CITIZENS FINANCIAL GROUP INC/RI MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
Page
Forward-Looking Statements 6
Introduction 7
Financial Performance 8
Results of Operations 10
Net Interest Income 10
Noninterest Income 11
Noninterest Expense 12
Provision for Credit Losses 12
Income Tax Expense 12
Business Operating Segments 12
Analysis of Financial Condition 14
Securities 14
Loans and Leases 15
Allowance for Credit Losses and Nonaccrual Loans and Leases 15
Deposits 20
Borrowed Funds 20
Capital and Regulatory Matters 20
Liquidity 23
Critical Accounting Estimates 26
A cco unting and Reporting Developments 28
Risk Governance 28
Market Risk 29
Non-GAAP Financial Measures and Reconciliations 33
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FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends as well as the potential effects of the COVID-19 disruption andRussia's invasion ofUkraine on our business, operations, financial performance and prospects, are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words "believes," "expects," "anticipates," "estimates," "intends," "plans," "goals," "targets," "initiatives," "potentially," "probably," "projects," "outlook," "guidance" 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 nonaccrual assets, charge-offs and provision expense;
•The rate of economic growth 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, including through the integration of Investors and the HSBC branches;
•The disruption of COVID-19 and its effects on the economic and business environments in which we operate;
•The impact ofRussia's invasion ofUkraine and the imposition of sanctions onRussia and other actions in response, including on economic and market conditions, inflationary pressures and the interest rate environment, commodity price and foreign exchange rate volatility, and heightened cybersecurity risks;
•Our ability to meet increased supervisory requirements and expectations;
• Liabilities and business restrictions resulting from litigation and regulatory investigations;
•Our capital and liquidity requirements in accordance with regulatory capital standards and our ability to generate capital internally or raise capital on favorable terms;
•The effect of changes in interest rates on our net interest income, net interest margin and originations of mortgages, 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 deposits in checking or savings accounts on our funding costs and our net interest margin;
• Financial services reform and other current, pending or future legislation or regulations that could adversely affect our revenues and business;
•A failure 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 cyberattacks;
• Higher than expected costs or other difficulties in integrating our business with that of the Investors and relevant HSBC branches;
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• The inability to retain existing investors or HSBC customers and employees following the closing of the Investors acquisition and the HSBC transaction; 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, risk-weighted assets, capital impacts of strategic initiatives, market conditions and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares from or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends. Further, statements about the effects of the COVID-19 disruption andRussia's invasion ofUkraine on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic andRussia's invasion ofUkraine , actions taken by governmental authorities in response to the pandemic andRussia's invasion ofUkraine , and the direct and indirect impact of the pandemic andRussia's invasion ofUkraine on our customers, third parties and us. More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the "Risk Factors" section in Part II, Item 1A of this report and Part I, Item 1A of our 2021 Form 10-K.
INTRODUCTION
Citizens Financial Group, Inc. is one of the nation's oldest and largest financial institutions with$192.1 billion in assets as ofMarch 31, 2022 . Headquartered inProvidence, 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 full-service customer contact center and, including the acquisition of Investors, the convenience of approximately 3,300 ATMs and more than 1,200 branches in 14 states and theDistrict of Columbia . Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer a broad complement of financial products and solutions, including lending and leasing, deposit and treasury management services, foreign exchange, interest rate and commodity risk management solutions, as well as loan syndication, corporate finance, merger and acquisition, and debt and equity capital markets capabilities. More information is available at www.citizensbank.com. OnFebruary 18, 2022 , CBNA completed the acquisition ofHSBC East Coast branches and national online deposit business. The transaction extends our physical presence and adds customers in several attractive markets, accelerating our national expansion strategy. The transaction includes 66 locations in theNew York City metropolitan area, 9 locations in the Mid-Atlantic/Washington D.C. area, and 5 locations inSoutheast Florida . OnApril 6, 2022 , Citizens completed the acquisition of all outstanding shares of Investors for a combination of stock and cash. The acquisition enhances Citizens' banking franchise, adding an attractive middle market, small business and consumer customer base while building our physical presence in the Mid-Atlantic region with the addition of 154 branches located in the greaterNew York City andPhiladelphia metropolitan areas and acrossNew Jersey .
For more information on these acquisitions, see Note 2.
The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Part I, Item 1, as well as other information contained in this document and our 2021 Form 10-K.
Non-GAAP Financial Measures
This document contains non-GAAP financial measures denoted as "Underlying"
results. Underlying results for any given reporting period exclude certain items
that may occur in that period which management does not consider indicative of
our on-going financial performance. We believe these non-GAAP financial measures
provide
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-------------------------------------------------------------------------------- useful information to investors because they are used by management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance, increase comparability of period-to-period results, and are useful to consider in addition to our GAAP financial results. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP. Non-GAAP measures are denoted throughout our MD&A by the use of the term Underlying. Where there is a reference to these metrics in that paragraph, all measures that follow are on the same basis when applicable. For more information on the computation of non-GAAP financial measures, see "-Non-GAAP Financial Measures and Reconciliations."
FINANCIAL PERFORMANCE
Quarter to date and end of period –
Net income of$420 million decreased$191 million from the first quarter of 2021, with earnings per diluted common share of$0.93 , down$0.44 from$1.37 per diluted common share in the first quarter of 2021. ROTCE of 11.4% decreased from 17.2% in the first quarter of 2021. In the first quarter of 2022, results reflect$56 million of expenses, net of tax benefit, or$0.14 per diluted common share, from notable items compared to$15 million of expenses, net of tax benefit, or$0.04 per diluted common share, from notable items in the first quarter of 2021.
