fund investments	47		47		—		—
Total equity securities, at fair value	47		47		—		—
Total assets		$24,995		$137		$24,302		$556
Derivative liabilities:
Interest rate contracts		$130		$—		$130		$—
Foreign exchange contracts	116		—		116		—
Other contracts	34		—		34		—
Total derivative liabilities	280		—		280		—
Total liabilities		$280		$—		$280		$—

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at December 31, 2018:



(in millions)	Total		Level 1		Level 2		Level 3
Debt securities available for sale:
Mortgage-backed securities		$19,866		$—		$19,866		$—
State and political subdivisions	5		—		5		—
U.S. Treasury and other	24		24		—		—
Total debt securities available for sale	19,895		24		19,871		—
Loans held for sale, at fair value:
Residential loans held for sale	967		—		967		—
Commercial loans held for sale	252		—		252		—
Total loans held for sale, at fair value	1,219		—		1,219		—
Mortgage servicing rights	600		—		—		600
Derivative assets:
Interest rate contracts	306		—		306		—
Foreign exchange contracts	129		—		129		—
Other contracts	14		—		14		—
Total derivative assets	449		—		449		—
Equity securities, at fair value:
Money market mutual fund investments	181		181		—		—
Total equity securities, at fair value	181		181		—		—
Total assets		$22,344		$205		$21,539		$600
Derivative liabilities:
Interest rate contracts		$277		$—		$277		$—
Foreign exchange contracts	113		—		113		—
Other contracts	25		—		25		—
Total derivative liabilities	415		—		415		—
Total liabilities		$415		$—		$415		$—

The following tables present a rollforward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as Level 3 for the three and six months ended June 30, 2019. There were no assets measured at fair value on a recurring basis and classified as Level 3 for the three and six months ended June 30, 2018.



	Three Months Ended June 30,						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.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Nonrecurring Fair Value Measurements

Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include MSRs accounted for by the amortization method and loan impairments for certain loans and leases. For more information on the valuation techniques utilized to measure nonrecurring fair value see Note 19 “Fair Value Measurements,” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.

The following table presents gains (losses) on assets and liabilities measured at fair value on a nonrecurring basis and recorded in earnings:



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018			2019			2018
Impaired collateral-dependent loans		($24	)		($4	)		($28	)		($6	)
MSRs	(14		)	—			(14		)	3
Foreclosed assets	(1		)	—			(1		)	(1		)
Leased assets	—			(2		)	(3		)	(2		)

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



	June 30, 2019								December 31, 2018
(in millions)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Impaired collateral-dependent loans		$300		$—		$300		$—		$338		$—		$338		$—
MSRs	193		—		—		193		243		—		—		243
Foreclosed assets	27		—		27		—		29		—		29		—
Leased assets	61		—		61		—		92		—		92		—

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, 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		$3,447		$3,441		$—		$—		$3,447		$3,441		$—		$—
Equity securities, at cost	706		706		—		—		706		706		—		—
Other loans held for sale	455		455		—		—		—		—		455		455
Loans and leases	116,838		117,494		—		—		300		300		116,538		117,194
Financial liabilities:
Deposits	124,004		124,028		—		—		124,004		124,028		—		—
Federal funds purchased and securities sold under agreements to repurchase	1,132		1,132		—		—		1,132		1,132		—		—
Other short-term borrowed funds	309		309		—		—		309		309		—		—
Long-term borrowed funds	11,538		11,639		—		—		11,538		11,639		—		—

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	December 31, 2018
	Total				Level 1				Level 2				Level 3
(in millions)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Securities held to maturity		$4,165		$4,041		$—		$—		$4,165		$4,041		$—		$—
Equity securities, at cost	834		834		—		—		834		834		—		—
Other loans held for sale	101		101		—		—		—		—		101		101
Loans and leases	116,660		116,627		—		—		338		338		116,322		116,289
Financial liabilities:
Deposits	119,575		119,503		—		—		119,575		119,503		—		—
Federal funds purchased and securities sold under agreements to repurchase	1,156		1,156		—		—		1,156		1,156		—		—
Other short-term borrowed funds	161		161		—		—		161		161		—		—
Long-term borrowed funds	15,925		15,877		—		—		15,925		15,877		—		—

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, 2019						Three Months Ended June 30, 2018
(in millions)	Consumer Banking		Commercial Banking		Consolidated ⁽¹⁾		Consumer Banking		Commercial Banking		Consolidated⁽¹⁾
Service charges and fees		$99		$26		$125		$100		$27		$127
Card fees	55		9		64		51		9		60
Capital markets fees	—		53		53		—		51		51
Trust and investment services fees	53		—		53		43		—		43
Other banking fees	—		3		3		—		2		2
Total revenue from contracts with customers		$207		$91		$298		$194		$89		$283



	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
(in millions)	Consumer Banking		Commercial Banking		Consolidated ⁽¹⁾		Consumer Banking		Commercial Banking		Consolidated⁽¹⁾
Service charges and fees		$196		$52		$248		$198		$53		$251
Card fees	105		18		123		103		18		121
Capital markets fees	—		102		102		—		88		88
Trust and investment services fees	100		—		100		83		—		83
Other banking fees	—		5		5		—		5		5
Total revenue from contracts with customers		$401		$177		$578		$384		$164		$548

⁽¹⁾There is no revenue from contracts with customers included in Other non-segment operations.

The Company recognized trailing commissions of $3 million and $4 million for the three months ended June 30, 2019 and 2018, respectively, and $7 million and $8 million for the six months ended June 30, 2019 and 2018, respectively, related to services provided in previous reporting periods. Fees from other investment services are recognized at a point in time upon completion of the service.

