Citizens Financial (CFG) - 2023 Q3 - Quarterly Report

SEC Filing Information This section provides details on the company's filer status, registrant information, and common stock outstanding for the quarterly period. Filer Status and Registrant Details Citizens Financial Group, Inc. is a large accelerated filer, with 466 million shares outstanding for the quarter ended September 30, 2023. - Citizens Financial Group, Inc. is classified as a large accelerated filer[2] - The report covers the quarterly period ended September 30, 2023[4] Common Stock Outstanding | Date | Shares Outstanding | | :--------------- | :----------------- | | October 26, 2023 | 466,222,967 | Glossary of Acronyms and Terms This section provides a comprehensive list of common acronyms and terms used throughout the financial reporting to aid reader comprehension. Common Acronyms and Terms This section defines common acronyms and terms used in the financial reporting to aid reader comprehension. - The glossary defines terms such as AACL, ACL, AFS, ALLL, ALM, AOCI, ASU, ATM, Board, bps, CBNA, CCAR, CCB, CECL, CET1, CLTV, COVID, EPS, EVE, Exchange Act, Fannie Mae, FCA, FDIC, FDM, FHA, FHLB, FICO, FRB, Freddie Mac, FTE, FTP, GAAP, GDP, Ginnie Mae, GSE, HSBC, HSBC transaction, HTM, Investors, JMP, LHFS, LIBOR, LIHTC, M&A, MD&A, Mid-Atlantic, Midwest, Modified AACL transition, Modified CECL transition, MSRs, New England, NMTC, OCC, OCI, Operating Leverage, Parent Company, PCD, PPP, ROTCE, RPA, RWA, SBA, SCB, SEC, SOFR, SVaR, TBAs, TDR, Tier 1 capital ratio, Tier 1 leverage ratio, TOP, Total capital ratio, USDA, VA, and VIE[7][8] Table of Contents This section outlines the main chapters and sub-sections of the quarterly report, providing a roadmap of its content. Report Structure Overview This section outlines the quarterly report's main chapters and sub-sections, providing a roadmap of its content. - The table of contents lists key sections such as Forward-Looking Statements, Introduction, Financial Performance, Results of Operations, Analysis of Financial Condition, Critical Accounting Estimates, Risk Governance, Market Risk, and Non-GAAP Financial Measures and Reconciliations[9] PART I. FINANCIAL INFORMATION This part contains the Management's Discussion and Analysis of Financial Condition and Results of Operations, along with the unaudited interim consolidated financial statements and related notes. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial condition, operations, balance sheet, income statement, capital, liquidity, and risk, including non-GAAP reconciliations. - The MD&A aims to assist readers in analyzing the unaudited interim Consolidated Financial Statements and supplemental financial information, to be read in conjunction with the 2022 Form 10-K[23] - Non-GAAP financial measures, denoted as 'Underlying' results, exclude certain items not indicative of ongoing financial performance and are used by management to evaluate operating performance and make day-to-day decisions[24] Forward-Looking Statements This section cautions that forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. - Forward-looking statements are based on current management beliefs and expectations and are not guarantees of future performance[10] - Key risk factors include negative economic, business, and political conditions, changes in interest rates, capital and liquidity requirements, competitive environment, geopolitical instability, and operational/cybersecurity risks[10] - Actual amounts and timing of future common stock dividends or share repurchases are subject to various factors including capital position, financial performance, market conditions, and regulatory considerations[11] Introduction Citizens Financial Group, Inc. is a large financial institution with $225.3 billion in assets, offering diverse banking services across 14 states. - Citizens Financial Group, Inc. is one of the nation's oldest and largest financial institutions[23] Total Assets | Date | Total Assets (in billions) | | :--------------- | :------------------------- | | September 30, 2023 | $225.3 | - The company offers retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations, and institutions across 14 states and the District of Columbia[23] Financial Performance Net income decreased $206 million for three months, while nine-month net income remained stable, with total revenue up 7.15% (GAAP). Key Financial Highlights (GAAP) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (3M) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (9M) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Net Income (in millions) | $430 | $636 | ($206) | $1,419 | $1,420 | ($1) | | Diluted EPS | $0.85 | $1.23 | ($0.38) | $2.78 | $2.84 | ($0.06) | | Net Income Available to Common Stockholders (in millions) | $400 | $611 | ($211) | $1,332 | $1,339 | ($7) | | Total Revenue (in millions) | $2,014 | $2,177 | ($163) | $6,236 | $5,821 | $415 | | Efficiency Ratio | 64.2% | 57.0% | 7.2% | 62.5% | 62.7% | (0.2)% | | ROTCE | 12.0% | 17.0% | (5.0)% | 12.9% | 12.5% | 0.4% | | Tangible Book Value per Common Share | $27.73 (Sep 30, 2023) | $26.62 (Sep 30, 2022) | $1.11 | | | | Key Financial Highlights (Underlying, non-GAAP) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (3M) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (9M) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Net Income Available to Common Stockholders (in millions) | $418 | $644 | ($226) | $1,452 | $1,659 | ($207) | | Diluted EPS | $0.89 | $1.30 | ($0.41) | $3.03 | $3.52 | ($0.49) | | Efficiency Ratio | 63.1% | 54.9% | 8.2% | 59.9% | 58.7% | 1.2% | | ROTCE | 12.5% | 17.9% | (5.4)% | 14.1% | 15.5% | (1.4)% | - Notable items, net of tax benefit, were $18 million ($0.04 per diluted common share) for the three months and $120 million ($0.25 per diluted common share) for the nine months ended September 30, 2023[55] Results of Operations This section details changes in net interest income, noninterest income, noninterest expense, provision for credit losses, and income tax expense. - Net interest income is the largest source of revenue, influenced by effective yield on interest-earning assets and effective cost of interest-bearing liabilities, impacted by economic conditions, competition, monetary policy, and market interest rates[59] Net Interest Income Net interest income decreased 9% for three months but increased 10% for nine months, driven by asset yields and acquisitions, offset by funding costs. Net Interest Income and Margin (FTE) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (3M) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (9M) | | :----------------------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Net Interest Income (in millions) | $1,526 | $1,668 | ($142) | $4,766 | $4,324 | $442 | | Net Interest Margin | 3.03% | 3.25% | (22 bps) | 3.17% | 3.03% | 14 bps | | Average Interest-Earning Assets (in millions) | $199,594 | $203,577 | ($3,983) | $201,204 | $190,635 | $10,569 | | Average Deposits (in millions) | $176,450 | $177,618 | ($1,168) | $174,691 | $169,770 | $4,921 | | Average Total Borrowed Funds (in millions) | $13,708 | $17,890 | ($4,182) | $16,740 | $12,778 | $3,962 | - The three-month decline in average interest-earning assets was due to a decrease in loans and leases from balance sheet optimization and Non-Core portfolio runoff. The nine-month increase was due to growth in loans and leases (HSBC transaction and Investors acquisition impacts) and investments[34] - Average deposits decreased for the three-month period due to rate-related outflows but increased for the nine-month period due to the HSBC transaction and Investors acquisition[34] Noninterest Income Noninterest income decreased 4% for three months and 1% for nine months, primarily due to lower capital markets and mortgage banking fees. Noninterest Income (in millions) | Category | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (3M) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (9M) | | :------------------------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Service charges and fees | $105 | $109 | ($4) | $306 | $315 | ($9) | | Capital markets fees | $67 | $89 | ($22) | $232 | $270 | ($38) | | Card fees | $74 | $71 | $3 | $226 | $202 | $24 | | Mortgage banking fees | $69 | $66 | $3 | $185 | $207 | ($22) | | Trust and investment services fees | $63 | $61 | $2 | $191 | $188 | $3 | | Foreign exchange and derivative products | $48 | $42 | $6 | $140 | $153 | ($13) | | Letter of credit and loan fees | $43 | $40 | $3 | $126 | $118 | $8 | | Securities gains, net | $5 | $— | $5 | $19 | $5 | $14 | | Other income | $18 | $34 | ($16) | $58 | $46 | $12 | | Total Noninterest Income | $492 | $512 | ($20) | $1,483 | $1,504 | ($21) | - Capital markets fees declined due to lower M&A advisory and underwriting fees (3M) and lower loan syndication and underwriting fees (9M)[35] - Card fees increased due to higher transaction volumes[35] - Mortgage banking fees declined for the nine-month period due to lower production volume and MSR valuation, partially offset by improved gain-on-sale margins[35] Noninterest Expense Noninterest expense increased 4% for three months and 7% for nine months, driven by salaries, software, and FDIC surcharge. Noninterest Expense (in millions) | Category | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (3M) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (9M) | | :--------------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Salaries and employee benefits | $659 | $639 | $20 | $1,932 | $1,916 | $16 |\ | Outside services | $160 | $172 | ($12) | $513 | $530 | ($17) |\ | Equipment and software | $191 | $159 | $32 | $541 | $478 | $63 |\ | Occupancy | $107 | $106 | $1 | $367 | $300 | $67 |\ | Other operating expense | $176 | $165 | $11 | $542 | $428 | $114 |\ | Total Noninterest Expense | $1,293 | $1,241 | $52 | $3,895 | $3,652 | $243 | - Increases were driven by Private Bank start-up investment (salaries), software maintenance and amortization (equipment and software), and FDIC deposit insurance surcharge (other operating expense)[38] - The nine-month increase also included acquisition and integration-related costs, occupancy, advertising, and fraud losses[38] Provision for Credit Losses Provision for credit losses increased to $172 million (3M) and $516 million (9M), mainly due to higher Commercial Real Estate Office portfolio reserves. Provision for Credit Losses (in millions) | Period | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for Credit Losses | $172 | $123 | $516 | $342 | - The increase in provision expense for 2023 reflects higher reserves against the Commercial Real Estate Office portfolio due to return-to-office dynamics and rising interest rates[39] - The 2022 provision expense reflected reduced reserve requirements as COVID concerns subsided and, for the nine-month period, was partially offset by the provision associated with the Investors acquisition[39] Income Tax Expense Income tax expense decreased by $58 million (3M) and $1 million (9M) due to lower pre-tax income, with effective rates of 21.5% and 22.2%. Income Tax Expense and Effective Tax Rate | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income Tax Expense (in millions) | $119 | $177 | $406 | $407 | | Effective Income Tax Rate | 21.5% | 21.8% | 22.2% | 22.3% | - The decrease in income tax expense was primarily driven by lower pre-tax income[40] - The effective tax rate decrease was mainly due to additional tax expense incurred in 2022 related to acquisitions, partially offset by the adoption of the proportional amortization method for qualified investments in tax credit structures in 2023 and increased non-deductible FDIC premium expense[40] Business Operating Segments The company operates in Consumer Banking, Commercial Banking, and a new Non-Core segment for non-strategic lending, with prior periods reclassified. - The company has three business operating segments: Consumer Banking, Commercial Banking, and Non-Core[41] - In Q3 2023, indirect auto and certain purchased consumer loan portfolios were transferred to a new Non-Core segment to reflect management's assessment of performance and resource allocation, aligning with a balance sheet optimization strategy[41] Segment Financial Performance (3 Months Ended Sep 30, 2023, in millions) | Metric | Consumer Banking | Commercial Banking | Non-Core | Other | Consolidated | | :-------------------------------------- | :--------------- | :----------------- | :------- | :------ | :----------- | | Net Interest Income | $1,067 | $560 | ($41) | ($64) | $1,522 | | Noninterest Income | 278 | 180 | — | 34 | 492 | | Total Revenue | 1,345 | 740 | (41) | (30) | 2,014 | | Noninterest Expense | 905 | 325 | 30 | 33 | 1,293 | | Profit (loss) before credit losses | 440 | 415 | (71) | (63) | 721 | | Provision (benefit) for credit losses | 67 | 67 | 20 | 18 | 172 | | Income (loss) before income tax expense | 373 | 348 | (91) | (81) | 549 | | Income Tax Expense (benefit) | 97 | 88 | (24) | (42) | 119 | | Net Income (loss) | $276 | $260 | ($67) | ($39) | $430 | | Total Average Assets | $72,964 | $74,997 | $13,113 | $59,088 | $220,162 | Segment Financial Performance (9 Months Ended Sep 30, 2023, in millions) | Metric | Consumer Banking | Commercial Banking | Non-Core | Other | Consolidated | | :-------------------------------------- | :--------------- | :----------------- | :------- | :------ | :----------- | | Net Interest Income | $3,101 | $1,741 | ($84) | ($5) | $4,753 | | Noninterest Income | 802 | 588 | — | 93 | 1,483 | | Total Revenue | 3,903 | 2,329 | (84) | 88 | 6,236 | | Noninterest Expense | 2,637 | 971 | 95 | 192 | 3,895 | | Profit (loss) before credit losses | 1,266 | 1,358 | (179) | (104) | 2,341 | | Provision (benefit) for credit losses | 198 | 185 | 54 | 79 | 516 | | Income (loss) before income tax expense | 1,068 | 1,173 | (233) | (183) | 1,825 | | Income Tax Expense (benefit) | 278 | 289 | (61) | (100) | 406 | | Net Income (loss) | $790 | $884 | ($172) | ($83) | $1,419 | | Total Average Assets | $72,477 | $77,130 | $14,409 | $57,723 | $221,739 | Analysis of Financial Condition This section analyzes the balance sheet, covering securities, loans, credit quality, deposits, borrowed funds, capital, regulatory matters, and liquidity. Securities The securities portfolio, primarily U.S. Treasuries and mortgage-backed securities, had an average effective duration of 5.2 years at September 30, 2023. - The primary objective of the securities portfolio is to provide a ready source of liquidity[74] - U.S. Treasuries and mortgage-backed securities issued by GNMA and GSEs represent 95% of the fair value of debt securities[74] Securities Portfolio Duration | Date | Average Effective Duration | | :--------------- | :------------------------- | | September 30, 2023 | 5.2 years | | December 31, 2022 | 5.8 years | Loans and Leases Total loans and leases decreased by $6.9 billion to $149.7 billion, driven by $4.7 billion commercial and $2.2 billion retail loan declines, partially offset by mortgage growth. Composition of Loans and Leases (Excluding LHFS, in millions) | Category | Sep 30, 2023 | Dec 31, 2022 | Change | Percent Change | | :----------------------- | :----------- | :----------- | :--------- | :------------- | | Commercial and industrial | $46,753 | $51,836 | ($5,083) | (10)% | | Commercial real estate | 29,486 | 28,865 | 621 | 2% | | Leases | 1,218 | 1,479 | (261) | (18)% | | Total Commercial | 77,457 | 82,180 | (4,723)| (6)% | | Residential mortgages | 30,983 | 29,921 | 1,062 | 4% | | Home equity | 14,729 | 14,043 | 686 | 5% | | Automobile | 9,290 | 12,292 | (3,002) | (24)% | | Education | 12,134 | 12,808 | (674) | (5)% | | Other retail | 5,153 | 5,418 | (265) | (5)% | | Total Retail | 72,289 | 74,482 | (2,193)| (3)% | | Total Loans and Leases | $149,746 | $156,662 | ($6,916)| (4)% | - Commercial loan decline was due to loans sold as part of balance sheet optimization and reduced line utilization[102] - Retail loan decline was due to planned Non-Core portfolio runoff in auto, education, and other retail, partially offset by growth in mortgage and home equity[102] Credit Quality ACL increased by $78 million to $2.3 billion, nonaccrual loans rose 37% to $1.3 billion, and the net charge-off ratio increased by 21 basis points. - The ACL increased by $78 million from December 31, 2022, to September 30, 2023[49] Nonaccrual Loans and Leases (in millions) | Category | Sep 30, 2023 | Dec 31, 2022 | Change | Percent Change | | :----------------------- | :----------- | :----------- | :----- | :------------- | | Commercial and industrial | $242 | $249 | ($7) | (3)% | | Commercial real estate | 470 | 103 | 367 | 356% | | Leases | 3 | — | 3 | — | | Total Commercial | 715 | 352 | 363| 103% | | Residential mortgages | 190 | 234 | (44) | (19)% | | Home equity | 268 | 241 | 27 | 11% | | Automobile | 62 | 56 | 6 | 11% | | Education | 23 | 33 | (10) | (30)% | | Other retail | 38 | 28 | 10 | 36% | | Total Retail | 581 | 592 | (11)| (2)% | | Nonaccrual Loans and Leases | $1,296 | $944 | $352| 37% | | Nonaccrual loans and leases to total loans and leases | 0.87% | 0.60% | 27 bps | | Net Charge-Off Ratio to Average Loans and Leases | Period | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Charge-Off Ratio | 0.40% | 0.19% | 0.38% | 0.17% | Commercial Loan Asset Quality Commercial criticized balances increased by $3.4 billion to $9.0 billion, mainly due to commercial real estate and industrial loan sectors. - Total commercial criticized balances increased by $3.4 billion to $9.0 billion at September 30, 2023, compared to December 31, 2022[52] - Commercial real estate criticized balances increased from $2.4 billion to $5.1 billion, driven by interest rates and return-to-office dynamics on the Office sector and interest rates on the Multi-family sector[52] - Commercial and industrial criticized balances increased from $3.1 billion to $3.8 billion, primarily due to rising interest rates and labor challenges in the Arts, Entertainment and Recreation, and trade sectors[52] Retail Loan Asset Quality Retail loan credit quality is monitored by FICO scores and delinquency, with an average FICO of 772 and a secured real estate CLTV of 51%. - Retail loan credit quality is monitored using FICO credit scores and payment/delinquency status[80] Retail Asset Quality Metrics | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Average refreshed FICO for total portfolio | 772 | 770 | | CLTV ratio for secured real estate | 51% | 50% | Deposits Total deposits decreased due to rate-related outflows; non-interest bearing deposits are 22% of total, with $125.0 billion (70%) insured/secured. - Total deposits decreased from December 31, 2022, due to rate-related outflows and migration to higher-yielding products[109] - Non-interest bearing deposits now represent approximately 22% of total deposits[109] Composition of Deposits (in millions) | Category | Sep 30, 2023 | % of Total Deposits | Dec 31, 2022 | % of Total Deposits | | :----------------------- | :----------- | :------------------ | :----------- | :------------------ | | Demand | $38,561 | 22% | $49,283 | 27% | | Money market | 53,517 | 30% | 49,905 | 28% | | Checking with interest | 33,355 | 19% | 39,721 | 22% | | Savings | 29,139 | 16% | 29,805 | 16% | | Term | 23,625 | 13% | 12,010 | 7% | | Total Deposits | $178,197 | 100% | $180,724 | 100% | Insured/Secured Deposits (in millions) | Metric | Sep 30, 2023 | | :----------------------------------------------- | :----------- | | Total deposits | $178,197 | | Estimated uninsured deposits | 77,278 | | Less: Uninsured affiliate deposits eliminated in consolidation | 15,596 | | Less: Secured deposits | 8,476 | | CFG adjusted estimated uninsured, excluding secured deposits | 53,206 | | Total estimated insured/secured deposits | $124,991 | | Insured/secured deposits to total deposits | 70% | Borrowed Funds Total borrowed funds increased by $1.7 billion to $17.6 billion, driven by secured auto loan borrowings, partially offset by FHLB advances. Total Borrowed Funds (in millions) | Date | Total Borrowed Funds | | :--------------- | :------------------- | | September 30, 2023 | $17,600 | | December 31, 2022 | $15,900 | - The increase was primarily driven by the issuance of secured borrowings collateralized by auto loans[84] - The increase was partially offset by a decline in FHLB advances[84] Capital and Regulatory Matters The company navigates evolving capital regulations, with SCB at 4.0% and CET1 ratios of 10.4% (CFG) and 11.1% (CBNA), while evaluating new Basel III proposals. - The FRB is evaluating its supervisory and regulatory framework following Silicon Valley Bank's failure, focusing on regulatory tailoring, interest rate risk management, liquidity risk (uninsured deposits), and capital requirements[118] Capital Adequacy Process Capital adequacy is guided by Board-approved risk appetite, with the FRB supervising and the SCB increasing to 4.0% effective October 1, 2023. - Capital adequacy is assessed based on the Board-approved risk appetite and risk management framework[86] Stress Capital Buffer (SCB) | Period | SCB | | :----------------------------------- | :------ | | Effective through September 30, 2023 | 3.4% | | Effective October 1, 2023 – Sep 30, 2024 | 4.0% | - The company was required to participate in the 2023 CCAR supervisory stress test to incorporate the effects of the Investors acquisition[86] Regulatory Capital Ratios and Capital Composition CFG and CBNA maintain U.S. Basel III capital ratios above minimums, with CFG's CET1 and Tier 1 ratios increasing, and CBNA's slightly decreasing. - CFG and CBNA must meet U.S. Basel III minimum requirements: CET1 (4.5%), Tier 1 (6.0%), Total Capital (8.0%), and Tier 1 Leverage (4.0%)[87] Regulatory Capital Ratios Under U.S. Basel III Standardized Rules | Metric (CFG) | Sep 30, 2023 Ratio | Dec 31, 2022 Ratio | Required Minimum (1) | | :----------- | :----------------- | :----------------- | :------------------- | | CET1 capital | 10.4% | 10.0% | 7.9% | | Tier 1 capital | 11.5% | 