UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
September 30, 2018
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From
(Not Applicable)
Commission File Number 001-36636
(Exact name of the registrant as specified in its charter)
Delaware | 05-0412693 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
One Citizens Plaza, Providence, RI 02903
(Address of principal executive offices, including zip code)
(401) 456-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
[ü] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
[ü] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer | [ü] | Accelerated filer | [ ] |
Non-accelerated filer | [ ] | Smaller reporting company | [ ] |
Emerging growth company | [ ] | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ü] No
There were 467,912,054 shares of Registrant’s common stock ($0.01 par value) outstanding on November 1, 2018.
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Table of Contents | ||||
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CITIZENS FINANCIAL GROUP, INC.
GLOSSARY OF ACRONYMS AND TERMS
The following listing provides a comprehensive reference of common acronyms and terms we regularly use in our financial reporting:
ACL | Allowance for Credit Losses | |
AFS | Available for Sale | |
ALLL | Allowance for Loan and Lease Losses | |
AOCI | Accumulated Other Comprehensive Income (Loss) | |
ATM | Automated Teller Machine | |
Board of Directors | The Board of Directors of Citizens Financial Group, Inc. | |
bps | Basis Points | |
Capital Plan Rule | Federal Reserve’s Regulation Y Capital Plan Rule | |
CBNA | Citizens Bank, National Association | |
CBPA | Citizens Bank of Pennsylvania | |
CCAR | Comprehensive Capital Analysis and Review | |
CCB | Capital Conservation Buffer | |
CET1 | Common Equity Tier 1 | |
Citizens or CFG or the Company | Citizens Financial Group, Inc. and its Subsidiaries | |
CLTV | Combined Loan to Value | |
CMO | Collateralized Mortgage Obligation | |
DFAST | Dodd-Frank Act Stress Test | |
Dodd-Frank Act | The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | |
EPS | Earnings Per Share | |
Exchange Act | The Securities Exchange Act of 1934 | |
FAMC | Franklin American Mortgage Company | |
FAMC acquisition | The August 1, 2018 acquisition of Franklin American Mortgage Company | |
Fannie Mae (FNMA) | Federal National Mortgage Association | |
FDIC | Federal Deposit Insurance Corporation | |
FHLB | Federal Home Loan Bank | |
FICO | Fair Isaac Corporation (credit rating) | |
FRB | Board of Governors of the Federal Reserve System and, as applicable, Federal Reserve Bank(s) | |
Freddie Mac (FHLMC) | Federal Home Loan Mortgage Corporation | |
FTP | Funds Transfer Pricing | |
GAAP | Accounting Principles Generally Accepted in the United States of America | |
Ginnie Mae (GNMA) | Government National Mortgage Association | |
HELOC | Home Equity Line of Credit | |
HTM | Held To Maturity | |
LCR | Liquidity Coverage Ratio | |
LIBOR | London Interbank Offered Rate | |
LIHTC | Low Income Housing Tax Credit | |
LTV | Loan to Value | |
MBS | Mortgage-Backed Securities | |
Mid-Atlantic | District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia | |
Midwest | Illinois, Indiana, Michigan, and Ohio | |
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
MSRs | Mortgage Servicing Rights | |
New England | Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont | |
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CITIZENS FINANCIAL GROUP, INC.
NM | Not meaningful | |
NSFR | Net Stable Funding Ratio | |
OCC | Office of the Comptroller of the Currency | |
OCI | Other Comprehensive Income (Loss) | |
Parent Company | Citizens Financial Group, Inc. (the Parent Company of Citizens Bank of Pennsylvania, Citizens Bank, National Association and other subsidiaries) | |
ROTCE | Return on Average Tangible Common Equity | |
RPA | Risk Participation Agreement | |
SBO | Serviced by Others portfolio | |
SEC | United States Securities and Exchange Commission | |
SVaR | Stressed Value at Risk | |
TDR | Troubled Debt Restructuring | |
VaR | Value at Risk | |
VIE | Variable Interest Entities | |
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CITIZENS FINANCIAL GROUP, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page | ||
Forward-Looking Statements | ||
Selected Consolidated Financial Data | ||
Results of Operations | ||
Analysis of Financial Condition | ||
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CITIZENS FINANCIAL GROUP, INC.
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.”
Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
• | Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; |
• | The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment; |
• | Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals; |
• | Our ability to meet heightened supervisory requirements and expectations; |
• | Liabilities and business restrictions resulting from litigation and regulatory investigations; |
• | Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms; |
• | The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale; |
• | Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; |
• | The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; |
• | Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services; |
• | A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and |
• | Management’s ability to identify and manage these and other risks. |
In addition to the above factors, we also caution that the amount and timing of any future common stock dividends or share repurchases will depend on our financial condition, earnings, cash needs, regulatory constraints, capital requirements (including requirements of our subsidiaries), and any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.
More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2017.
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $158.6 billion in assets as of September 30, 2018. Our mission is to help our customers, colleagues and communities reach their potential. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. We help our customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center and the convenience of approximately 2,900 ATMs and approximately 1,150 branches in 11 states in the New England, Mid-Atlantic and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.
The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Item 1 of this Form 10-Q, as well as other information contained in this document and our Annual Report on Form 10-K for the year ended December 31, 2017.
Key Performance Metrics Used by Management and Non-GAAP Financial Measures
As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and statement of operations, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally.
