Citizens Financial (CFG) - 2022 Q2 - Quarterly Report

GLOSSARY OF ACRONYMS AND TERMS This section defines key acronyms and terms used throughout the financial report, ensuring clarity and consistent understanding of specialized terminology PART I. FINANCIAL INFORMATION This part provides comprehensive financial data, management's analysis, and the unaudited interim consolidated financial statements for the reporting period MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes the company's financial performance, condition, and operational results for the three and six months ended June 30, 2022, including key metrics and acquisition impacts Forward-Looking Statements This section outlines potential future events, including share repurchases, dividends, and the impact of global disruptions, subject to various economic and political risks - The document contains forward-looking statements regarding potential future share repurchases, dividends, and the effects of the COVID-19 disruption and Russia's invasion of Ukraine on business, operations, financial performance, and prospects[16] - Key risk factors that could cause actual results to differ materially include negative economic and political conditions, the rate of economic growth, ability to implement business strategy (including integrations), and changes in interest rates and market liquidity[16] Introduction Citizens Financial Group, Inc. is a large financial institution with $226.7 billion in assets as of June 30, 2022, expanding through recent acquisitions - Citizens Financial Group, Inc. is a large financial institution with $226.7 billion in assets as of June 30, 2022, offering a broad range of retail and commercial banking products and services[19] - The company completed several acquisitions in early 2022, including HSBC East Coast branches (February 18, 2022), Investors Bancorp (April 6, 2022), and DH Capital (June 8, 2022), to expand its physical presence and corporate advisory capabilities[19] Financial Performance Net income significantly decreased for both the three and six months ended June 30, 2022, primarily due to notable items, despite revenue growth - Net income decreased significantly for both the three and six months ended June 30, 2022, compared to the same periods in 2021, primarily due to notable items totaling $231 million and $287 million, respectively[22] Key Financial Highlights (GAAP vs. Underlying) | Metric | Three Months Ended June 30, 2022 (GAAP) | Three Months Ended June 30, 2022 (Underlying) | Six Months Ended June 30, 2022 (GAAP) | Six Months Ended June 30, 2022 (Underlying) | |:-------------------------------------------|:----------------------------------------|:----------------------------------------------|:--------------------------------------|:--------------------------------------------| | Net Income Available to Common Stockholders| $332 million | $563 million | $728 million | $1.0 billion | | Diluted EPS | $0.67 | $1.14 | $1.58 | $2.21 | | Total Revenue | $2.0 billion (up 24% YoY) | $2.03 billion (up 26% YoY) | $3.6 billion (up 11.5% YoY) | $3.68 billion (up 12.5% YoY) | | Efficiency Ratio | 65.3% | 58.2% | 66.2% | 60.9% | | ROTCE | 9.1% | 15.5% | 10.2% | 14.2% | | Tangible Book Value per Common Share | $29.14 (down 16% from Dec 31, 2021) | N/A | N/A | N/A | Results of Operations This section details the company's operational results, including net interest income, noninterest income, expenses, and provision for credit losses, for the reporting periods Net Interest Income Net interest income, the company's largest revenue source, increased significantly for both the three and six months ended June 30, 2022, driven by higher interest-earning assets and improved yields, partially offset by increased interest-bearing liabilities Net Interest Income and Margin (FTE) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (YoY) | |:-------------------------------------|:---------------------------------|:---------------------------------|:-------------| | Net Interest Income (FTE) | $1,507 million | $1,126 million | +$381 million| | Net Interest Margin (FTE) | 3.04% | 2.72% | +32 bps | | Average Interest-Earning Assets | $198,677 million | $166,333 million | +$32,344 million| | Average Interest-Bearing Liabilities | $136,390 million | $111,222 million | +$25,168 million| | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change (YoY) | |:-------------------------------------|:---------------------------------|:---------------------------------|:-------------| | Net Interest Income (FTE) | $2,656 million | $2,246 million | +$410 million| | Net Interest Margin (FTE) | 2.91% | 2.74% | +17 bps | | Average Interest-Earning Assets | $184,058 million | $165,433 million | +$18,625 million| | Average Interest-Bearing Liabilities | $124,529 million | $111,271 million | +$13,258 million| - The increase in net interest income was primarily driven by the HSBC transaction and Investors acquisition, leading to growth in loans and investments[31] Noninterest Income Noninterest income saw a modest increase for the three months ended June 30, 2022, but a decrease for the six-month period, influenced by varied performance across different fee categories and mark-to-market losses Noninterest Income Performance | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (YoY) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change (YoY) | |:---------------------------------------|:---------------------------------|:---------------------------------|:-------------|:-------------------------------|:-------------------------------|:-------------| | Total