Table 1: Notable elements
Three Months EndedMarch 31, 2022 Less: notable items Integration Underlying results (in millions) Reported results (GAAP)
costs(1) TOP and other(2) Provision(3) (non-GAAP) Provision (profit) for credit losses
$3 $- $-$24 ($21 ) Noninterest expense 1,106 37 11 - 1,058 Income tax expense 116 (10) - (6) 132 Three Months Ended March 31, 2021 Less: notable items Underlying results (in millions) Reported results (GAAP)
TOP integration costs and others(2) Provision (non-GAAP) Provision (profit) for credit losses
($140 ) $- $- $- ($140 ) Noninterest expense 1,018 - 20 - 998 Income tax expense 170 - (5) - 175 (1) Includes integration costs associated with acquisitions. (2) Includes our TOP transformational and revenue and efficiency initiatives for the three months endedMarch 31, 2022 and 2021, and income tax impacts related to legacy tax matters for the three months endedMarch 31, 2022 . (3) Includes the initial provision for credit losses of$24 million tied to the HSBC transaction. As required by purchase accounting, a fair value mark for performing loans including both credit and interest rate components is recorded in addition to the provision for credit losses expense, thus the credit exposure has been "double counted".
• Net profit available to ordinary shareholders of
• On an underlying basis, which excludes notable items, net income available to common shareholders of
• On an underlying basis, diluted earnings per ordinary share of
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• Total turnover of
• Net interest income of
• The net interest margin of 2.75% is stable compared to the first quarter of 2021.
– Net interest margin on an ETP basis of 2.75% decreased by 1 basis point, compared to 2.76% in the first quarter of 2021, as the impact of lower yields on earning assets was largely offset by the deployment of cash in loan growth.
-Average loans and leases of$129.2 billion increased$6.3 billion , or 5%, from$122.8 billion in the first quarter of 2021, driven by a$6.6 billion increase in retail loans given growth in mortgage, auto and education, and the impact of the HSBC transaction, partially offset by planned run-off of personal unsecured installment loans and a$304 million decrease in commercial as growth was more than offset by a reduction in PPP loans. -Average deposits of$155.1 billion increased$8.4 billion , or 6%, from$146.6 billion in the first quarter of 2021, driven by the impact of the HSBC transaction and growth in demand, checking with interest and savings, partially offset by a decrease in money market and term.
• Non-interest income of
• Non-interest expenses of
•On an Underlying basis, noninterest expense increased 6% from the first quarter of 2021, reflecting higher salaries and employee benefits given merit increases, and other operating expense associated with increased travel and advertising costs, partially offset by the benefit of efficiency initiatives.
•The efficiency coefficient of 67.2% compared to 61.4% for the first quarter of 2021, and the ROTCE of 11.4% compared to 17.2%.
• On an underlying basis, the efficiency ratio of 64.3% compared to 60.2% for the first quarter of 2021, and the ROTCE of 13.0% compared to 17.6%.
•Credit provision expense of$3 million compares with a$140 million credit provision benefit for the first quarter of 2021, reflecting strong credit performance across the retail and commercial loan portfolios. The first quarter 2022 Underlying credit provision benefit excludes the "double count" of the$24 million day-one CECL provision expense tied to the HSBC transaction. •Tangible book value per common share of$30.97 decreased 6% from the first quarter of 2021.Citizens Financial Group, Inc. | 9
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RESULTS OF OPERATIONS
Net interest income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to "-Market Risk - Non-Trading Risk," and "-Risk Governance" as described in our 2021 Form 10-K.
Table 2: Main components of net interest income
Three Months Ended March 31,
2022 2021 Change
Average Income/ Yields/ Average Income/ Yields/ Average Yields/
(dollars in millions) Balances Expense Rates Balances Expense Rates Balances Rates (bps)
Assets:
Interest-bearing cash and due from banks and deposits in banks$8,055 $4 0.21 %$10,861 $3 0.11 % ($2,806 ) 10 bps Taxable investment securities 29,245 138 1.88 27,031 128 1.89 2,214 (1) Non-taxable investment securities 2 - 2.60 3 - 2.60 (1) - Total investment securities 29,247 138 1.88 27,034 128 1.89 2,213 (1) Commercial and industrial 44,947 328 2.91 44,287 347 3.12 660 (21) Commercial real estate 14,066 90 2.57 14,675 94 2.57 (609) - Leases 1,560 11 2.81 1,915 13 2.69 (355) 12 Total commercial loans and leases 60,573 429 2.83 60,877 454 2.98 (304) (15) Residential mortgages 23,461 169 2.88 19,388 148 3.05 4,073 (17) Home equity 12,124 90 3.02 12,001 95 3.20 123 (18) Automobile 14,534 127 3.55 12,229 125 4.14 2,305 (59) Education 13,034 131 4.07 12,436 134 4.38 598 (31) Other retail 5,428 102 7.63 5,916 105 7.25 (488) 38 Total retail loans 68,581 619 3.65 61,970 607 3.96 6,611 (31) Total loans and leases 129,154 1,048 3.26 122,847 1,061 3.47 6,307 (21) Loans held for sale, at fair value 2,366 16 2.70 3,254 18 2.27 (888) 43 Other loans held for sale 454 7 5.89 385 6 6.30 69 (41) Interest-earning assets 169,276 1,213 2.88 164,381 1,216 2.97 4,895 (9) Noninterest-earning assets 19,041 18,188 853 Total assets$188,317 $182,569 $5,748 Liabilities and Stockholders' Equity: Checking with interest$30,417 $5 0.07 %$26,116 $6 0.09 %$4,301 (2) Money market 47,220 12 0.10 49,536 22 0.18 (2,316) (8) Savings 23,835 5 0.08 18,611 5 0.11 5,224 (3) Term 4,970 3 0.29 8,572 17 0.83 (3,602) (54) Total interest-bearing deposits 106,442 25 0.10 102,835 50 0.20 3,607 (10) Short-term borrowed funds 29 - 3.50 150 - 0.46 (121) 304 Long-term borrowed funds 6,066 41 2.66 8,336 49 2.35 (2,270) 31 Total borrowed funds 6,095 41 2.66 8,486 49 2.32 (2,391) 34 Total interest-bearing liabilities 112,537 66 0.23 111,321 99 0.36 1,216 (13) Demand deposits 48,641 43,814 4,827 Other liabilities 4,144 4,858 (714) Total liabilities 165,322 159,993 5,329 Stockholders' equity 22,995 22,576 419 Total liabilities and stockholders' equity$188,317 $182,569 $5,748 Interest rate spread 2.65 % 2.62 % 3 Net interest income and net interest margin$1,147 2.75 %$1,117 2.75 % - Net interest income and net interest margin, FTE(1)$1,149 2.75 %$1,120 2.76 % (1)
Reminder: Total deposits (interest bearing and demand)
0.07 %$146,649 $50 0.14
%
(1) Net interest income and net interest margin are presented on an FTE basis using the federal statutory tax rate of 21%. The ETP impact is mainly attributable to commercial and industrial loans for the periods presented.