The primary line items we use in our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense, net income and net income available to common stockholders. The primary line items we use in our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives.
We consider various measures when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including:
• | Return on average common equity, which we define as annualized net income available to common stockholders divided by average common equity; |
• | Return on average tangible common equity, which we define as annualized net income available to common stockholders divided by average common equity excluding average goodwill (net of related deferred tax liability) and average other intangibles; |
• | Return on average total assets, which we define as annualized net income divided by average total assets; |
• | Return on average total tangible assets, which we define as annualized net income divided by average total assets excluding average goodwill (net of related deferred tax liability) and average other intangibles; |
• | Efficiency ratio, which we define as the ratio of our total noninterest expense to the sum of net interest income and total noninterest income. We measure our efficiency ratio to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to our income. A decrease in our efficiency ratio represents improvement; |
• | Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense; |
• | Net interest margin, which we calculate by dividing annualized net interest income for the period by average total interest-earning assets, is a key measure that we use to evaluate our net interest income; and |
• | Common equity tier 1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach. |
This document contains non-GAAP financial measures denoted as “Underlying” results. “Underlying” results for any given reporting period exclude certain items that may occur in that period which Management does not
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
consider indicative of the Company’s on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by our Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our “Underlying” results in any given reporting period reflect our on-going financial performance in that period and, accordingly, are useful to consider in addition to our GAAP financial results. We further believe the presentation of “Underlying” results increases comparability of period-to-period results.
Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.
Non-GAAP measures are denoted throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” by the use of the term “Underlying” and/or are followed by an asterisk (*). For additional information regarding our non-GAAP financial measures and reconciliations, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations,” included in this report.
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL PERFORMANCE
Third Quarter 2018 compared with Third Quarter 2017 - Key Highlights
Third quarter 2018 net income of $443 million increased 27% from $348 million in third quarter 2017, with earnings per diluted common share of $0.91, up 34% from $0.68 per diluted common share in third quarter 2017. Third quarter 2018 ROTCE of 13.3% improved from 10.1% in third quarter 2017.
There were $7 million after-tax, or $0.02 per diluted common share, of notable items recorded in third quarter 2018 tied to integration costs associated with the acquisition of Franklin American Mortgage Company (“FAMC”). There were no notable items recorded in third quarter 2017.
Three Months Ended September 30, | |||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
(in millions) | Noninterest expense | Income tax expense | Net Income | Noninterest expense | Income tax expense | Net Income | |||||||||||||||||
Reported results (GAAP) | $910 | $133 | $443 | $858 | $165 | $348 | |||||||||||||||||
Less notable items: | |||||||||||||||||||||||
FAMC integration costs | 9 | (2 | ) | (7 | ) | — | — | — | |||||||||||||||
Underlying results* (non-GAAP) | $901 | $135 | $450 | $858 | $165 | $348 | |||||||||||||||||
* Where there is a reference to “Underlying” results in a paragraph, all measures that follow these references are on the same basis when applicable. For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Introduction — Key Performance Metrics Used By Management and Non-GAAP Financial Measures” and “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations.”
• | Net income available to common stockholders of $436 million increased $95 million, or 28%, compared to $341 million in third quarter 2017, driven by 8% revenue growth, with 8% growth in net interest income and 9% growth in noninterest income. |
◦ | On an Underlying basis,* net income available to common stockholders increased $102 million, or 30%, to $443 million from third quarter 2017. |
• | Total revenue of $1.6 billion increased $121 million, or 8%, from third quarter 2017, driven by strength in net interest income and noninterest income. |
◦ | Net interest income of $1.1 billion increased $86 million, or 8%, compared to $1.1 billion in third quarter 2017, driven by improvement in net interest margin and 4% average loan growth. |
◦ | Net interest margin of 3.19% increased by 14 basis points, compared to 3.05% in third quarter 2017, reflecting higher interest-earning asset yields given higher rates and continued mix shift towards higher-yielding assets, partially offset by higher deposit and other funding costs. The 14 basis point increase included a 1 basis point reduction associated with FAMC. |
– | Average loans and leases of $114.0 billion increased $4.5 billion, or 4%, from $109.5 billion in third quarter 2017, reflecting a $3.1 billion increase in commercial loans and leases and a $1.4 billion increase in retail loans. |
– | Average deposits of $117.0 billion increased $4.1 billion, or 4%, from $112.9 billion in third quarter 2017, reflecting growth in term deposits, demand deposits and savings, partially offset by lower money market accounts and checking with interest. |
◦ | Noninterest income of $416 million increased $35 million, or 9%, from third quarter 2017, driven by a $24 million increase in mortgage banking fees related to FAMC. |
• | Noninterest expense of $910 million increased $52 million, or 6%, compared to $858 million in third quarter 2017, driven by $25 million of FAMC costs, primarily related to salaries and employee benefits, and $9 million of pre-tax FAMC integration costs, composed of $5 million in salaries and employee benefits, $3 million of other operating expense and $1 million of outside services. |