Noninterest Income | $494 million | $485 million | +2% | $992 million | $1,027 million | -3% | | Capital Markets Fees | $88 million | $91 million | -3% | $181 million | $172 million | +5% | | Service Charges and Fees | $108 million | $100 million | +8% | $206 million | $199 million | +4% | | Mortgage Banking Fees | $72 million | $85 million | -15% | $141 million | $250 million | -44% | | Card Fees | $71 million | $64 million | +11% | $131 million | $119 million | +10% | | Trust and Investment Services Fees | $66 million | $60 million | +10% | $127 million | $118 million | +8% | | Foreign Exchange & Derivative Products | $60 million | $28 million | +114% | $111 million | $56 million | +98% | | Other Income | ($12) million | $16 million | NM | $12 million | $31 million | -61% | - Mortgage banking fees declined due to lower gain-on-sale margins and production volumes, while foreign exchange and derivative products revenue significantly increased due to higher client hedging activity[31] - Other income decreased, primarily driven by $31 million in mark-to-market losses on loans acquired from Investors classified as held for sale (LHFS)[31] Noninterest Expense Noninterest expense increased substantially for both periods, primarily due to integration-related costs from recent acquisitions and higher operational expenses Noninterest Expense Performance | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (YoY) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change (YoY) | |:-----------------------------|:---------------------------------|:---------------------------------|:-------------|:-------------------------------|:-------------------------------|:-------------| | Total Noninterest Expense | $1,305 million | $991 million | +32% | $2,411 million | $2,009 million | +20% | | Salaries and Employee Benefits | $683 million | $524 million | +30% | $1,277 million | $1,072 million | +19% | | Outside Services | $189 million | $137 million | +38% | $358 million | $276 million | +30% | | Other Operating Expense | $153 million | $93 million | +65% | $263 million | $184 million | +43% | - The increases were driven by $104 million (three months) and $141 million (six months) of integration-related costs, higher salaries and employee benefits, and increased FDIC insurance, travel, and advertising costs[34] Provision for Credit Losses The company recorded a significant provision for credit losses in Q2 and H1 2022, a reversal from the benefit recorded in the prior year, primarily due to loan growth from acquisitions and a slightly deteriorated macroeconomic outlook Provision for Credit Losses | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:-------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Provision (benefit) for credit losses | $216 million | ($213) million | $219 million | ($353) million | - The provision includes a 'double count' of non-PCD loan CECL provision expense of $145 million (three months) and $169 million (six months) related to the Investors acquisition and HSBC transaction[35] - Increased provision expense reflects loan growth, including acquisitions, and a slight deterioration in the macroeconomic outlook, partially offset by strong credit performance[35] Income Tax Expense Income tax expense decreased for both periods due to decreased taxable income, while the effective income tax rate increased due to higher state taxes and non-deductible expenses from acquisitions Income Tax Expense and Effective Rate | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Income Tax Expense | $114 million | $183 million | $230 million | $353 million | | Effective Income Tax Rate | 23.8% | 22.0% | 22.7% | 21.9% | Business Operating Segments The company operates with two main segments: Consumer Banking and Commercial Banking, both experiencing growth in net interest income and assets due to acquisitions, with varied noninterest income performance Segment Performance (Three Months Ended June 30, 2022 vs. 2021) | Metric (in millions) | Consumer Banking 2022 | Consumer Banking 2021 | Commercial Banking 2022 | Commercial Banking 2021 | |:---------------------|:----------------------|:----------------------|:------------------------|:------------------------| | Net Interest Income | $995 | $897 | $534 | $419 | | Noninterest Income | $280 | $283 | $221 | $178 | | Total Revenue | $1,275 | $1,180 | $755 | $597 | | Net Income | $265 | $286 | $341 | $265 | | Average Total Assets | $88,881 | $75,600 | $78,638 | $57,527 | | Average Loans & Leases | $83,248 | $71,389 | $74,172 | $54,758 | | Deposits | $118,482 | $100,933 | $51,575 | $44,049 | Segment Performance (Six Months Ended June 30, 2022 vs. 2021) | Metric (in millions) | Consumer Banking 2022 | Consumer Banking 2021 | Commercial Banking 2022 | Commercial Banking 2021 | |:---------------------|:----------------------|:----------------------|:------------------------|:------------------------| | Net Interest Income | $1,852 | $1,760 | $950 | $840 | | Noninterest Income | $537 | $634 | $434 | $348 | | Total Revenue | $2,389 | $2,394 | $1,384 | $1,188 | | Net Income | $474 | $588 | $612 | $476 | | Average Total Assets | $83,247 | $75,443 | $69,927 | $57,632 | | Average Loans & Leases | $78,268 | $70,792 | $66,134 | $54,786 | | Deposits | $111,610 | $99,067 | $48,067 | $44,012 | - Consumer Banking's net interest income increased due to higher net interest margin and asset growth from acquisitions, while noninterest income decreased