Citizens Financial Group, Inc. | 10 -------------------------------------------------------------------------------- Net interest income of$1.1 billion increased 3% from the first quarter of 2021, reflecting 3% growth in interest-earning assets and broadly stable net interest margin. Net interest margin on a FTE basis of 2.75% decreased 1 basis point compared to 2.76% in the first quarter of 2021, as the impact of lower earning asset yields was largely offset by the deployment of cash into loan growth. Average interest-earning asset yields of 2.88% decreased 9 basis points from 2.97% in the first quarter of 2021, while average interest-bearing liability costs of 0.23% decreased 13 basis points from 0.36% in the first quarter of 2021. Average interest-earning assets of$169.3 billion increased$4.9 billion , or 3%, from the first quarter of 2021, as a$2.2 billion , or 8% increase in investments and a$6.3 billion , or 5%, increase in loans and leases was partially offset by a$2.8 billion decrease in cash held in interest-bearing deposits reflecting partial deployment of elevated liquidity. Loan growth was driven by a$6.6 billion increase in retail loans given growth in mortgage, auto and education, partially offset by planned runoff of personal unsecured installment loans. Commercial loans decreased$304 million as growth was more than offset by a$4.2 billion reduction in PPP loans. Average deposits of$155.1 billion increased$8.4 billion , or 6%, from the first quarter of 2021, reflecting growth in lower cost deposits and the$2.9 billion impact of the HSBC transaction, partially offset by decreases in money market and term. Average total borrowed funds of$6.1 billion decreased$2.4 billion from the first quarter of 2021, given the pay down of senior debt. Total borrowed funds costs of$41 million decreased$8 million from the first quarter of 2021. The total borrowed funds cost of 2.66% increased 34 basis points from 2.32% in the first quarter of 2021.
Non-interest income
Table 3: Non-interest income
Three Months Ended March 31, (in millions) 2022 2021 Change Percent Capital markets fees$93 $81 $12 15 % Service charges and fees 98 99 (1) (1) Mortgage banking fees 69 165 (96) (58) Card fees 60 55 5 9 Trust and investment services fees 61 58 3 5 Letter of credit and loan fees 38 38 - - Foreign exchange and derivative products 51 28 23 82 Securities gains, net 4 3 1 33 Other income(1) 24 15 9 60 Noninterest income$498 $542 ($44 ) (8 %)
(1) Includes life insurance income held by the bank and other income for all periods presented.
Noninterest income decreased$44 million , or 8%, from the first quarter of 2021, primarily reflecting lower mortgage banking fees partially offset by improved capital markets fees, foreign exchange and derivative products revenue, and other income.
•Lower mortgage banking fees are due to lower sales margins and lower production volumes.
•Companies we acquired in the second half of 2021 contributed$21 million of capital market fees in the first quarter of 2022. Excluding these acquisitions, capital markets fees reflect lower merger and acquisition advisory and underwriting fees, partially offset by higher loan syndication fees.
•Record increase in foreign exchange and derivative products reflecting growth in interest rate and commodity hedging activities.
•The increase in other income mainly reflects the increase in investment income.
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Non-interest expenses
Table 4: Non-interest expenses
Three Months Ended March 31, (in millions) 2022 2021 Change
Percent
Salaries and employee benefits$594 $548 $46 8 % Equipment and software 150 152 (2) (1) Outside services 169 139 30 22 Occupancy 83 88 (5) (6) Other operating expense 110 91 19 21 Noninterest expense$1,106 $1,018 $88 9 % Noninterest expense increased$88 million , or 9%, compared to the first quarter of 2021. On an Underlying basis, noninterest expense of$1.1 billion increased$60 million , or 6%, reflecting higher salaries and employee benefits given merit increases, and other operating expense associated with increased travel and advertising costs, partially offset by the benefit of efficiency initiatives.