◦ | On an Underlying basis,* noninterest expense increased $43 million, or 5%, from third quarter 2017, driven by $25 million of FAMC costs, primarily related to salaries and employee benefits. |
• | Continued focus on top-line growth and expense management helped deliver positive operating leverage of 2.2% from third quarter 2017, and a 121 basis point improvement in the efficiency ratio to 58.2%. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
◦ | On an Underlying basis,* operating leverage was 3.3% despite a 116 basis point reduction associated with the impact of FAMC, and the efficiency ratio improved 179 basis points to 57.6% from third quarter 2017, including a 67 basis point increase associated with the impact of FAMC. |
• | ROTCE of 13.3% improved 316 basis points from 10.1% in third quarter 2017. |
◦ | On an Underlying basis,* ROTCE improved 337 basis points to 13.5% in third quarter 2018. |
• | Tangible book value per common share improved to $27.66, up 2%, from third quarter 2017. Fully diluted average common shares outstanding decreased 5%, or 24.6 million shares over the same period. |
• | Provision for credit losses of $78 million increased $6 million, or 8%, from $72 million in third quarter 2017, reflecting higher commercial net charge-offs from third quarter 2017 levels that included higher recoveries, and higher retail net charge-offs tied to seasoning in unsecured products. |
• | Net charge-offs of $86 million increased $21 million, or 32%, from $65 million in third quarter 2017. The ALLL of $1.2 billion increased $6 million compared to December 31, 2017. |
◦ | ALLL to total loans and leases of 1.08% as of September 30, 2018 compared with 1.12% as of December 31, 2017. |
◦ | ALLL to nonperforming loans and leases ratio of 149% as of September 30, 2018, compared with 142% as of December 31, 2017. |
• | The effective income tax rate decreased to 23.2% from 32.2% in third quarter 2017, primarily driven by the impact of December 2017 tax reform. |
Nine Months Ended 2018 compared with Nine Months Ended 2017 - Key Highlights
Net income of $1.3 billion increased 27% from $986 million in the first nine months of 2017, with earnings per diluted common share of $2.57, up 34% from $1.92 per diluted common share over the first nine months of 2017. ROTCE of 12.6% improved from 9.8% in the first nine months of 2017.
There were $7 million after-tax, or $0.01 per diluted common share, of notable items in the first nine months of 2018 tied to the FAMC integration costs. Notable items in the same period last year consisted of $23 million in state tax settlement benefits, or $0.05 per diluted common share, and $26 million pre-tax impairments on aircraft lease assets, reducing noninterest income by $11 million and increasing noninterest expense by $15 million.
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||||||||||||||||||
(in millions) | Noninterest income | Noninterest expense | Credit-related costs | Income tax expense | Net Income | Noninterest income | Noninterest expense | Credit-related costs | Income tax expense | Net Income | |||||||||||||||||||||||||||||
Reported results (GAAP) | $1,175 | $2,668 | $241 | $370 | $1,256 | $1,130 | $2,576 | $238 | $423 | $986 | |||||||||||||||||||||||||||||
Less notable items: | |||||||||||||||||||||||||||||||||||||||
FAMC integration costs | — | 9 | — | (2 | ) | (7 | ) | — | — | — | — | — | |||||||||||||||||||||||||||
Lease impairment credit-related costs | — | — | — | — | — | (11 | ) | 15 | (26 | ) | — | — | |||||||||||||||||||||||||||
Settlement of certain state tax matters | — | — | — | — | — | — | — | — | (23 | ) | 23 | ||||||||||||||||||||||||||||
Total Notable items | $— | $9 | $— | ($2 | ) | ($7 | ) | ($11 | ) | $15 | ($26 | ) | ($23 | ) | $23 | ||||||||||||||||||||||||
Underlying results* (non-GAAP) | $1,175 | $2,659 | $241 | $372 | $1,263 | $1,141 | $2,561 | $264 | $446 | $963 | |||||||||||||||||||||||||||||
* Where there is a reference to “Underlying” results in a paragraph, all measures that follow these references are on the same basis when applicable. For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Introduction — Key Performance Metrics Used By Management and Non-GAAP Financial Measures” and “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations.”
• | Net income available to common stockholders of $1.2 billion increased $270 million, or 28%, compared to $972 million in the first nine months of 2017. |
◦ | On an Underlying basis,* net income available to common stockholders increased by 32%, led by 7% revenue growth with 9% growth in net interest income. |
• | Total revenue of $4.5 billion increased $312 million, or 7%, from the first nine months of 2017, driven by strong net interest and noninterest income growth: |
◦ | Net interest income of $3.4 billion increased $267 million, or 9%, compared to $3.1 billion in the first nine months of 2017, driven by higher loan yields and 3% average loan growth. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
◦ | Net interest margin of 3.18% increased 18 basis points from 3.00% in the first nine months of 2017, reflecting the benefit of higher interest rates and continued mix shift towards higher-yielding assets, partially offset by higher deposit and other funding costs. |
– | Average loans and leases of $112.7 billion increased $3.8 billion, or 3%, from $108.9 billion in the first nine months of 2017, reflecting a $1.9 billion increase in commercial loans and leases and a $1.8 billion increase in retail loans. |
– | Average deposits of $115.2 billion increased $4.0 billion, or 4%, from $111.2 billion in the first nine months of 2017, reflecting strength in term, checking with interest, savings and demand deposits. |
◦ | Noninterest income of $1.2 billion increased $45 million, or 4%, from the first nine months of 2017, driven by strength in mortgage banking fees, including the $24 million impact of FAMC, as well as foreign exchange and interest rate products, trust and investment services fees, card fees and letter of credit and loan fees, partially offset by lower capital market fees and service charges and fees. |
– | On an Underlying basis,* noninterest income increased $34 million from $1.1 billion in the first nine months of 2017, excluding the $11 million impact of 2017 aircraft finance lease impairments. |