due to lower mortgage banking fees[40] - Commercial Banking's net interest income and noninterest income both increased, driven by asset growth from acquisitions and higher foreign exchange and derivative product revenue[43] Analysis of Financial Condition This section provides a detailed analysis of the company's balance sheet, including securities, loans, deposits, borrowed funds, capital, and liquidity, highlighting changes from recent acquisitions Securities The securities portfolio increased in fair value, largely due to the Investors acquisition and net purchases, but was partially offset by increased unrealized losses from higher interest rates Securities Portfolio (June 30, 2022 vs. December 31, 2021) | Category | June 30, 2022 (Fair Value) | December 31, 2021 (Fair Value) | Change |\ |:---------------------------------------------|:---------------------------|:-------------------------------|:-------|\ | Total Debt Securities AFS | $24,961 million | $26,067 million | -$1,106 million |\ | Total Debt Securities HTM | $9,361 million | $2,289 million | +$7,072 million |\ | Total Debt Securities AFS and HTM | $34,322 million | $28,356 million | +$5,966 million |\ | HTM Securities as % of Total Securities | 27% | N/A | N/A | - The fair value of the debt securities portfolio increased by $6.0 billion from December 31, 2021, including $3.8 billion from the Investors acquisition, but was partially offset by a $2.8 billion increase in unrealized losses due to higher interest rates[44] - The amortized cost of the HTM portfolio increased by $7.3 billion, primarily due to a $7.8 billion transfer from the AFS portfolio in Q2 2022, increasing HTM's ratio to total securities to approximately 27%[44] Loans and Leases Total loans and leases significantly increased by $28.0 billion, driven by the Investors acquisition and HSBC transaction, with substantial growth in both commercial and retail portfolios Composition of Loans and Leases (June 30, 2022 vs. December 31, 2021) | Category | June 30, 2022 (in millions) | December 31, 2021 (in millions) | Change (YoY) | Percent Change | |:-----------------------------|:----------------------------|:--------------------------------|:-------------|:---------------| | Commercial and Industrial | $51,801 | $44,500 | $7,301 | 16% | | Commercial Real Estate | $28,070 | $14,264 | $13,806 | 97% | | Total Commercial | $81,445 | $60,350 | $21,095 | 35% | | Residential Mortgages | $29,088 | $22,822 | $6,266 | 27% | | Home Equity | $13,122 | $12,015 | $1,107 | 9% | | Total Retail | $74,727 | $67,813 | $6,914 | 10% | | Total Loans and Leases | $156,172 | $128,163 | $28,009 | 22% | - The $28.0 billion increase in total loans and leases was primarily due to the Investors acquisition and HSBC transaction, resulting in 35% growth in commercial and 10% in retail[44] Allowance for Credit Losses and Nonaccrual Loans and Leases The Allowance for Credit Losses (ACL) increased, reflecting loan growth from acquisitions and a slightly deteriorated macroeconomic outlook, while nonaccrual loans also rose due to the Investors acquisition Allowance for Credit Losses (ACL) and Coverage Ratios | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | Change |\ |:-------------------------------------------|:----------------------------|:--------------------------------|:-------|\ | Total Allowance for Credit Losses (ACL) | $2,147 | $1,934 | +$213 |\ | ACL to Total Loans and Leases | 1.37% | 1.51% | -14 bps|\ | Nonaccrual Loans and Leases | $839 | $702 | +$137 |\ | Nonaccrual Loans and Leases to Total Loans | 0.54% | 0.55% | -1 bp | - The increase in ACL reflects loan growth, including the Investors acquisition, and a slight deterioration in the macroeconomic outlook, partially offset by strong credit performance[35] - The increase in nonaccrual loans and leases is primarily due to the impact of the Investors acquisition[47] - Net charge-offs decreased by $128 million (54%) in the first half of 2022 compared to 2021, with annualized net charge-offs at 0.15% of average loans and leases, down 24 basis points[49] Deposits Total deposits increased significantly by $24.6 billion, primarily driven by the Investors acquisition and HSBC transaction, expanding the company's funding base Composition of Deposits (June 30, 2022 vs. December 31, 2021) | Category | June 30, 2022 (in millions) | December 31, 2021 (in millions) | Change (YoY) | Percent Change | |:-------------------------|:----------------------------|:--------------------------------|:-------------|:---------------| | Total Deposits | $178,925 | $154,361 | $24,564 | 16% | | Demand | $54,169 | $49,443 | $4,726 | 10% | | Checking with Interest | $39,611 | $30,409 | $9,202 | 30% | | Savings | $27,959 | $22,030 | $5,929 | 27% | | Term | $9,123 | $5,263 | $3,860 | 73% | - The increase in total deposits was driven by $25.8 billion of period-end balances from the Investors acquisition and the HSBC transaction[59] Borrowed Funds Total borrowed funds increased substantially by $11.2 billion, primarily due to an increase in FHLB borrowings related to the Investors acquisition and funding of loan and security growth Total Borrowed Funds (June 30, 2022 vs. December 31, 2021) | Category | June 30, 2022 (in millions) | December 31, 2021 (in millions) | Change |\ |:-------------------------|:----------------------------|:--------------------------------|:-------|\ | Total Borrowed Funds | $18,200 | $7,000 | +$11,200 |\ | FHLB Borrowings | N/A | N/A | Increased | - The increase was driven by FHLB borrowings