Provision for credit losses
The provision for credit losses is the result of a detailed analysis performed to estimate our ACL. The total provision for credit losses includes the provision for loan and lease losses and the provision for unfunded commitments. Refer to "-Analysis of Financial Condition - Allowance for Credit Losses and Nonaccrual Loans and Leases" for more information. Credit provision expense was$3 million for the first quarter of 2022, compared to a credit provision benefit of$140 million in the first quarter of 2021, reflecting strong economic growth that began in the fourth quarter of 2020 and continued solid credit performance. Underlying credit provision benefit of$21 million in the first quarter of 2022 excludes the "double count" of the$24 million day-one CECL provision expense tied to the HSBC transaction.
income tax expense
Income tax expense of$116 million for the first quarter of 2022 decreased$54 million from$170 million in the first quarter of 2021 due to decreased taxable income. The effective income tax rate decreased to 21.7% in the first quarter of 2022 from 21.8% in the first quarter of 2021, primarily driven by the increased benefit of tax-advantaged investments on lower pre-tax income.
Operating sectors
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, which at
the segment level is equal to net charge-offs, and other expenses. The residual
difference between the consolidated provision for credit losses and the business
operating segments' net charge-offs is reflected in Other.
Non-segment operations are classified as Other and include assets, liabilities,
capital, revenues, provision for credit losses, expenses and income tax expense
not attributed to our Consumer or Commercial Banking segments as well as
treasury and community development. In addition, for impairment testing
purposes, we allocate all goodwill to our Consumer Banking and Commercial
Banking reporting units.
There have been no significant changes in our methodologies used to allocate
items to our business operating segments as described in "-Results of Operations
- Business Operating Segments" in our 2021 Form 10-K other than the change
relative to our FTP methodology. See Note 17 for additional information.
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The following table presents certain financial data of our business operating
segments. Total business operating segment financial results differ from total
consolidated financial results. These differences are reflected in Other
non-segment operations. See Note 17 for additional information.
Table 5: Selected Financial Data for Lines of Business
Consumer Banking Commercial Banking
Three Months Ended March 31, Three Months Ended March 31,
(dollars in millions) 2022 2021 2022 2021
Net interest income $857 $863 $416 $421
Noninterest income 257 351 213 170
Total revenue 1,114 1,214 629 591
Noninterest expense 784 750 272 227
Profit before credit losses 330 464 357 364
Net charge-offs 49 59 12 101
Income before income tax expense 281 405 345 263
Income tax expense 72 103 74 52
Net income $209 $302 $271 $211
Average Balances:
Total assets $77,551 $75,283 $61,118 $57,738
Total loans and leases(1) 73,233 70,188 58,007 54,813
Deposits 104,663 97,180 44,520 43,974
Interest-earning assets 74,052 71,135 58,312 55,175
(1) Includes LHFS.
Consumer Banking
Net interest income of $857 million decreased $6 million , or 1%, from the first
quarter of 2021, driven by a reduced benefit from PPP loan forgiveness,
partially offset by loan growth, including the impacts from the HSBC
transaction. Average loans increased $3.0 billion driven by higher residential
mortgages, including approximately $480 million from the HSBC transaction,
automobile and education, partially offset by the impact of the reduction in PPP
loans and planned runoff of personal unsecured installment loans. Deposits
increased $7.5 billion , or 8%, including the $2.9 billion impact of the HSBC
transaction. Growth in demand, checking with interest and savings were partially
offset by decreases in money market and term.
Noninterest income decreased $94 million , or 27%, from the first quarter of
2021, driven by lower mortgage banking fees reflecting lower gain-on-sale
margins and production volumes. This decrease was partially offset by higher
trust and investment services fees driven by an increase in assets under
management from strong net inflows and higher equity market levels, and higher
card fees driven by higher debit and credit card volumes.
Non-interest expenses increased
Net imputations of
The Commercial Bank
Net interest income of
Non-interest income of
Noninterest expense of$272 million increased$45 million , or 20%, from$227 million in the first quarter of 2021, reflecting higher salaries and employee benefits given merit increases, as well as higher other operating expense associated with increased travel and advertising costs, partially offset by the benefit of efficiency initiatives.Citizens Financial Group, Inc. | 13 --------------------------------------------------------------------------------
Net imputations of
ANALYSIS OF THE FINANCIAL SITUATION
Securities
Table 6: Amortized cost and fair value of
March 31, 2022 December 31, 2021
Amortized Amortized
(in millions) Cost Fair Value Cost Fair Value
U.S. Treasury and other $158 $154 $11 $11
State and political subdivisions 2 2 2 2
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities 25,074 23,498 24,607 24,442
Other/non-agency 412 401 397 405
Total mortgage-backed securities 25,486 23,899 25,004 24,847
Collateralized loan obligations 1,276 1,264 1,208 1,207
Total available-for-sale debt securities, at fair value
$25,319 $26,225 $26,067 Mortgage-backed securities: Federal agencies and U.S. government sponsored entities$1,370 $1,355 $1,505 $1,557 Total mortgage-backed securities 1,370 1,355 1,505 1,557 Asset-backed securities 686 656 737 732 Total debt securities held to maturity$2,056 $2,011 $2,242 $2,289
Total available-for-sale and held-to-maturity debt securities
$28,978 $27,330 $28,467 $28,356 Equity securities, at cost$611 $611 $624 $624 Equity securities, at fair value 130 130 109 109 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 portfolio primarily includes high quality, highly liquid investments reflecting our ongoing commitment to maintain strong contingent liquidity levels and pledging capacity.U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 92% of the fair value of our debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge those securities to the FHLB for collateral purposes. For further discussion of the liquidity coverage ratios, see "Regulation and Supervision - Liquidity Requirements" in our 2021 Form 10-K. The fair value of the AFS debt securities portfolio of$25.3 billion atMarch 31, 2022 decreased$748 million from$26.1 billion atDecember 31, 2021 , reflecting$697 million in portfolio growth offset by a$1.4 billion increase in unrealized losses driven by higher rates. The decline in fair value of the HTM debt securities portfolio of$278 million reflects$191 million from portfolio runoff and$87 million due to higher rates. As ofMarch 31, 2022 , the portfolio's average effective duration was 5.3 years compared with 4.3 years as ofDecember 31, 2021 , as higher long-term rates drove a decrease 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 our risk appetite in the context of the broader interest rate risk framework and limits. Citizens Financial Group, Inc. | 14 --------------------------------------------------------------------------------
Loans and leases
Table 7: Composition of loans and leases, excluding LHFS (in millions)
March 31, 2022 December 31, 2021 Change Percent Commercial and industrial(1)$45,724 $44,500 $1,224 3 % Commercial real estate 14,268 14,264 4 - Leases 1,529 1,586 (57) (4) Total commercial 61,521 60,350 1,171 2 Residential mortgages 24,211 22,822 1,389 6 Home equity 12,264 12,015 249 2 Automobile 14,439 14,549 (110) (1) Education 13,306 12,997 309 2 Other retail 5,564 5,430 134 2 Total retail 69,784 67,813 1,971 3 Total loans and leases$131,305 $128,163 $3,142 2 % Total loans and leases increased$3.1 billion from$128.2 billion as ofDecember 31, 2021 , driven by 3% growth in retail, including the impact of the HSBC transaction, as well as growth in mortgage, education and home equity, and 2% growth in commercial.