• | Noninterest expense of $2.7 billion increased $92 million, or 4% from $2.6 billion in the first nine months of 2017, reflecting higher salaries and employee benefits driven by higher revenue-based incentives and merit increases, higher outside services expense, including continued investments to drive growth, $25 million of FAMC costs, primarily in salaries and employee benefits, and $9 million of FAMC integration costs. These increases were partially offset by lower other operating expense. |
◦ | On an Underlying basis,* noninterest expense increased 4% from the first nine months of 2017, and excluded the $9 million of FAMC integration costs and the $15 million of 2017 aircraft operating lease impairments. |
• | Operating leverage improved to 3.8%, the efficiency ratio improved by 215 basis points to 58.8% compared to the first nine months of 2017, and ROTCE moved to 12.6%. |
◦ | On an Underlying basis,* operating leverage was 3.2%, the efficiency ratio improved 183 basis points from 60.5% in the first nine months of 2017 and ROTCE increased 314 basis points from 9.6%. |
• | Earnings per diluted common share increased $0.65, or 34%, from the first nine months of 2017. |
◦ | On an Underlying basis,* earnings per diluted common share increased $0.71, or 38%, from the first nine months of 2017. |
• | Tangible book value per common share improved 2% to $27.66 from September 30, 2017. Fully diluted average common shares outstanding decreased by 22.8 million shares over the first nine months of 2018. |
• | Provision for credit losses of $241 million increased $3 million, or 1%, from $238 million for the first nine months of 2017. |
◦ | On an Underlying basis,* total credit-related costs decreased $23 million, or 9%, from $264 million in the first nine months of 2017, driven primarily by the $26 million impact of 2017 aircraft lease impairments. |
• | Net charge-offs of $232 million increased $5 million, or 2%, from $227 million in the first nine months of 2017. The ALLL of $1.2 billion increased $6 million compared to December 31, 2017. |
◦ | ALLL to total loans and leases of 1.08% decreased from 1.12% as of December 31, 2017. |
◦ | The ALLL to nonperforming loans and leases ratio of 149% increased from 142% as of December 31, 2017. |
• | The effective income tax rate decreased to 22.8% from 30.0% in the first nine months of 2017, primarily driven by the impact of December 2017 tax reform, partially offset by the prior year settlement of certain state tax matters. |
◦ | On an Underlying basis,* the effective income tax rate decreased to 22.8% from 31.7% in the first nine months of 2017, primarily due to the impact of December 2017 tax reform. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SELECTED CONSOLIDATED FINANCIAL DATA
The summary Consolidated Operating Data for the three and nine months ended September 30, 2018 and 2017 and the summary Consolidated Balance Sheet data as of September 30, 2018 and December 31, 2017 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1 — Financial Statements of this report. Our historical results are not necessarily indicative of the results expected for any future period.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions, except per-share amounts) | 2018 | 2017 | 2018 | 2017 | |||||||||||
OPERATING DATA: | |||||||||||||||
Net interest income | $1,148 | $1,062 | $3,360 | $3,093 | |||||||||||
Noninterest income | 416 | 381 | 1,175 | 1,130 | |||||||||||
Total revenue | 1,564 | 1,443 | 4,535 | 4,223 | |||||||||||
Provision for credit losses | 78 | 72 | 241 | 238 | |||||||||||
Noninterest expense | 910 | 858 | 2,668 | 2,576 | |||||||||||
Income before income tax expense | 576 | 513 | 1,626 | 1,409 | |||||||||||
Income tax expense | 133 | 165 | 370 | 423 | |||||||||||
Net income | $443 | $348 | $1,256 | $986 | |||||||||||
Net income available to common stockholders | $436 | $341 | $1,242 | $972 | |||||||||||
Net income per common share - basic | $0.92 | $0.68 | $2.57 | $1.92 | |||||||||||
Net income per common share - diluted | $0.91 | $0.68 | $2.57 | $1.92 | |||||||||||
OTHER OPERATING DATA: | |||||||||||||||
Return on average common equity | 8.82 | % | 6.87 | % | 8.44 | % | 6.63 | % | |||||||
Return on average tangible common equity | 13.29 | 10.13 | 12.64 | 9.80 | |||||||||||
Return on average total assets | 1.13 | 0.92 | 1.09 | 0.88 | |||||||||||
Return on average total tangible assets | 1.18 | 0.96 | 1.14 | 0.92 | |||||||||||
Efficiency ratio | 58.20 | 59.41 | 58.84 | 60.99 | |||||||||||
Operating leverage | 2.21 | 5.61 | 3.79 | 5.67 | |||||||||||
Net interest margin | 3.19 | 3.05 | 3.18 | 3.00 | |||||||||||
Effective income tax rate | 23.16 | 32.18 | 22.77 | 30.04 | |||||||||||
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(dollars in millions) | September 30, 2018 | December 31, 2017 | |||||
BALANCE SHEET DATA: | |||||||
Total assets | $158,598 | $152,336 | |||||
Loans held for sale, at fair value | 1,303 | 497 | |||||
Other loans held for sale | 27 | 221 | |||||
Loans and leases | 114,720 | 110,617 | |||||
Allowance for loan and lease losses | (1,242 | ) | (1,236 | ) | |||
Total securities | 25,485 | 25,733 | |||||
Goodwill | 6,946 | 6,887 | |||||
Total liabilities | 138,322 | 132,066 | |||||
Total deposits | 117,075 | 115,089 | |||||
Federal funds purchased and securities sold under agreements to repurchase | 374 | 815 | |||||
Other short-term borrowed funds | 2,006 | 1,856 | |||||
Long-term borrowed funds | 15,639 | 11,765 | |||||
Total stockholders’ equity | 20,276 | 20,270 | |||||
OTHER BALANCE SHEET DATA: | |||||||
Asset Quality Ratios: | |||||||
Allowance for loan and lease losses as a percentage of total loans and leases | 1.08 | % | 1.12 | % | |||
Allowance for loan and lease losses as a percentage of nonperforming loans and leases | 149.29 | 141.96 | |||||
Nonperforming loans and leases as a percentage of total loans and leases | 0.73 | 0.79 | |||||
Capital Ratios: | |||||||
CET1 capital ratio (1) | 10.8 | % | 11.2 | % | |||
Tier 1 capital ratio (2) | 11.2 | 11.4 | |||||
Total capital ratio (3) | 13.4 | 13.9 | |||||
Tier 1 leverage ratio (4) | 9.9 | 10.0 | |||||
(1) “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(2) “Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital,
divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(3) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(4) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.