acquired from Investors and used for funding loan and security growth[60] Capital and Regulatory Matters The company's regulatory capital ratios remained well above minimums, despite decreases in CET1 and Tier 1 ratios driven by RWA growth and acquisition-related goodwill Regulatory Capital Ratios (June 30, 2022 vs. December 31, 2021) | Ratio | June 30, 2022 | December 31, 2021 | Required Minimum Capital Ratios | |:-----------------------|:--------------|:------------------|:--------------------------------| | CET1 Capital Ratio | 9.6% | 9.9% | 7.9% | | Tier 1 Capital Ratio | 10.6% | 11.1% | 9.4% | | Total Capital Ratio | 12.3% | 12.7% | 11.4% | | Tier 1 Leverage Ratio | 9.3% | 9.7% | 4.0% | | Risk-Weighted Assets | $187,727 million | $158,831 million | N/A | - CET1 and Tier 1 capital ratios decreased due to $28.9 billion in RWA growth, higher goodwill and intangibles from acquisitions, and dividends, partially offset by common stock issued for the Investors acquisition and net income[67] - The company's preliminary Stress Capital Buffer (SCB) will remain at 3.4% for the period effective October 1, 2022, through September 30, 2023[64] - The Board of Directors increased common share repurchase authorization to $1.0 billion and declared a three-cent increase in the quarterly common stock dividend to $0.42 per share for Q3 2022[69] Liquidity The company maintains strong liquidity, with organically generated deposits as its primary funding source, and total available liquidity of approximately $66.5 billion as of June 30, 2022 - Organically generated deposits are the primary funding source, resulting in a consolidated period-end loan-to-deposits ratio (excluding LHFS) of 87.3%[83] Total Available Liquidity (June 30, 2022) | Component | Amount (in billions) | |:----------------------------------------|:---------------------| | Total Available Liquidity | $66.5 | | Contingent Liquidity | $39.8 | | Unencumbered High-Quality Liquid Securities | $26.9 | | Unused FHLB Capacity | $7.9 | | Cash Balances at FRB | $5.0 | | Available Discount Window Capacity | $26.7 | - The Parent Company's cash and cash equivalents totaled $2.0 billion at June 30, 2022, down from $2.3 billion at December 31, 2021[74] - CBNA issued $650 million of senior notes and redeemed $1.75 billion of senior notes during the six months ended June 30, 2022[75] Critical Accounting Estimates The Allowance for Credit Losses (ACL) is a critical accounting estimate, increasing to $2.1 billion at June 30, 2022, incorporating an economic forecast reflecting real GDP growth and unemployment - The ACL increased from $1.9 billion at December 31, 2021, to $2.1 billion at June 30, 2022[87] - The ACL determination uses an economic forecast for 2022 reflecting 2.1% real GDP growth and 4.3% average unemployment, incorporating the risk of a mild recession in the latter half of the year[87] - Qualitative adjustments to the ACL reflect macroeconomic risks from aggressive monetary tightening, fiscal policy contraction, and impacts of global commodity prices, wage increases, and supply-chain challenges[87] - A more pessimistic scenario (real GDP contraction for three consecutive quarters, 4.4% unemployment) would result in an approximate $175 million increase in the quantitative lifetime loss estimate, excluding qualitative adjustments[87] Accounting and Reporting Developments The company is monitoring new accounting standards for Troubled Debt Restructurings (TDRs) and Derivatives and Hedging, with adoption expected in 2023, primarily impacting disclosures - New accounting standards for Troubled Debt Restructurings (TDRs) eliminate separate recognition guidance and require enhanced disclosures for modifications to borrowers experiencing financial difficulty[89] - The effective date for the TDR pronouncement is January 1, 2023, and while not expected to have a material financial impact, it will significantly affect required disclosures[89] - A new standard for Derivatives and Hedging replaces the 'last-of-layer' method and allows for multiple layers in a closed portfolio of prepayable assets, also effective January 1, 2023[91] Risk Governance The company maintains a strong, integrated, and proactive approach to risk management, with the Board setting risk appetite and delegating oversight to various risk committees - The Board of Directors sets the risk appetite, and the Executive Risk Committee, chaired by the Chief Risk Officer, oversees enterprise-wide risk management[92] - No significant changes occurred in risk governance practices, framework, risk appetite, or credit risk during the period[92] Market Risk The company is exposed to market risk primarily from non-trading banking activities, mainly interest rate risk, actively managed through asset sensitivity and hedging strategies, with trading activities also monitored - The balance sheet is asset-sensitive, meaning net interest income benefits from rising interest rates. Asset sensitivity to a 200 basis point gradual increase in rates was 2.6% at June 30, 2022, down from 10.1% at December 31, 2021, due to rising base net interest income and hedging activities[94] Sensitivity of Net Interest Income to Interest Rate Changes | Basis Points Change in Interest Rates | Estimated % Change in Net Interest Income (June 30, 2022) | Estimated % Change in Net Interest Income (December 31, 2021) | |:--------------------------------------|:----------------------------------------------------------|:--------------------------------------------------------------| | Instantaneous +200 | 3.8% | 19.4% | | Instantaneous +100 | 1.6% | 10.2% | | Instantaneous -100 | (2.4)% | (8.5)% | | Gradual +200 | 2.6% | 10.1% | | Gradual +100 | 1.9% | 5.2% | | Gradual -100 | (0.9)% | (6.0)% | - The fair value of Mortgage Servicing Rights (MSRs) was $1.4 billion at June 30, 2022, with related derivative contracts totaling $9.8 billion notional amount used for economic hedging[97] Market Risk-Weighted Assets (in millions) | Market Risk Category | For the Period End June 30, 2022 | For the Period End June 30, 2021 | |:---------------------|:---------------------------------|:---------------------------------| | General VaR | $3 | $14 | | Total VaR | $3 | $14 | | Total Stressed VaR | $14 | $16 | | Market Risk-Weighted Assets | $955 | $1,350 | Non-GAAP Financial Measures and Reconciliations This section provides reconciliations of non-GAAP financial measures, or 'Underlying' results, to their most directly comparable GAAP measures, offering additional insights into operating performance - Underlying results exclude certain items (e.g., integration-related costs, TOP initiatives, mark-to-market losses on LHFS, initial provision for credit losses from acquisitions) that management does not consider indicative of ongoing financial performance[22][25][106] Non-GAAP Financial Measures Reconciliation (Three Months Ended June 30, 2022) | Metric | GAAP (in millions) | Notable Items (in millions) | Underlying (non-GAAP) (in millions) | |:-------------------------------------------|:-------------------|:----------------------------|:------------------------------------| | Noninterest Income | $494 | ($31) | $525 | | Total Revenue | $1,999 | ($31) | $2,030 | | Noninterest Expense | $1,305 | $125 | $1,180 | | Pre-provision Profit | $694 | $156 | $850 | | Provision (benefit) for Credit Losses | $216 | $145 | $71 | | Income before Income Tax Expense | $478 | ($301) | $779 | | Net Income | $364 | $231 | $595 | | Net Income Available to Common Stockholders| $332 | $231 | $563 | Non-GAAP Financial Measures Reconciliation (Six Months Ended June 30, 2022) | Metric | GAAP (in millions) | Notable Items (in millions) | Underlying (non-GAAP) (in millions) | |:-------------------------------------------|:-------------------|:----------------------------|:------------------------------------| | Noninterest Income | $992 | ($31) | $1,023 | | Total Revenue | $3,644 | ($31) | $3,675 | | Noninterest Expense | $2,411 | $173 | $2,238 | | Pre-provision Profit | $1,233 | $204 | $1,437 | | Provision (benefit) for Credit Losses | $219 | $169 | $50 | | Income before Income Tax Expense | $1,014 | ($373) | $1,387 | | Net Income | $784 | $287 | $1,071 | | Net Income Available to Common Stockholders| $728 | $287 | $1,015 | ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited interim consolidated financial statements, including balance sheets, statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes Consolidated Balance Sheets (unaudited) This table presents the company's financial position, detailing assets, liabilities, and stockholders' equity as of June 30, 2022, compared to December 31, 2021 Consolidated Balance Sheet Highlights (June 30, 2022 vs. December 31, 2021) | Item (in millions) | June 30, 2022 | December 31, 2021 | Change |\ |:-----------------------------------|:--------------|:------------------|:-------|\ | TOTAL ASSETS | $226,712 | $188,409 | +$38,303 |\ | Loans and leases | $156,172 | $128,163 | +$28,009 |\ | Net loans and leases | $154,208 | $126,405 | +$27,803 |\ | Debt securities available for sale | $24,961 | $26,067 | -$1,106 |\ | Debt securities held to maturity | $9,567 | $2,242 | +$7,325 |\ | Goodwill | $8,081 | $7,116 | +$965 |\ | TOTAL LIABILITIES | $202,384 | $164,989 | +$37,395 |\ | Total deposits | $178,925 | $154,361 | +$24,564 |\ | Long-term borrowed funds | $14,440 | $6,932 | +$7,508 |\ | TOTAL STOCKHOLDERS' EQUITY | $24,328 | $23,420 | +$908 |\ | Accumulated other comprehensive income (loss) | ($3,218) | ($665) | -$2,553 | Consolidated Statements of Operations (unaudited) This table summarizes the company's revenues, expenses, and net income for the three and six months ended June 30, 2022, compared to the same periods in 2021 Consolidated Statements of Operations Highlights (Three and Six Months Ended June 30, 2022 vs. 2021) | Item (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:-----------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Total interest income | $1,626 | $1,211 | $2,839 | $2,427 | | Total interest expense | $121 | $87 | $187 | $186 | | Net interest income | $1,505 | $1,124 | $2,652 | $2,241 | | Provision (benefit) for credit losses | $216 | ($213) | $219 | ($353) | | Total noninterest income | $494 | $485 | $992 | $1,027 | | Total noninterest expense | $1,305 | $991 | $2,411 | $2,009 | | NET INCOME | $364 | $648 | $784 | $1,259 | | Net income available to common stockholders | $332 | $616 | $728 | $1,204 | | Diluted earnings per common share | $0.67 | $1.44 | $1.58 | $2.81 | Consolidated Statements of Comprehensive Income (unaudited) This table presents the company's net income and other comprehensive income (loss) components for the three and six months ended June 30, 2022, compared to the prior year Consolidated Statements of Comprehensive Income Highlights (Three and Six Months Ended June 30, 2022 vs. 2021) | Item (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:-----------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net income | $364 | $648 | $784 | $1,259 | | Total other comprehensive