Allowance for credit losses and unearned loans and leases
The ACL is a reserve to absorb estimated future credit losses in accordance with GAAP. For additional information regarding the ACL, see Note 5 of this report, and "-Critical Accounting Estimates - Allowance for Credit Losses" and Note 6 in our 2021 Form 10-K.
The ACL of
Table 8: ACL and associated coverage ratios by portfolio
March 31, 2022 December 31, 2021 (in millions) Loans and Leases Allowance Coverage Loans and Leases Allowance Coverage Allowance for Loan and Lease Losses Commercial and industrial$45,724 $525 1.15 %$44,500 $555 1.25 % Commercial real estate 14,268 214 1.50 14,264 220 1.54 Leases 1,529 39 2.54 1,586 46 2.92 Total commercial 61,521 778 1.26 60,350 821 1.36 Residential mortgages 24,211 144 0.60 22,822 144 0.63 Home equity 12,264 78 0.64 12,015 82 0.69 Automobile 14,439 149 1.03 14,549 154 1.05 Education 13,306 321 2.41 12,997 308 2.37 Other retail 5,564 250 4.49 5,430 249 4.59 Total retail 69,784 942 1.35 67,813 937 1.38 Total loans and leases$131,305 $1,720 1.31 %$128,163 $1,758 1.37 % Allowance for Unfunded Lending Commitments Commercial(1)$147 1.50 %$153 1.61 % Retail(2) 11 1.37 23 1.42 Total allowance for unfunded lending commitments 158 176 Allowance for credit losses$131,305 $1,878 1.43 %$128,163 $1,934 1.51 %
(1) The coverage ratio includes total trade provision for unfunded loan commitments and total trade provision for loan and lease losses in the numerator and total trade loans and leases in the denominator. (2) Coverage ratio includes total allowance for retail loans for unfunded loan commitments and total allowance for loan losses in the numerator and total retail loans in the denominator.
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Table 9: Nonaccrual Loans and Leases
(dollars in millions) March 31, 2022 December 31, 2021 Change Percent
Commercial and industrial $200 $171 $29 17 %
Commercial real estate 11 11 - -
Leases 1 1 - -
Total commercial 212 183 29 16
Residential mortgages(1) 243 201 42 21
Home equity 239 220 19 9
Automobile 52 55 (3) (5)
Education 23 23 - -
Other retail 20 20 - -
Total retail 577 519 58 11
Nonaccrual loans and leases $789 $702 $87 12 %
Nonaccrual loans and leases to total loans and
leases 0.60 % 0.55 % 5 bps
Allowance for loan and lease losses to
nonaccrual loans and leases 218 251 (3,264)
Allowance for credit losses to nonaccrual loans
and leases 238 276 (3,769)
(1) Loans fully or partially guaranteed by the FHA,
Nonaccrual loans and leases of$789 million as ofMarch 31, 2022 increased$87 million , or 12%, fromDecember 31, 2021 , primarily due to residential real estate secured loans exiting forbearance. Total commercial nonaccrual loans and leases were 0.3% of the commercial portfolio as ofMarch 31, 2022 andDecember 31, 2021 .
Table 10: Ratio of Net Charges to Average Loans and Leases
Three Months Ended March 31,
2022 2021
(dollars in millions) Net Charge-Offs Average Balance Ratio Net Charge-Offs Average Balance Ratio
Commercial and industrial $11 $44,947 0.10 % $77 $44,287 0.70 %
Commercial real estate - 14,066 - 26 14,675 0.73
Leases - 1,560 0.10 1 1,915 0.26
Total commercial 11 60,573 0.08 104 60,877 0.69
Residential mortgages - 23,461 - (1) 19,388 (0.01)
Home equity (9) 12,124 (0.32) (7) 12,001 (0.25)
Automobile 6 14,534 0.18 11 12,229 0.35
Education 16 13,034 0.49 7 12,436 0.24
Other retail 35 5,428 2.61 44 5,916 3.00
Total retail 48 68,581 0.28 54 61,970 0.35
Total loans and leases $59 $129,154 0.19 % $158 $122,847 0.52 %
First quarter 2022 NCOs of $59 million decreased $99 million , or 63%, from $158
million in the first quarter of 2021, driven by decreases in commercial and
retail of $93 million and $6 million , respectively. First quarter 2022
annualized net charge-offs of 0.19% of average loans and leases were down 33
basis points from first quarter of 2021.