11.1% | 9.4% | | Total capital | 13.4% | 12.8% | 11.4% | | Tier 1 leverage | 9.4% | 9.3% | 4.0% | | Risk-weighted assets (in millions) | $176,407 | $185,224 | | | Metric (CBNA) | Sep 30, 2023 Ratio | Dec 31, 2022 Ratio | Required Minimum (1) | | :------------ | :----------------- | :----------------- | :------------------- | | CET1 capital | 11.1% | 11.2% | 7.0% | | Tier 1 capital | 11.1% | 11.2% | 8.5% | | Total capital | 12.8% | 12.7% | 10.5% | | Tier 1 leverage | 9.1% | 9.4% | 4.0% | | Risk-weighted assets (in millions) | $175,865 | $184,781 | | - CFG's CET1 and Tier 1 capital ratios increased due to net income and a decrease in RWA, partially offset by common share repurchases, dividends, and a decrease in modified CECL transition amount[88] Capital Transactions The company declared $609 million in common dividends and $87 million in preferred dividends, repurchased $906 million of common stock, and increased repurchase authorization to $2.0 billion. Capital Transactions (9 Months Ended Sep 30, 2023, in millions) | Transaction | Amount | | :-------------------------------- | :----- | | Common Stock Dividends Declared | $609 | | Preferred Stock Dividends Declared | $87 | | Common Stock Repurchased | $906 | - The Board of Directors increased the common share repurchase authorization to $2.0 billion in February 2023[117] Recent Regulatory Developments Recent regulatory proposals, including FDIC special assessments and Basel III 'Endgame' revisions, could significantly impact capital, costs, and resolution planning. - The FRB is evaluating its supervisory and regulatory framework following Silicon Valley Bank's failure, focusing on regulatory tailoring, interest rate risk management, liquidity risk (uninsured deposits), and capital requirements[118] Bank Failures The FRB is reviewing its supervisory framework post-bank failures, focusing on regulatory tailoring, interest rate risk, liquidity, and capital requirements. - The FRB's review of supervision and regulation of Silicon Valley Bank emphasizes strengthening supervision and regulation[118] - Focus areas include regulatory tailoring for banks with $100 billion or more in assets, management of interest rate risk, liquidity risk (uninsured deposits), and capital requirements[118] Deposit Insurance - Proposed FDIC Special Assessment The FDIC proposed a special assessment on uninsured deposits to recover DIF losses, estimated to impact the company's noninterest expense by $210 million. - The FDIC proposed special assessments to recover losses to the DIF from protecting uninsured depositors in connection with SVB and Signature Bank closures[119] - The assessment would be levied on estimated uninsured deposits (excluding the first $5 billion) at an annual rate of approximately 12.5 basis points, collected quarterly starting Q1 2024[119] - The company estimates a noninterest expense impact of approximately $210 million upon adoption[119] Proposed Regulatory Capital Revisions The Basel III 'Endgame' proposal would revise capital requirements for large banks, subjecting Category III/IV firms to new AOCI and risk-based approaches, with an estimated pro forma CET1 of 8.3%. - The Basel III 'Endgame' proposal would significantly revise capital requirements for large banking organizations, including the company[94] - Category III and IV firms would become subject to the same capital treatment as Category I and II firms regarding AOCI, deductions, and minority interest[94] - The company estimates a pro forma CET1 ratio of 8.3% adjusted for the AOCI opt-out removal as of September 30, 2023[94] AOCI Impact on Regulatory Capital Regulatory agencies are considering including AOCI in capital for Category IV firms; if included, CFG's CET1 would be 8.3% and CBNA's 8.9%. - The company currently excludes AOCI from regulatory capital due to an opt-out election[121] - Regulatory agencies are considering including AOCI in regulatory capital for Category IV firms[121] Regulatory Capital Ratios, Including AOCI Impact (non-GAAP) | Metric (CFG) | Sep 30, 2023 Ratio | | :----------- | :----------------- | | CET1 | 8.3% | | Tier 1 | 9.4% | | Total | 11.3% | | Metric (CBNA) | Sep 30, 2023 Ratio | | :------------ | :----------------- | | CET1 | 8.9% | | Tier 1 | 8.9% | | Total | 10.7% | Proposed Long-Term Debt Requirements A proposal requires large banks to maintain minimum long-term debt, with the company estimating a need to issue $4 billion incrementally. - A proposal would require large bank holding companies and IDIs to maintain a minimum amount of long-term debt[151] - The requirement is the greater of 6% of RWA, 3.5% of average total consolidated assets, and 2.5% of total leverage exposure[151] - The company estimates needing to issue approximately $4 billion of incremental eligible long-term debt to meet the minimum requirement[151] Proposed Resolution Plan Requirements The FDIC proposed requiring IDIs with $100 billion+ assets to submit robust biennial resolution plans, outlining failure-to-liquidation strategies. - The FDIC proposed requiring IDIs with $100 billion or more in assets to submit more robust biennial resolution plans[97] - Plans must include a comprehensive strategy from failure to liquidation, ensuring timely access to insured deposits and maximizing asset value[97] Liquidity Liquidity, the ability to meet obligations timely and affordably, is managed with $75.2 billion total available liquidity, supported by a robust risk management framework. - Liquidity is defined as the ability to meet