income (loss), net of income taxes | ($960) | $30 | ($2,553) | ($321) | | Total comprehensive income (loss) | ($596) | $678 | ($1,769) | $938 | Consolidated Statements of Changes in Stockholders' Equity (unaudited) This table details the changes in stockholders' equity, including net income, other comprehensive income, stock issuance, and dividends, for the six months ended June 30, 2022 and 2021 Consolidated Statements of Changes in Stockholders' Equity Highlights (Six Months Ended June 30, 2022 vs. 2021) | Item (in millions) | Balance at January 1, 2022 | Balance at June 30, 2022 | Balance at January 1, 2021 | Balance at June 30, 2021 | |:-----------------------------------|:---------------------------|:-------------------------|:---------------------------|:-------------------------| | Total Stockholders' Equity | $23,420 | $24,328 | $22,673 | $23,199 | | Net Income | N/A | $784 | N/A | $1,259 | | Other Comprehensive Income (Loss) | N/A | ($2,553) | N/A | ($321) | | Issuance of Common Stock - Business Acquisition | N/A | $3,036 | N/A | N/A | | Dividends to Common Stockholders | N/A | ($360) | N/A | ($335) | | Treasury Stock Purchased | N/A | ($2) | N/A | ($95) | Consolidated Statements of Cash Flows (unaudited) This table summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021 Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, 2022 vs. 2021) | Item (in millions) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:-----------------------------------|:-------------------------------|:-------------------------------| | Net change due to operating activities | ($322) | ($110) | | Net change due to investing activities | ($13,362) | ($1,703) | | Net change due to financing activities | $11,040 | $1,721 | | Net change in cash and cash equivalents | ($2,644) | ($92) | | Cash and cash equivalents at end of period | $6,514 | $12,641 | - Investing activities saw a significant net outflow of $13.36 billion, primarily due to purchases of debt securities, acquisitions (net of cash acquired), and net increase in loans and leases[124] - Financing activities generated $11.04 billion, driven by increases in deposits and short-term and long-term borrowed funds, partially offset by dividends and treasury stock repurchases[124] Notes to Consolidated Financial Statements (unaudited) This section provides detailed explanations of the company's accounting policies, significant estimates, and specific financial items presented in the consolidated financial statements Note 1 - Basis of Presentation The unaudited interim Consolidated Financial Statements are prepared in accordance with GAAP interim reporting requirements and include all necessary adjustments for fair presentation - The interim financial statements are prepared in accordance with GAAP interim reporting requirements and include all normal recurring adjustments[127] - The Allowance for Credit Losses (ACL) is identified as a material estimate particularly susceptible to significant change in the near-term[127] Note 2 - Acquisitions Citizens completed three significant acquisitions in early 2022, expanding its physical presence, customer base, and corporate advisory capabilities, resulting in increased goodwill and preliminary asset/liability allocations - On February 18, 2022, CBNA acquired HSBC East Coast branches and national online deposit business, adding approximately $6.3 billion in deposits and $1.5 billion in loans, and increasing goodwill by $119 million[128] - On April 6, 2022, Citizens acquired Investors Bancorp for a combination of stock and cash, adding 154 branches and resulting in an increase of approximately 73.6 million basic and diluted shares[130] Preliminary Allocation of Investors Acquisition (April 6, 2022) | Item (in millions) | Amount |\ |:-----------------------------------|:-------|\ | Fair value of merger consideration | $3,410 |\ | Cash and equivalents acquired | $287 |\ | Investment securities acquired | $3,825 |\ | Net loans and leases acquired | $20,158|\ | Deposits assumed | $20,217|\ | Borrowed funds assumed | $4,097 |\ | Goodwill | $799 | - On June 8, 2022, Citizens acquired DH Capital, a private investment banking firm, further strengthening corporate advisory capabilities, with the financial impact not material to the Consolidated Balance Sheet[145] Note 3 - Securities The securities portfolio saw an increase in amortized cost and fair value, largely due to the Investors acquisition and a significant transfer of securities from AFS to HTM, despite rising unrealized losses Major Components of Securities (June 30, 2022 vs. December 31, 2021) | Category (in millions) | June 30, 2022 (Amortized Cost) | June 30, 2022 (Fair Value) | December 31, 2021 (Amortized Cost) | December 31, 2021 (Fair Value) | |:-------------------------------------------|:-------------------------------|:---------------------------|:-----------------------------------|:-------------------------------| | Total Debt Securities Available for Sale | $26,555 | $24,961 | $26,225 | $26,067 | | Total Debt Securities Held to Maturity | $9,567 | $9,361 | $2,242 | $2,289 | | Total Debt Securities (AFS & HTM) | $36,122 | $34,322 | $28,467 | $28,356 | - The amortized cost of debt securities held to maturity increased by $7.3 billion, primarily due to a $7.8 billion transfer from available-for-sale securities during Q2 2022[44][124] - Unrealized losses on debt securities available for sale increased to ($1,599) million at June 30, 2022, from ($377) million at December 31, 2021, reflecting non-credit-related