Retail NCOs declined as consumers continue to benefit from the fiscal support
provided during the pandemic, the rapid growth in jobs, and elevated residential
mortgage and auto loan collateral values. Commercial NCOs decreased given the
strong economic growth that began in the fourth quarter of 2020 and continued
solid credit performance. However, we continue to assess risks to the
macroeconomic environment. While the outlook is positive, uncertainty exists
given changing monetary and fiscal policies, the recent surge in inflation and
higher inflation expectations, labor shortages, continuing supply-chain
challenges, and possible consequences from Russia's invasion of Ukraine .
Citizens Financial Group, Inc. | 16
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Commercial loan asset quality
Our commercial portfolio consists of traditional commercial and industrial loans, commercial leases and commercial real estate loans. The portfolio is predominantly focused on customers in our footprint and adjacent states in which we have a physical presence where our local delivery model provides for strong client connectivity. Additionally, we also do business in certain specialized industry sectors on a national basis. As discussed in our 2021 Form 10-K, we utilize regulatory classification ratings to monitor credit quality for commercial loans and leases.
Table 11: Commercial loans and leases by regulatory classification
March 31, 2022
Criticized
(in millions) Pass Special Mention Substandard Doubtful Total
Commercial and industrial $43,594 $845 $1,109 $176 $45,724
Commercial real estate 13,273 512 472 11 14,268
Leases 1,509 8 11 1 1,529
Total commercial $58,376 $1,365 $1,592 $188 $61,521
December 31, 2021
Criticized
(in millions) Pass Special Mention Substandard Doubtful Total
Commercial and industrial $42,254 $809 $1,294 $143 $44,500
Commercial real estate 13,319 406 528 11 14,264
Leases 1,512 49 24 1 1,586
Total commercial $57,085 $1,264 $1,846 $155 $60,350
Total commercial criticized balances of $3.1 billion as of March 31, 2022
decreased $120 million compared with December 31, 2021 . Commercial criticized as
a percent of total commercial of 5.1% at March 31, 2022 decreased from 5.4% at
December 31, 2021 .
Commercial and industrial criticized balances of $2.1 billion , or 4.7% of the
total commercial and industrial loan portfolio as of March 31, 2022 , decreased
from $2.2 billion , or 5.0%, as of December 31, 2021 . The percentage decrease was
driven by an increase in total commercial and industrial net book balances, with
a modest decrease in the criticized net book balances primarily attributable to
loan payoffs. Commercial and industrial criticized loans represented 68% of
total criticized loans as of March 31, 2022 compared to 69% as of December 31,
2021 .
Commercial real estate criticized balances of $995 million , or 7.0% of the
commercial real estate portfolio, increased from $945 million , or 6.6% as of
December 31, 2021 . The increase was primarily driven by downgrades from lowest
pass for a limited number of higher net book balance loans. Loss content,
however, remained stable. Commercial real estate accounted for 32% of total
criticized loans as of March 31, 2022 compared to 29% as of December 31, 2021 .
Citizens Financial Group, Inc. | 17
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Table 12: Commercial loans and leases by sector of activity
March 31, 2022 December 31, 2021
% of % of
Total Loans Total Loans
(dollars in millions) Balance and Leases Balance and Leases
Finance and insurance $9,610 7 % $9,301 7 %
Health, pharma, and social assistance 2,862 2 2,912 2
Accommodation and food services 3,442 3 3,438 3
Professional, scientific, and technical services 2,836 2 2,665 2
Other manufacturing 4,162 3 4,087 3
Technology 4,183 3 4,220 3
Retail trade 2,400 2 2,237 2
Energy and related 2,044 2 2,017 2
Wholesale trade 2,678 2 2,358 2
Arts, entertainment, and recreation 1,107 1 1,189 1
Other services 1,911 2 2,051 2
Administrative and waste management services 1,424 1 1,396 1
Transportation and warehousing 1,302 1 1,147 1
Consumer products manufacturing 1,303 1 1,192 1
Automotive 1,208 1 1,172 1
Educational services 553 - 573 -
Chemicals 939 1 896 1
Real estate and rental and leasing 968 1 739 -
All other(1) 375 - 123 -
Total commercial and industrial 45,307 35 43,713 34
Real estate and rental and leasing 12,807 10 12,773 10
Accommodation and food services 615 - 605 -
Finance and insurance 624 1 624 1
All other(1) 222 - 262 -
Total commercial real estate 14,268 11 14,264 11
Total leases 1,529 1 1,586 1
Total commercial(2) $61,104 47 % $59,563 46 %
(1) Deferred charges and costs are presented in All Others. (2) Excluding PPP loans of
Retail Lending Asset Quality
For retail loans, we utilize credit scores provided by FICO, which are generally refreshed on a quarterly basis, and the loan's payment and delinquency status to monitor credit quality. Management believes FICO credit scores are considered the strongest indicator of credit losses over the contractual life of the loan as the scores are based on current and historical national industry-wide consumer level credit performance data, and assist management in predicting the borrower's future payment performance. The largest portion of the retail portfolio is represented by borrowers located in theNew England , Mid-Atlantic and Midwest regions, although we have continued to lend selectively in areas outside the footprint primarily in auto finance and education lending.Citizens Financial Group, Inc. | 18 --------------------------------------------------------------------------------
Table 13: Analysis of the personal loan portfolio
March 31, 2022 December 31, 2021
Days Past Due and Accruing Days Past Due and Accruing
(dollars in millions) Current 30-59 60-89 90+ Nonaccrual Current 30-59 60-89 90+ Nonaccrual
Residential mortgages(1) 95.32 % 0.24 % 0.17 % 3.27 % 1.00 % 96.03 % 0.45 % 0.23 % 2.41 % 0.88 %
Home equity 97.60 0.34 0.11 - 1.95 97.75 0.32 0.10 - 1.83
Automobile 98.60 0.83 0.21 - 0.36 98.45 0.90 0.27 - 0.38
Education 99.53 0.20 0.08 0.02 0.17 99.45 0.26 0.10 0.01 0.18
Other retail 97.89 1.10 0.40 0.25 0.36 98.18 0.74 0.42 0.29 0.37
Total retail 97.40 % 0.44 % 0.17 % 1.16 % 0.83 % 97.69 % 0.51 % 0.20 % 0.83 % 0.77 %
(1) 90+ days past due and accruing includes $792 million and $544 million of
loans fully or partially guaranteed by the FHA, VA , and USDA at March 31, 2022
and December 31, 2021 , respectively.