13
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Income
The following table presents the significant components of our net income:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | |||||||||||||||||||||
Operating Data: | |||||||||||||||||||||||||||||
Net interest income | $1,148 | $1,062 | $86 | 8 | % | $3,360 | $3,093 | $267 | 9 | % | |||||||||||||||||||
Noninterest income | 416 | 381 | 35 | 9 | 1,175 | 1,130 | 45 | 4 | |||||||||||||||||||||
Total revenue | 1,564 | 1,443 | 121 | 8 | 4,535 | 4,223 | 312 | 7 | |||||||||||||||||||||
Provision for credit losses | 78 | 72 | 6 | 8 | 241 | 238 | 3 | 1 | |||||||||||||||||||||
Noninterest expense | 910 | 858 | 52 | 6 | 2,668 | 2,576 | 92 | 4 | |||||||||||||||||||||
Income before income tax expense | 576 | 513 | 63 | 12 | 1,626 | 1,409 | 217 | 15 | |||||||||||||||||||||
Income tax expense | 133 | 165 | (32 | ) | (19 | ) | 370 | 423 | (53 | ) | (13 | ) | |||||||||||||||||
Net income | $443 | $348 | $95 | 27 | $1,256 | $986 | $270 | 27 | |||||||||||||||||||||
Net income available to common stockholders | $436 | $341 | $95 | 28 | % | $1,242 | $972 | $270 | 28 | % | |||||||||||||||||||
Return on average common equity | 8.82 | % | 6.87 | % | 195 | bps | 8.44 | % | 6.63 | % | 181 | bps | |||||||||||||||||
Return on average tangible common equity | 13.29 | % | 10.13 | % | 316 | bps | 12.64 | % | 9.80 | % | 284 | bps | |||||||||||||||||
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the effective yield on such assets and the effective cost of such liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Market Risk — Non-Trading Risk,” included in this report and “—Risk Governance” as described in our Annual Report on Form 10-K for the year ended December 31, 2017.
14
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the major components of net interest income and net interest margin:
Three Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | Change | ||||||||||||||||||||
(dollars in millions) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Yields/ Rates | ||||||||||||||
Assets | ||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks | $1,604 | $7 | 1.85 | % | $1,663 | $5 | 1.14 | % | ($59 | ) | 71 bps | |||||||||||
Taxable investment securities | 25,225 | 167 | 2.65 | 25,588 | 155 | 2.42 | (363 | ) | 23 | |||||||||||||
Non-taxable investment securities | 6 | — | 2.60 | 7 | — | 2.60 | (1 | ) | — | |||||||||||||
Total investment securities | 25,231 | 167 | 2.65 | 25,595 | 155 | 2.42 | (364 | ) | 23 | |||||||||||||
Commercial | 39,592 | 419 | 4.14 | 37,448 | 344 | 3.61 | 2,144 | 53 | ||||||||||||||
Commercial real estate | 12,656 | 147 | 4.56 | 11,401 | 108 | 3.69 | 1,255 | 87 | ||||||||||||||
Leases | 3,028 | 21 | 2.74 | 3,302 | 21 | 2.54 | (274 | ) | 20 | |||||||||||||
Total commercial loans and leases | 55,276 | 587 | 4.16 | 52,151 | 473 | 3.56 | 3,125 | 60 | ||||||||||||||
Residential mortgages | 18,147 | 164 | 3.62 | 16,323 | 146 | 3.57 | 1,824 | 5 | ||||||||||||||
Home equity loans | 1,168 | 18 | 5.93 | 1,547 | 22 | 5.72 | (379 | ) | 21 | |||||||||||||
Home equity lines of credit | 12,925 | 152 | 4.66 | 13,608 | 135 | 3.93 | (683 | ) | 73 | |||||||||||||
Home equity loans serviced by others | 444 | 8 | 7.45 | 618 | 11 | 7.04 | (174 | ) | 41 | |||||||||||||
Home equity lines of credit serviced by others | 118 | 2 | 4.89 | 173 | 2 | 4.05 | (55 | ) | 84 | |||||||||||||
Automobile | 12,379 | 117 | 3.74 | 13,349 | 111 | 3.31 | (970 | ) | 43 | |||||||||||||
Education | 8,481 | 124 | 5.78 | 7,814 | 106 | 5.36 | 667 | 42 | ||||||||||||||
Credit cards | 1,909 | 52 | 10.77 | 1,738 | 47 | 10.69 | 171 | 8 | ||||||||||||||
Other retail | 3,124 | 63 | 8.10 | 2,163 | 43 | 7.88 | 961 | 22 | ||||||||||||||
Total retail loans | 58,695 | 700 | 4.73 | 57,333 | 623 | 4.32 | 1,362 | 41 | ||||||||||||||
Total loans and leases | 113,971 | 1,287 | 4.46 | 109,484 | 1,096 | 3.96 | 4,487 | 50 | ||||||||||||||
Loans held for sale, at fair value | 1,228 | 14 | 4.49 | 503 | 5 | 3.69 | 725 | 80 | ||||||||||||||
Other loans held for sale | 129 | 2 | 6.44 | 234 | 3 | 4.72 | (105 | ) | 172 | |||||||||||||
Interest-earning assets | 142,163 | 1,477 | 4.11 | 137,479 | 1,264 | 3.64 | 4,684 | 47 | ||||||||||||||