factors driven by changes in interest rates[146][150] - The company does not intend to sell these debt securities and does not expect to incur credit losses on them, as unrealized losses are due to interest rate changes[150] Note 4 - Loans and Leases Total loans and leases, excluding those held for sale, significantly increased to $156.2 billion, driven by growth in both commercial and retail portfolios, with a substantial portion pledged as collateral Loans and Leases, Excluding LHFS (June 30, 2022 vs. December 31, 2021) | Category (in millions) | June 30, 2022 | December 31, 2021 | Change |\ |:-----------------------------|:--------------|:------------------|:-------|\ | Total loans and leases | $156,172 | $128,163 | +$28,009 |\ | Commercial and industrial | $51,801 | $44,500 | +$7,301 |\ | Commercial real estate | $28,070 | $14,264 | +$13,806 |\ | Residential mortgages | $29,088 | $22,822 | +$6,266 |\ | Home equity | $13,122 | $12,015 | +$1,107 | - Loans pledged as collateral for FHLB borrowing capacity totaled $38.5 billion at June 30, 2022, and loans pledged for the FRB discount window totaled $37.9 billion[152] Composition of Loans Held for Sale (LHFS) (June 30, 2022 vs. December 31, 2021) | Category (in millions) | June 30, 2022 | December 31, 2021 | |:-----------------------|:--------------|:------------------| | Loans held for sale at fair value | $1,377 | $2,733 | | Other loans held for sale | $2,078 | $735 | Note 5 - Allowance for Credit Losses, Nonaccrual Loans and Leases, and Concentrations of Credit Risk The Allowance for Credit Losses (ACL) increased to $2.1 billion, driven by acquisitions and a weaker macroeconomic outlook, with nonaccrual loans and TDRs also rising, though credit quality remained strong Summary of Changes in ACL (Six Months Ended June 30, 2022) | Item (in millions) | Commercial | Retail | Total |\ |:-------------------------------------------------|:-----------|:-------|:------|\ | Allowance for loan and lease losses, beginning of period | $821 | $937 | $1,758|\ | Allowance on PCD loans and leases at acquisition | $99 | $2 | $101 |\ | Net charge-offs | ($21) | ($87) | ($108)|\ | Provision expense for loans and leases | $88 | $125 | $213 |\ | Total allowance for credit losses, end of period | $1,153 | $994 | $2,147| - The increase in ACL was due to net charge-offs of $108 million, ACL on PCD loans and unfunded commitments at acquisition of $102 million, and a credit provision of $219 million[154] Nonaccrual Loans and Leases (June 30, 2022 vs. December 31, 2021) | Category (in millions) | June 30, 2022 | December 31, 2021 | Change |\ |:-----------------------------|:------------------|:------------------|:-------|\ | Nonaccrual loans and leases | $839 | $702 | +$137 |\ | Total commercial | $239 | $183 | +$56 |\ | Total retail | $600 | $519 | +$81 | - The increase in nonaccrual loans and leases is primarily due to the Investors acquisition[47] Troubled Debt Restructurings (TDRs) (Six Months Ended June 30, 2022 vs. 2021) | Item (in millions) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |\ |:-----------------------------|:-------------------------------|:-------------------------------|\ | Total TDRs (Amortized Cost Basis) | $421 | $295 |\ | Commercial TDRs | $58 | $60 |\ | Retail TDRs | $363 | $235 | Note 6 - Mortgage Banking and Other The company sells residential mortgages into the secondary market, retaining servicing rights, with the fair value of Mortgage Servicing Rights (MSRs) increasing and actively hedged using derivatives Residential Mortgage Loans Sold with Servicing Retained (in millions) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |\ |:-----------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------|\ | Cash proceeds from residential mortgage loans sold with servicing retained | $4,576 | $10,540 | $11,158 | $19,577 |\ | Gain on sales | $23 | $85 | $87 | $225 | Changes in MSRs Recorded Using Fair Value Method (in millions) | Item | June 30, 2022 | December 31, 2021 |\ |:-----------------------------------------|:--------------|:------------------|\ | Fair value at end of the period | $1,411 | $1,029 |\ | Weighted average life (years) | 8.5 | 6.4 |\ | Weighted average constant prepayment rate | 7.6% | 10.7% | - The unpaid principal balance of residential mortgage loans related to MSRs was $95.5 billion at June 30, 2022, up from $90.2 billion at December 31, 2021[174] - The company uses freestanding derivatives (e.g., interest rate swaps, swaptions, futures) to economically hedge changes in the fair value of MSRs[97] Note 7 - Goodwill and Intangible Assets Goodwill increased significantly due to recent acquisitions, primarily Investors and DH Capital, and was allocated to the Consumer and Commercial Banking segments, with intangible assets also rising Changes in Carrying Value of Goodwill (Six Months Ended June 30, 2022) | Segment (in millions) | Balance at December 31, 2021 | Business Acquisitions | Balance at June 30, 2022 |\ |:-----------------------------|:-----------------------------|:----------------------|:-------------------------|\ | Consumer Banking | $2,258 | $319 | $2,577 |\ | Commercial Banking | $4,858 | $646 | $5,504 |\ | Total | $7,116 | $965 | $8,081 | - Goodwill increased by $965 million, primarily from the Investors and DH Capital acquisitions and the HSBC transaction, reflecting expected synergies and increased market share[181] Summary of Carrying Value of Intangible Assets (June 30, 2022 vs. December 31, 2021) | Category (in millions) | June 30, 2022 (Net) | December 