cash-flow and collateral obligations in a timely manner at a reasonable cost[98] - The company maintains operating liquidity for expected needs and contingent liquidity for unexpected funding requirements[98] Total Available Liquidity (Sep 30, 2023, in billions) | Category | Amount | | :--------------------------- | :----- | | Total Available Liquidity | $75.2 | | Contingent Liquidity | $53.3 | | Unencumbered HQLS | $26.7 | | Unused FHLB Capacity | $12.7 | | Cash at FRB | $13.9 | | Available Discount Window Capacity | $21.9 | Parent Company Liquidity The Parent Company's cash sources include CBNA dividends and debt, with $2.8 billion in cash and a 96.9% double-leverage ratio. - Parent Company's primary cash sources are dividends and interest from CBNA, externally issued preferred stock, senior debt, and subordinated debt[125] Parent Company Liquidity Metrics | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Cash and Cash Equivalents (in billions) | $2.8 | $1.6 | | Double-Leverage Ratio | 96.9% | 101.2% | - During the nine months ended September 30, 2023, the Parent Company repurchased $906 million of its outstanding common stock[125] CBNA Liquidity CBNA's liquidity management ensures timely fund access, with $450 million in senior notes and $3.5 billion in secured auto loan borrowings issued in nine months. - CBNA's liquidity management ensures timely access to funds from deposits and for loans, and repayment of wholesale borrowings[154] - Primary sources of bank liquidity include deposits, principal/interest payments on loans and debt securities, and wholesale borrowings[154] - During the nine months ended September 30, 2023, CBNA issued $450 million of 5.284% fixed-to-floating rate senior notes and $3.5 billion of secured borrowings collateralized by auto loans[154] Liquidity Risk Liquidity risk, the inability to meet timely payment obligations, encompasses contingent and funding risks, both viewed as relatively low by the company. - Liquidity risk is the risk that an entity will be unable to meet its payment obligations in a timely manner at a reasonable cost[127] - Contingent liquidity risk relates to market conditions reducing the ability to liquidate, pledge, or finance assets[127] - Funding liquidity risk relates to market conditions or entity-specific events reducing the ability to raise funds from depositors or wholesale counterparties[127] Factors Affecting Liquidity CBNA's liquidity risk is affected by financing market conditions, FHLB/FRB advances, adverse events, and credit ratings from Moody's, S&P, and Fitch. - Contingent liquidity risk at CBNA is materially affected by deterioration of financing markets for high-quality securities and the ability of FHLBs or the FRB to provide advances[101] - Funding liquidity risk can be materially affected by adverse idiosyncratic or systemic events[101] Credit Ratings (September 30, 2023) | Entity / Rating Type | Moody's | Standard & Poor's | Fitch | | :------------------- | :------ | :---------------- | :---- | | Citizens Financial Group, Inc.: | | | | | Long-term issuer | Baa1 | BBB+ | BBB+ | | Short-term issuer | NR | A-2 | F1 | | Subordinated debt | Baa1 | BBB | BBB | | Preferred Stock | Baa3 | BB+ | BB | | Citizens Bank, National Association: | | | | | Long-term issuer | Baa1 | A- | BBB+ | | Short-term issuer | NR | A-2 | F1 | | Long-term deposits | A1 | NR | | | Short-term deposits | P-1 | NR | F1 | Liquidity Risk Management and Governance Liquidity risk is managed by Treasury's Funding and Liquidity unit, maintaining prudent liquidity levels with organically generated deposits as the primary funding source, resulting in an 84.0% loans-to-deposits ratio. - Liquidity risk is measured and managed by the Funding and Liquidity unit within the Treasury group[157] - The unit's goals include maintaining prudent levels of operating and contingent liquidity, and meeting regulatory requirements from stable and cost-efficient funding sources[157] - As of September 30, 2023, organically generated deposits were the primary funding source, resulting in a consolidated period-end loans-to-deposits ratio (excluding LHFS) of 84.0%[157] Critical Accounting Estimates Financial statements require critical estimates for ACL and goodwill impairment; a pessimistic scenario could increase ACL by $224 million, while goodwill showed no impairment in Q3 2023. - Material estimates susceptible to significant change include the determination of the ACL and the evaluation and measurement of goodwill impairment[160] Allowance for Credit Losses ACL increased to $2.3 billion, based on a mild recession forecast, but a pessimistic scenario could increase the loss estimate by $224 million. Allowance for Credit Losses (in billions) | Date | ACL Amount | | :--------------- | :--------- | | September 30, 2023 | $2.3 | | December 31, 2022 | $2.2 | - The ACL forecast assumes a mild recession over a two-year period, with implied peak unemployment of approximately 6% and peak-to-trough GDP decline of approximately 1.0%[133] - A more pessimistic scenario (1.7% peak-to-trough real GDP decline) would result in a quantitative lifetime loss estimate increase of approximately $224 million[133] Goodwill Goodwill totaled $8.2 billion, allocated to Commercial ($5.5 billion) and Consumer Banking ($2.7 billion), with a Q3 2023 assessment finding no impairment. Goodwill Allocation (Sep 30, 2023, in billions) | Reporting Unit | Goodwill Amount | | :--------------- | :-------------- | | Commercial Banking | $5.5 | | Consumer Banking | $2.7 | | Total | $8.2 | - A quantitative goodwill impairment assessment was performed in Q3 2023 due to banking sector stress and market conditions[163] - The assessment concluded that the estimated fair value of Consumer Banking and Commercial Banking reporting units exceeded their carrying value, thus no impairment was recorded[163] Risk Governance The company maintains a strong, integrated, and proactive risk management approach, guided by a Board-approved risk appetite, with no significant changes in governance. - The company is committed to a strong, integrated, and proactive approach to risk management[163] - The Board sets the risk appetite, and the Executive Risk Committee oversees enterprise-wide risk, supported by committees for Compliance and Operational Risk, Model Risk, Credit Policy, Asset Liability, Business Initiatives Review, and Conduct and Ethics[163] - There have been no significant changes in risk governance practices, risk framework, risk appetite, or credit risk[163] Market Risk Market risk, primarily from non-trading activities, is managed through derivatives, with sensitivity to a 200-basis point rate increase being approximately neutral. - Market risk refers to potential losses from changes in interest rates, foreign exchange rates, equity prices, commodity prices, and other market rates/prices[137] - The market risk from non-trading banking activities (interest rate risk) is more significant than from trading activities[138] Sensitivity of Net Interest Income to Gradual Interest Rate Changes | Basis Points | Sep 30, 2023 (% Change) | Dec 31, 2022 (% Change) | | :----------- | :---------------------- | :---------------------- | | +200 | 0.0% | 2.7% | | +100 | 0.1% | 1.4% | | -100 | (0.9)% | (1.4)% | | -200 | (2.1)% | (3.0)% | Non-Trading Risk Non-trading activities expose the company to interest rate risk, with asset sensitivity to a 200-basis point rate increase being approximately neutral due to hedging. - Non-trading banking activities primarily expose the company to interest rate risk[138] - Asset sensitivity to a 200-basis point gradual increase in rates was approximately neutral on September 30, 2023, compared with 2.7% on December 31, 2022[139] - The decrease in asset sensitivity reflects ongoing hedge activity and changes in balance sheet mix due to the higher interest rate environment[139] LIBOR Transition The company successfully completed its LIBOR transition by June 30, 2023, following the cessation of U.S. Dollar LIBOR tenors. - All U.S. Dollar LIBOR tenors ceased as of June 30, 2023[194] - The company formed a LIBOR Transition Program in 2018 to develop and execute a coordinated strategy for the transition[195] - As of June 30, 2023, the company's transition and remediation efforts were complete, with ongoing monitoring for LIBOR-based financial instruments[195] Capital Markets Capital markets activities involve underwriting and distributing corporate credit facilities, managed by a rigorous risk management process with limit structures. - Capital markets activities include underwriting and distribution of corporate credit facilities to finance M&A transactions[145] - A rigorous risk management process is in place, including a limit structure capping underwriting risk and potential loss, with sub-limits for specific asset classes[145] Mortgage Servicing Rights The company manages market risk from MSRs through active hedging, with $1.6 billion MSR fair value and $18.6 billion notional derivatives. - The company has market risk associated with the value of residential MSRs, impacted by duration, basis, convexity, volatility, and yield curve risks[169] - An active economic hedging strategy, using derivatives such as interest rate swaps, swaptions, futures, and forward contracts, is used to manage MSR fair value changes[169] Mortgage Servicing Rights and Related Derivatives | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Fair Value of MSRs (in billions) | $1.6 | $1.5 | | Notional Amount of Related Derivatives (in billions) | $18.6 | $12.9 | Trading Risk Trading risk arises from client facilitation activities, including derivatives and foreign exchange, with all trades classified as 'covered positions' under the Market Risk Rule. - Market risk exposure arises from client facilitation activities, including derivatives, foreign exchange products, underwriting, and market making[170] - These activities are conducted through CBNA and Citizens JMP Securities, LLC[170] - All client-facing trades and associated hedges maintain a net low risk and qualify as 'covered positions' under the Market Risk Rule[198] Market Risk Regulatory Capital Market risk regulatory capital, calculated under the 'Market Risk Rule', was $55 million, with average VaR of $4 million and Stressed VaR of $7 million. Market Risk Regulatory Capital (in millions) | Metric | 3 Months Ended Sep 30, 2023 (Period End) | 3 Months Ended Sep 30, 2023 (Average) | | :--------------------------- | :--------------------------------------- | :------------------------------------ | | Total VaR | $5 | $4 | | Total Stressed VaR | $6 | $7 | | Market Risk Regulatory Capital | $34 | | | Specific Risk Not Modeled Add-on | $21 | | | de Minimis Exposure Add-on | $— | | | Total Market Risk Regulatory Capital | $55 | | | Market Risk-Weighted Assets | $681 | | - The internal management VaR measure is calculated based on the same population of trades utilized for regulatory VaR[198] VaR Backtesting VaR backtesting daily validates the model by comparing