Revenue from Other Sources



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
Bank-owned life insurance		$13		$14		$27		$28

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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)	2019		2018		2019		2018
Deposit insurance		$16		$28		$32		$59
Promotional expense	28		34		55		59
Settlements and operating losses	9		12		20		24
Other	65		53		121		105
Other operating expense		$118		$127		$228		$247

NOTE 16 - EARNINGS PER SHARE



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions, except share and per share data)	2019		2018		2019		2018
Numerator (basic and diluted):
Net income		$453		$425		$892		$813
Less: Preferred stock dividends	18		—		33		7
Net income available to common stockholders		$435		$425		$859		$806
Denominator:
Weighted-average common shares outstanding - basic	458,154,335		484,744,354		459,426,685		486,114,872
Dilutive common shares: share-based awards	1,149,889		1,397,341		1,430,850		1,568,344
Weighted-average common shares outstanding - diluted	459,304,224		486,141,695		460,857,535		487,683,216
Earnings per common share:
Basic		$0.95		$0.88		$1.87		$1.66
Diluted ⁽¹⁾	0.95		0.88		1.86		1.65

⁽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 371,627 and 1,073,431 for the three and six months ended June 30, 2019, respectively. There were no weighted average antidilutive shares for the three or six months ended June 30, 2018.

NOTE 17 - BUSINESS OPERATING SEGMENTS

Citizens is managed by its Chief Executive Officer on a segment basis. The Company’s two business operating segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided, or the type of customer served. Each segment has a segment head who reports directly to the Chief Executive Officer. The Chief Executive Officer has final authority over resource allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the Chief Executive Officer. For more information on our business operating segments, as well as Other non-segment operations, see Note 25 “Business Operating Segments,” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.



	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

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	As of and for the Three Months Ended June 30, 2018
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated
Net interest income		$759		$376		($14	)		$1,121
Noninterest income	228		140		20			388
Total revenue	987		516		6			1,509
Noninterest expense	658		200		17			875
Profit (loss) before provision for credit losses	329		316		(11		)	634
Provision for credit losses	66		9		10			85
Income (loss) before income tax expense (benefit)	263		307		(21		)	549
Income tax expense (benefit)	66		70		(12		)	124
Net income (loss)		$197		$237		($9	)		$425
Total average assets		$61,232		$52,170		$39,851			$153,253



	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



	As of and for the Six Months Ended June 30, 2018
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated
Net interest income		$1,492		$733		($13	)		$2,212
Noninterest income	450		265		44			759
Total revenue	1,942		998		31			2,971
Noninterest expense	1,314		408		36			1,758
Profit (loss) before provision for credit losses	628		590		(5		)	1,213
Provision for credit losses	138		5		20			163
Income (loss) before income tax expense (benefit)	490		585		(25		)	1,050
Income tax expense (benefit)	123		133		(19		)	237
Net income (loss)		$367		$452		($6	)		$813
Total average assets		$61,290		$51,286		$39,817			$152,393

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 “Business Operating Segments,” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018.

CITIZENS FINANCIAL GROUP, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information presented in the “Market Risk” section of Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this quarterly report on Form 10-Q that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is set forth in Note 12 "Commitments and Contingencies" in the Notes to the unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements of this Report, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Report, you should consider the risks described under the caption “Risk Factors” in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

Details of the repurchases of the Company’s common stock during the three months ended June 30, 2019 are included below:



Period	Total Number of Shares Repurchased	Weighted Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Maximum Dollar Amount of Shares That May Yet Be Purchased As Part of Publicly Announced Plans or Programs ⁽¹⁾
April 1, 2019 - April 30, 2019	2,802,198	$34.64	2,802,198	$22,919,251
May 1, 2019 - May 31, 2019	661,555	34.64	661,555	$—
June 1, 2019 - June 30, 2019	—	$—	—	$—

⁽¹⁾On June 28, 2018, the Company announced that its 2018 Capital Plan, submitted as part of the CCAR process and not objected to by the FRB, included share repurchases of CFG common stock of up to $1.02 billion for the four-quarter period ending with the second quarter of 2019. This share repurchase plan, which was approved by the Company’s Board of Directors at the time of the announcement, allowed for share repurchases that may be executed in the open market or in privately negotiated transactions, including under Rule 10b5-1 plans. All shares repurchased by the Company during the second quarter were executed pursuant to an accelerated share repurchase transaction, which was completed by June 30, 2019. The timing and exact amount of future share repurchases will be subject to various factors, including the Company’s capital position, financial performance and market conditions.

CITIZENS FINANCIAL GROUP, INC.

ITEM 6. EXHIBITS

3.1 Amended and Restated Certificate of Incorporation of the Registrant as in effect on the date hereof (incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q, filed May 8, 2015)

3.2 Certificate of Designations of the Registrant with respect to the Series B Preferred Stock, dated May 22, 2018, filed with the Secretary of State of the State of Delaware and effective May 22, 2018 (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed May 24, 2018)

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

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

3.5 Bylaws of the Registrant (as amended and restated on June 20, 2019) (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed June 21, 2019)

10.1 Citizens Financial Group, Inc. Non-Employee Directors Compensation Policy, amended and effective as of April 25, 2019†*

10.2 Amended and Restated Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan, as of June 20, 2019†*

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

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

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

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

101

The following materials from the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements*

† Indicates management contract or compensatory plan or arrangement.

* Filed herewith.

CITIZENS FINANCIAL GROUP, INC.

SIGNATURE

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



CITIZENS FINANCIAL GROUP, INC.
(Registrant)

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