Allowance for loan and lease losses | (1,255 | ) | (1,220 | ) | (35 | ) | ||||||||||||||||
Goodwill | 6,926 | 6,887 | 39 | |||||||||||||||||||
Other noninterest-earning assets | 7,790 | 6,866 | 924 | |||||||||||||||||||
Total assets | $155,624 | $150,012 | $5,612 | |||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||
Checking with interest | $21,780 | $36 | 0.67 | % | $21,909 | $23 | 0.43 | % | ($129 | ) | 24 bps | |||||||||||
Money market accounts | 36,593 | 95 | 1.03 | 37,535 | 54 | 0.57 | (942 | ) | 46 | |||||||||||||
Regular savings | 10,198 | 3 | 0.12 | 9,491 | 1 | 0.04 | 707 | 8 | ||||||||||||||
Term deposits | 18,764 | 80 | 1.68 | 15,971 | 45 | 1.09 | 2,793 | 59 | ||||||||||||||
Total interest-bearing deposits | 87,335 | 214 | 0.98 | 84,906 | 123 | 0.58 | 2,429 | 40 | ||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) | 643 | 2 | 0.93 | 733 | 1 | 0.50 | (90 | ) | 43 | |||||||||||||
Other short-term borrowed funds | 2,239 | 19 | 3.21 | 1,624 | 7 | 1.55 | 615 | 166 | ||||||||||||||
Long-term borrowed funds | 12,793 | 94 | 2.94 | 12,210 | 71 | 2.31 | 583 | 63 | ||||||||||||||
Total borrowed funds | 15,675 | 115 | 2.90 | 14,567 | 79 | 2.14 | 1,108 | 76 | ||||||||||||||
Total interest-bearing liabilities | 103,010 | 329 | 1.27 | 99,473 | 202 | 0.80 | 3,537 | 47 | ||||||||||||||
Demand deposits | 29,703 | 28,041 | 1,662 | |||||||||||||||||||
Other liabilities | 2,769 | 2,523 | 246 | |||||||||||||||||||
Total liabilities | 135,482 | 130,037 | 5,445 | |||||||||||||||||||
Stockholders’ equity | 20,142 | 19,975 | 167 | |||||||||||||||||||
Total liabilities and stockholders’ equity | $155,624 | $150,012 | $5,612 | |||||||||||||||||||
Interest rate spread | 2.84 | % | 2.84 | % | — | |||||||||||||||||
Net interest income | $1,148 | $1,062 | ||||||||||||||||||||
Net interest margin | 3.19 | % | 3.05 | % | 14 bps | |||||||||||||||||
Memo: Total deposits (interest-bearing and demand) | $117,038 | $214 | 0.73 | % | $112,947 | $123 | 0.43 | % | $4,091 | 30 bps | ||||||||||||
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. See “—Analysis of Financial Condition — Derivatives” for further information.
Net interest margin of 3.19% increased 14 basis points compared to 3.05% in third quarter 2017, driven by higher interest-earning asset yields given higher interest rates and continued mix shift towards higher-yielding assets, partially offset by higher deposit and other funding costs. The 14 basis points increase included a one basis point reduction associated with FAMC.
15
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Average interest-earning asset yields of 4.11% increased 47 basis points from 3.64% in third quarter 2017, and average interest-bearing liability costs of 1.27% also increased 47 basis points from 0.80% in third quarter 2017.
Average interest-earning assets of $142.2 billion increased $4.7 billion, or 3%, from third quarter 2017, driven by a $3.1 billion increase in average commercial loans and leases and a $1.4 billion increase in average retail loans, partially offset by a $423 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by strength in commercial and commercial real estate. Retail loan growth was driven by strength in residential mortgage, other retail, education and credit cards.
Average deposits of $117.0 billion increased $4.1 billion from third quarter 2017, reflecting growth in term deposits, checking with interest, savings and demand deposits. Total interest-bearing deposit costs of $214 million increased $91 million, or 74%, from $123 million in third quarter 2017, primarily due to the impact of rising rates and a shift in mix.
Average total borrowed funds of $15.7 billion increased $1.1 billion from third quarter 2017, reflecting an increase in other short-term borrowed funds and long-term borrowed funds, partially offset by a decrease in federal funds purchased and repurchase agreements. Total borrowed funds costs of $115 million increased $36 million from third quarter 2017. The total borrowed funds yield of 2.90% increased 76 basis points from 2.14% in third quarter 2017 due to the rise in benchmark interest rates.