VaR to actual trading revenue, determining capital multiplication factors, and includes sub-portfolio testing. - Backtesting is a daily validation process for the VaR model, comparing internal VaR to actual net trading revenue[200] - The level of exceptions determines the multiplication factor for VaR and SVaR-based capital requirements[200] - Sub-portfolio backtesting is performed for interest rate, credit spread, and foreign exchange positions using approved models[200] Non-GAAP Financial Measures and Reconciliations This section reconciles non-GAAP 'Underlying' financial measures to GAAP, providing management and investors with insights into ongoing performance and comparability. - Non-GAAP financial measures, denoted as 'Underlying' results, exclude certain items not indicative of ongoing financial performance[24][202] - These measures are used by management to evaluate operating performance and make day-to-day operating decisions[24] Non-GAAP Financial Measures Reconciliation (3 Months Ended Sep 30, 2023, in millions) | Metric | Reported Results (GAAP) | Less: Notable Items | Underlying Results (non-GAAP) | | :-------------------------------------- | :---------------------- | :------------------ | :---------------------------- | | Noninterest income | $492 | $— | $492 | | Total revenue | $2,014 | $— | $2,014 | | Noninterest expense | $1,293 | $22 | $1,271 | | Pre-provision profit | $721 | | $743 | | Provision for credit losses | $172 | $— | $172 | | Income before income tax expense | $549 | ($22) | $571 | | Income tax expense | $119 | ($4) | $123 | | Net income | $430 | $18 | $448 | | Net income available to common stockholders | $400 | $18 | $418 | Non-GAAP Financial Measures Reconciliation (9 Months Ended Sep 30, 2023, in millions) | Metric | Reported Results (GAAP) | Less: Notable Items | Underlying Results (non-GAAP) | | :-------------------------------------- | :---------------------- | :------------------ | :---------------------------- | | Noninterest income | $1,483 | $— | $1,483 | | Total revenue | $6,236 | $— | $6,236 | | Noninterest expense | $3,895 | $161 | $3,734 | | Pre-provision profit | $2,341 | | $2,502 | | Provision for credit losses | $516 | $— | $516 | | Income before income tax expense | $1,825 | ($161) | $1,986 | | Income tax expense | $406 | ($41) | $447 | | Net income | $1,419 | $120 | $1,539 | | Net income available to common stockholders | $1,332 | $120 | $1,452 | Financial Statements This section presents unaudited interim consolidated financial statements and notes, prepared under GAAP, offering a comprehensive view of financial position and performance. - The financial statements are unaudited interim consolidated statements prepared in accordance with GAAP and instructions for Form 10-Q[186] - They include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the interim period results[186] Consolidated Balance Sheets (unaudited) The consolidated balance sheets show assets, liabilities, and equity, with total assets decreasing slightly to $225.3 billion at September 30, 2023. Consolidated Balance Sheets (in millions) | Category | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------- | :----------- | :----------- | | ASSETS: | | | | Cash and due from banks | $1,395 | $1,489 | | Interest-bearing cash and due from banks | 14,005 | 9,058 | | Interest-bearing deposits in banks | 324 | 303 | | Debt securities available for sale, at fair value | 25,069 | 24,007 | | Debt securities held to maturity | 9,320 | 9,834 | | Loans held for sale, at fair value | 749 | 774 | | Other loans held for sale | 99 | 208 | | Loans and leases | 149,746 | 156,662 | | Less: Allowance for loan and lease losses | (2,080) | (1,983) | | Net loans and leases | 147,666 | 154,679 | | Derivative assets | 522 | 842 | | Premises and equipment, net | 878 | 844 | | Bank-owned life insurance | 3,275 | 3,236 | | Goodwill | 8,188 | 8,173 | | Other intangible assets | 167 | 197 | | Other assets | 13,613 | 13,089 | | TOTAL ASSETS | $225,270 | $226,733 | | LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | LIABILITIES: | | | | Noninterest-bearing deposits | $38,561 | $49,283 | | Interest-bearing deposits | 139,636 | 131,441 | | Total deposits | 178,197 | 180,724 | | Short-term borrowed funds | 232 | 3 | | Derivative liabilities | 2,109 | 1,909 | | Long-term borrowed funds | 17,354 | 15,887 | | Other liabilities | 4,500 | 4,520 | | TOTAL LIABILITIES | 202,392 | 203,043 | | STOCKHOLDERS' EQUITY: | | | | Preferred stock | 2,014 | 2,014 | | Common stock | 6 | 6 | | Additional paid-in capital | 22,231 | 22,142 | | Retained earnings | 9,856 | 9,159 | | Treasury stock, at cost | (5,986) | (5,071) | | Accumulated other comprehensive income (loss) | (5,243) | (4,560) | | TOTAL STOCKHOLDERS' EQUITY | 22,878 | 23,690 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $225,270 | $226,733 | Consolidated Statements of Operations (unaudited) Consolidated statements of operations show net income decreased to $430 million (3M) but remained stable at $1,419 million (9M) in 2023. Consolidated Statements of Operations (in millions, except per share data) | Category | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | INTEREST INCOME: | | | | | | Total interest income | $2,595 | $1,969 | $7,528 | $4,808 | | INTEREST EXPENSE: | | | | | | Total interest expense | $1,073 | $304 | $2,775 | $491 | | Net interest income | $1,522 | $1,665 | $4,753 | $4,317 | | Provision (benefit) for credit losses | 172 | 123 | 516 | 342 | | Net interest income after provisio