31, 2021 (Net) |\ |:-----------------------|:--------------------|:------------------------|\ | Core deposits | $137 | $— |\ | Acquired technology | $6 | $10 |\ | Acquired relationships | $36 | $39 |\ | Naming rights | $26 | $7 |\ | Total | $211 | $64 | - Intangible assets from the Investors acquisition and HSBC transaction, consisting of core deposits and naming rights, are the primary drivers of the increase[182] Note 8 - Variable Interest Entities Citizens is involved in various Variable Interest Entities (VIEs), including investments in affordable housing and renewable energy, with maximum exposure to loss limited to carrying amounts Summary of VIE Investments (June 30, 2022 vs. December 31, 2021) | Item (in millions) | June 30, 2022 | December 31, 2021 |\ |:-------------------------------------------------|:--------------|:------------------|\ | Lending to special purpose entities (in loans and leases) | $3,341 | $2,646 |\ | LIHTC investment (in other assets) | $2,175 | $1,978 |\ | LIHTC unfunded commitments (in other liabilities) | $1,045 | $927 |\ | Asset-backed investments (in HTM securities) | $646 | $737 |\ | Renewable energy investments (in other assets) | $401 | $429 | - The company's maximum exposure to loss from VIEs is limited to the balance sheet carrying amount of its investments, unfunded commitments, and outstanding principal balance of loans[183] Net Benefit from Affordable Housing Tax Credit Investments (in millions) | Item | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 |\ |:-----------------------------------------|:---------------------------------|:-------------------------------|\ | Total tax benefits included in income tax expense | $76 | $152 |\ | Less: Amortization | $65 | $129 |\ | Net benefit | $11 | $23 | Note 9 - Borrowed Funds Total borrowed funds increased significantly, driven by a substantial rise in FHLB advances and new subordinated debt issuances, while maintaining substantial unused secured borrowing capacity Summary of Long-Term Borrowed Funds (June 30, 2022 vs. December 31, 2021) | Item (in millions) | June 30, 2022 | December 31, 2021 | Change |\ |:-----------------------------------|:--------------|:------------------|:-------|\ | Total long-term borrowed funds | $14,440 | $6,932 | +$7,508 |\ | FHLB advances | $8,269 | $19 | +$8,250 |\ | Parent Company subordinated debt | $1,398 | $968 | +$430 |\ | CBNA senior unsecured notes | $2,695 | $2,531 | +$164 | - Short-term borrowed funds increased from $74 million at December 31, 2021, to $3.8 billion at June 30, 2022[186] - The company issued $400 million of 5.641% fixed-rate reset subordinated notes in Q2 2022 and $650 million of 4.119% fixed-to-floating rate senior notes[69][75][189] - Unused secured borrowing capacity was approximately $61.5 billion at June 30, 2022, including unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity[189] Note 10 - Derivatives Citizens uses various derivative instruments for hedging and customer needs, not for speculation, including interest rate, foreign exchange, and commodity contracts, with a significant portion used for economic hedging Derivative Instruments (June 30, 2022 vs. December 31, 2021) | Item (in millions) | June 30, 2022 (Notional Amount) | June 30, 2022 (Derivative Assets) | June 30, 2022 (Derivative Liabilities) | December 31, 2021 (Notional Amount) | December 31, 2021 (Derivative Assets) | December 31, 2021 (Derivative Liabilities) | |:-----------------------------------|:--------------------------------|:----------------------------------|:---------------------------------------|:------------------------------------|:--------------------------------------|:-------------------------------------------| | Derivatives designated as hedging instruments (Interest rate contracts) | $22,930 | $100 | $1 | $23,450 | $12 | $2 | | Derivatives not designated as hedging instruments (Total) | N/A | $2,271 | $3,002 | N/A | $1,497 | $920 | | Total net derivative fair values | N/A | $1,669 | $1,004 | N/A | $1,216 | $197 | - The company uses interest rate swap contracts to manage interest rate exposure on floating-rate assets and wholesale funding, and to hedge fixed-rate debt issuances[97] - For cash flow hedges, approximately ($334) million in pre-tax net losses on derivative instruments are expected to be reclassified from OCI to net interest income over the next 12 months[197] - Economic hedges include those related to offsetting customer derivatives, residential mortgage loan derivatives, and derivatives to hedge the residential MSR portfolio[200] Note 11 - Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (AOCI) significantly decreased to a loss of ($3,218) million at June 30, 2022, primarily driven by substantial net unrealized losses on debt securities and derivative instruments Changes in AOCI (Six Months Ended June 30, 2022 vs. 2021) | Item (in millions) | Balance at January 1, 2022 | Balance at June 30, 2022 | Balance at January 1, 2021 | Balance at June 30, 2021 |\ |:-------------------------------------------------|:---------------------------|:-------------------------|:---------------------------|:-------------------------|\ | Total AOCI | ($665) | ($3,218) | ($60) | ($381) |\ | Net Unrealized Gains (Losses) on Derivatives | ($161) | ($862) | ($11) | ($38) |\ | Net Unrealized Gains (Losses) on Debt Securities | ($156) | ($2,016) | $380 | $78 | - The significant decrease in AOCI was primarily due to net unrealized losses on debt securities of ($1,860) million and net unrealized losses on der