16
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Nine Months Ended September 30, | |||||||||||||||||||||||
2018 | 2017 | Change | |||||||||||||||||||||
(dollars in millions) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Yields/ Rates | |||||||||||||||
Assets | |||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks | $1,616 | $21 | 1.75 | % | $1,902 | $13 | 0.87 | % | ($286 | ) | 88 bps | ||||||||||||
Taxable investment securities | 25,284 | 500 | 2.64 | 25,702 | 469 | 2.43 | (418 | ) | 21 | ||||||||||||||
Non-taxable investment securities | 6 | — | 2.60 | 7 | — | 2.60 | (1 | ) | — | ||||||||||||||
Total investment securities | 25,290 | 500 | 2.64 | 25,709 | 469 | 2.43 | (419 | ) | 21 | ||||||||||||||
Commercial | 38,990 | 1,181 | 3.99 | 37,603 | 982 | 3.45 | 1,387 | 54 | |||||||||||||||
Commercial real estate | 12,096 | 400 | 4.36 | 11,105 | 292 | 3.46 | 991 | 90 | |||||||||||||||
Leases | 3,071 | 62 | 2.68 | 3,517 | 66 | 2.50 | (446 | ) | 18 | ||||||||||||||
Total commercial loans and leases | 54,157 | 1,643 | 4.00 | 52,225 | 1,340 | 3.39 | 1,932 | 61 | |||||||||||||||
Residential mortgages | 17,603 | 473 | 3.58 | 15,755 | 422 | 3.57 | 1,848 | 1 | |||||||||||||||
Home equity loans | 1,253 | 55 | 5.86 | 1,668 | 71 | 5.71 | (415 | ) | 15 | ||||||||||||||
Home equity lines of credit | 13,129 | 434 | 4.42 | 13,775 | 379 | 3.68 | (646 | ) | 74 | ||||||||||||||
Home equity loans serviced by others | 481 | 26 | 7.33 | 668 | 35 | 7.06 | (187 | ) | 27 | ||||||||||||||
Home equity lines of credit serviced by others | 130 | 4 | 4.14 | 189 | 6 | 4.00 | (59 | ) | 14 | ||||||||||||||
Automobile | 12,681 | 342 | 3.60 | 13,563 | 328 | 3.23 | (882 | ) | 37 | ||||||||||||||
Education | 8,380 | 357 | 5.69 | 7,384 | 292 | 5.29 | 996 | 40 | |||||||||||||||
Credit cards | 1,864 | 150 | 10.74 | 1,699 | 138 | 10.85 | 165 | (11 | ) | ||||||||||||||
Other retail | 2,980 | 179 | 8.06 | 1,976 | 117 | 7.94 | 1,004 | 12 | |||||||||||||||
Total retail loans | 58,501 | 2,020 | 4.61 | 56,677 | 1,788 | 4.21 | 1,824 | 40 | |||||||||||||||
Total loans and leases | 112,658 | 3,663 | 4.32 | 108,902 | 3,128 | 3.82 | 3,756 | 50 | |||||||||||||||
Loans held for sale, at fair value | 709 | 23 | 4.27 | 492 | 13 | 3.53 | 217 | 74 | |||||||||||||||
Other loans held for sale | 193 | 9 | 6.32 | 158 | 6 | 5.29 | 35 | 103 | |||||||||||||||
Interest-earning assets | 140,466 | 4,216 | 3.99 | 137,163 | 3,629 | 3.52 | 3,303 | 47 | |||||||||||||||
Allowance for loan and lease losses | (1,246 | ) | (1,226 | ) | (20 | ) | |||||||||||||||||
Goodwill | 6,900 | 6,882 | 18 | ||||||||||||||||||||
Other noninterest-earning assets | 7,362 | 6,744 | 618 | ||||||||||||||||||||
Total assets | $153,482 | $149,563 | $3,919 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||||||
Checking with interest | $21,877 | $96 | 0.59 | % | $21,457 | $56 | 0.35 | % | $420 | 24 bps | |||||||||||||
Money market accounts | 36,689 | 239 | 0.87 | 37,439 | 140 | 0.50 | (750 | ) | 37 | ||||||||||||||
Regular savings | 9,907 | 5 | 0.07 | 9,355 | 3 | 0.04 | 552 | 3 | |||||||||||||||
Term deposits | 17,710 | 200 | 1.51 | 15,104 | 112 | 0.99 | 2,606 | 52 | |||||||||||||||
Total interest-bearing deposits | 86,183 | 540 | 0.84 | 83,355 | 311 | 0.50 | 2,828 | 34 | |||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) | 598 | 4 | 0.78 | 807 | 2 | 0.36 | (209 | ) | 42 | ||||||||||||||
Other short-term borrowed funds | 1,802 | 42 | 3.08 | 2,283 | 22 | 1.23 | (481 | ) | 185 | ||||||||||||||
Long-term borrowed funds | 13,242 | 270 | 2.71 | 12,755 | 201 | 2.10 | 487 | 61 | |||||||||||||||
Total borrowed funds | 15,642 | 316 | 2.68 | 15,845 | 225 | 1.88 | (203 | ) | 80 | ||||||||||||||
Total interest-bearing liabilities | 101,825 | 856 | 1.12 | 99,200 | 536 | 0.72 | 2,625 | 40 | |||||||||||||||
Demand deposits | 29,031 | 27,886 | 1,145 | ||||||||||||||||||||
Other liabilities | 2,551 | 2,613 | (62 | ) | |||||||||||||||||||
Total liabilities | 133,407 | 129,699 | 3,708 | ||||||||||||||||||||
Stockholders’ equity | 20,075 | 19,864 | 211 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $153,482 | $149,563 | $3,919 | ||||||||||||||||||||
Interest rate spread | 2.87 | % | 2.80 | % | 7 | ||||||||||||||||||
Net interest income | $3,360 | $3,093 | |||||||||||||||||||||
Net interest margin | 3.18 | % | 3.00 | % | 18 bps | ||||||||||||||||||
Memo: Total deposits (interest-bearing and demand) | $115,214 | $540 | 0.63 | % | $111,241 | $311 | 0.37 | % | $3,973 | 26 bps | |||||||||||||
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. See “—Analysis of Financial Condition — Derivatives” for further information.