For more information on the aging of accrued and unaccrued personal loans, see Note 5.
Table 14: Retail Asset Quality Metrics
March 31, 2022 December 31, 2021 Average refreshed FICO for total portfolio 768 768 CLTV ratio for secured real estate(1) 54 % 56 % Nonaccrual retail loans as a percentage of total retail 0.83 % 0.77 % (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.
Distressed Debt Restructurings
In the first quarter of 2020, we adopted the CARES Act and interagency guidance issued by the bank regulatory agencies which provide that COVID-19-related modifications to retail and commercial loans that met certain eligibility criteria are exempt from classification as a TDR. We generally do not consider payment deferrals and forbearance plans established due to the COVID-19 pandemic and under the CARES Act to be TDRs. Relief provisions granted under the CARES Act, including the TDR classification exemption for certain eligible loans, expired onDecember 31, 2021 .
For more information on TORs, see Note 6 of our 2021 Form 10-K.
Table 15: Restructurings of distressed debt at maturity and not at maturity
March 31, 2022
As a % of Accruing TDRs
30-89 Days 90+ Days Past
(dollars in millions) Accruing Past Due Due Nonaccrual Total
Commercial and industrial $189 0.2 % - % $80 $269
Commercial real estate 1 - - 9 10
Total commercial 190 0.2 - 89 279
Residential mortgages(1) 479 2.5 27.5 78 557
Home equity 169 0.3 - 91 260
Automobile 8 0.2 - 17 25
Education 110 0.4 0.1 11 121
Other retail 18 0.2 - 2 20
Total retail 784 3.6 27.6 199 983
Total $974 3.8 % 27.6 % $288 $1,262
Citizens Financial Group, Inc. | 19
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December 31, 2021
As a % of Accruing TDRs
30-89 Days 90+ Days Past
(dollars in millions) Accruing Past Due Due Nonaccrual Total
Commercial and industrial $196 - % - % $74 $270
Commercial real estate 1 - - 9 10
Total commercial 197 - - 83 280
Residential mortgages(1) 295
2.9 12.0 42 337 Home equity 183 0.6 - 74 257 Automobile 8 0.2 - 22 30 Education 112 0.5 0.1 11 123 Other retail 20 0.2 - 2 22 Total retail 618 4.5 12.1 151 769 Total$815 4.5 % 12.1 %$234 $1,049 (1) Includes$265 million and$98 million in 90+ days past due and accruing that are fully or partially guaranteed by the FHA,VA , andUSDA atMarch 31, 2022 andDecember 31, 2021 , respectively.
Deposits
Table 16: Composition of Deposits (in millions) March 31, 2022 December 31, 2021 Change Percent Demand$50,113 $49,443 $670 1 % Money market 45,342 47,216 (1,874) (4) Checking with interest 32,417 30,409 2,008 7 Savings 26,104 22,030 4,074 18 Term 4,800 5,263 (463) (9) Total deposits$158,776 $154,361 $4,415 3 % Total deposits as ofMarch 31, 2022 increased$4.4 billion , or 3%, to$158.8 billion , from$154.4 billion as ofDecember 31, 2021 , driven by the$6.3 billion impact of the HSBC transaction, partially offset by seasonal impacts as well as continued normalization from elevated liquidity levels. Citizens Access®, our national digital platform, had$4.2 billion in deposits as ofMarch 31, 2022 , down from$4.4 billion as ofDecember 31, 2021 .
Borrowed funds
Long-term borrowed funds of$5.9 billion as ofMarch 31, 2022 decreased$1.0 billion fromDecember 31, 2021 driven by the redemption of CBNA senior notes during the quarter. For more information regarding our borrowed funds, see "-Liquidity" and Note 8.
CAPITAL AND REGULATORY MATTERS
As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association primarily regulated by the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. For more information, see "Regulation and Supervision" in our 2021 Form 10-K.
Capital adequacy process
Our assessment of capital adequacy begins with our board-approved risk appetite and risk management framework. This framework provides for the identification, measurement and management of material risks. There have been no significant changes to our capital adequacy risk appetite and risk management framework as described in "-Capital and Regulatory Matters" in our 2021 Form 10-K. Under the FRB's Tailoring Rules, Category IV firms, such as us, are subject to biennial supervisory stress testing and are exempt from company-run stress testing and related disclosure requirements. The FRB supervises Category IV firms on an ongoing basis, including evaluation of the capital adequacy and capital planning processes during off-cycle years. Annually, the FRB requires us to submit a capital plan approved by our board of directors or one of its committees. Our annual capital plan is due each year in April. We submitted our 2022 Capital Plan to the FRB onApril 4, 2022 . For more information, see the "Tailoring of Prudential Requirements" section in Item 1 of our 2021 Form 10-K.Citizens Financial Group, Inc. | 20 --------------------------------------------------------------------------------
Under the Crisis Capital Buffer (“SCB”), the FRB will not object to capital plans on quantitative grounds and each company is required to maintain capital ratios above the sum of its minimum requirements and SCB to avoid restrictions on capital distributions and discretionary bonuses. Payments.
For Category IV firms, like us, the SCB will be re-calibrated with each biennial supervisory stress test and updated annually to reflect our planned common stock dividends. In addition, Category IV firms may elect to participate in the supervisory stress test and receive an updated SCB requirement in a year in which they are not subject to the supervisory stress test. Our SCB requirement effectiveOctober 1, 2021 , throughSeptember 30, 2022 , is 3.4%. We are subject to the 2022 supervisory stress test conducted by the FRB and expect to receive an updated SCB from the FRB later this year. OnMarch 22, 2022 , the FRB approved our application to acquire Investors and indicated that it will use the 2023 stress test to recalculate our SCB to incorporate the effects of the Investors acquisition into our capital requirements. Regulations relating to capital planning, regulatory reporting, stress testing and capital buffer requirements applicable to firms like us are presently subject to rule-making and potential further guidance and interpretation by the applicable federal regulators. We will continue to evaluate the impact of these and any other prudential regulatory changes, including their potential resultant changes in our regulatory and compliance costs and expenses.
For more information, see the “Regulation and Oversight” and “-Capital and Regulatory Matters” sections in our 2021 Form 10-K.
Regulatory capital ratios and capital composition
Under the currentU.S. Basel III capital framework, we and our banking subsidiary, CBNA, 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%. As a bank holding company, our SCB of 3.4% is imposed on top of the three minimum risk-based capital ratios listed above and a CCB of 2.5% is imposed on top of the three minimum risk-based capital ratios listed above for our banking subsidiary. Under theU.S. Basel III rules, the CET1 deduction threshold for MSRs, certain deferred tax assets and investments in the capital of unconsolidated financial institutions is 25%. As ofMarch 31, 2022 , we did not meet the threshold for these additional capital deductions. MSRs or certain deferred tax assets not deducted from CET1 capital are assigned a 250% risk weight and investments in the capital of unconsolidated financial institutions not deducted from CET1 capital are assigned an exposure category risk weight. In reaction to the COVID-19 pandemic, the FRB and the other federal banking regulators adopted a final rule relative to regulatory capital treatment of ACL under CECL. This rule allows electing banking organizations to delay the estimated impact of CECL on regulatory capital for a two-year period endingDecember 31, 2021 , followed by a three-year transition period endingDecember 31, 2024 . The three-year transition period will phase-in the aggregate amount of capital benefit provided during the initial two-year delay. OnDecember 31, 2021 , the aggregate amount of capital benefit was$384 million . The reduction in the capital benefit in 2022 is$96 million , or 6 basis points. For additional discussion of theU.S. Basel III capital framework and its related application, see "Regulation and Supervision" in our 2021 Form 10-K. The table below presents our actual regulatory capital ratios under theU.S. Basel III Standardized rules:
Table 17: Regulatory capital ratios under the
March 31, 2022 December 31, 2021 Required Minimum (in millions, except ratio data) Amount Ratio Amount Ratio Capital Ratios(1) CET1 capital$15,643 9.7 %$15,656 9.9 % 7.9 % Tier 1 capital 17,657 10.9 17,670 11.1 9.4 Total capital 20,301 12.5 20,244 12.7 11.4 Tier 1 leverage 17,657 9.6 17,670 9.7 4.0 Risk-weighted assets 161,859 158,831 Quarterly adjusted average assets 183,089 181,800 (1) Required "Minimum Capital Ratios" are: CET1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%. "Minimum Capital Ratios" also include a SCB of 3.4%; N/A to Tier 1 leverage. Citizens Financial Group, Inc. | 21 -------------------------------------------------------------------------------- AtMarch 31, 2022 , our CET1 capital, tier 1 capital and total capital ratios were 9.7%, 10.9% and 12.5%, respectively, as compared with 9.9%, 11.1% and 12.7%, respectively, as ofDecember 31, 2021 . The CET1 and tier 1 capital ratios decreased driven by$3.0 billion of RWA growth, dividends as described in "-Capital Transactions" below, higher estimated goodwill and intangibles related to the HSBC transaction and a decrease in the modified CECL transition amount as a result of entering the CECL three-year transition period, partially offset by net income for the three months endedMarch 31, 2022 . The total capital ratio decreased due to the changes in the CET1 capital ratio described above and lower AACL partially offset by a reduction in the modified AACL transition amount as a result of entering the CECL three-year transition period. AtMarch 31, 2022 , our CET1 capital, tier 1 capital and total capital ratios were approximately 180 basis points, 150 basis points and 110 basis points, respectively, above their regulatory minimums plus our SCB. All ratios remained well above theU.S. Basel III minimums. Both the Company and CBNA are subject to the standardized approach for determining RWA. AtMarch 31, 2022 RWA totaled$161.9 billion , up$3.0 billion fromDecember 31, 2021 , driven by higher commercial and consumer loans including higher home lending loans resulting from the HSBC transaction, MSRs, derivative valuations and market risk, partially offset by lower loans held for sale and commercial commitments.
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