Net interest margin of 3.18% increased 18 basis points compared to 3.00% in the first nine months of 2017, driven by higher interest-earning asset yields given higher interest rates and continued mix shift toward higher-yielding assets. These results were partially offset by the impact of higher deposit and other funding costs. Average interest-earning asset yields of 3.99% increased 47 basis points from 3.52% in the first nine months of 2017, while average interest-bearing liability costs of 1.12% increased 40 basis points from 0.72% in the first nine months of 2017.
17
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Average interest-earning assets of $140.5 billion increased $3.3 billion, or 2%, from the first nine months of 2017, driven by a $1.9 billion increase in average commercial loans and leases and a $1.8 billion increase in average retail loans, partially offset by a $705 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by commercial and commercial real estate. Retail loan growth was driven by residential mortgage, education and other retail.
Average deposits of $115.2 billion increased $4.0 billion from the first nine months of 2017, reflecting growth in term deposits, checking with interest, savings and demand deposits. Total interest-bearing deposit costs of $540 million increased $229 million, or 74%, from $311 million in the first nine months of 2017, primarily due to rising rates.
Average total borrowed funds of $15.6 billion decreased $203 million from the first nine months of 2017, reflecting a decrease in other short-term borrowed funds and a decrease in federal funds purchased and repurchase agreements, partially offset by an increase in long-term borrowed funds, primarily senior debt. Total borrowed funds costs of $316 million increased $91 million from the first nine months of 2017. The total borrowed funds cost of 2.68% increased 80 basis points from 1.88% in the first nine months of 2017 due to an increase in long-term rates and a mix shift to long-term senior debt.
Noninterest Income
The following table presents the significant components of our noninterest income:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | |||||||||||||||||||||
Service charges and fees | $131 | $131 | $— | — | % | $382 | $385 | ($3 | ) | (1 | %) | ||||||||||||||||||
Card fees | 61 | 58 | 3 | 5 | 182 | 177 | 5 | 3 | |||||||||||||||||||||
Capital markets fees | 47 | 53 | (6 | ) | (11 | ) | 134 | 152 | (18 | ) | (12 | ) | |||||||||||||||||
Trust and investment services fees | 45 | 38 | 7 | 18 | 128 | 116 | 12 | 10 | |||||||||||||||||||||
Letter of credit and loan fees | 32 | 30 | 2 | 7 | 94 | 90 | 4 | 4 | |||||||||||||||||||||
Foreign exchange and interest rate products | 31 | 24 | 7 | 29 | 92 | 77 | 15 | 19 | |||||||||||||||||||||
Mortgage banking fees | 49 | 27 | 22 | 81 | 101 | 80 | 21 | 26 | |||||||||||||||||||||
Securities gains, net | 3 | 2 | 1 | 50 | 13 | 9 | 4 | 44 | |||||||||||||||||||||
Other income (1) | 17 | 18 | (1 | ) | (6 | ) | 49 | 44 | 5 | 11 | |||||||||||||||||||
Noninterest income(2) | $416 | $381 | $35 | 9 | % | $1,175 | $1,130 | $45 | 4 | % | |||||||||||||||||||
(1) Includes net securities impairment losses on debt securities available for sale recognized in earnings, bank-owned life insurance income and other income. Amounts for the three and nine months ended September 30, 2017 include $11 million of aircraft finance lease impairment charges.
(2) 2018 noninterest income amounts reflect the adoption of ASU 2014-09, Revenue From Contracts With Customers (Topic 606).
Noninterest income of $416 million increased $35 million, or 9%, from $381 million in third quarter 2017 driven by a $24 million increase in mortgage banking fees related to FAMC. Third quarter results also reflect growth in trust and investment services fees, foreign exchange and interest rate products, card fees and letter of credit and loan fees, partially offset by lower capital market fees, including lower loan syndication fees in line with overall market activity.
Noninterest income of $1.2 billion increased $45 million, or 4%, from $1.1 billion in the first nine months of 2017, driven by strength in mortgage banking fees, reflecting the $24 million impact of FAMC, as well as foreign exchange and interest rate products, trust and investment services fees, card fees and letter of credit and loan fees, partially offset by lower capital market fees and service charges and fees. Excluding the impact of 2017 aircraft finance lease impairments, Underlying noninterest income* in the first nine months of 2018 increased $34 million, or 3%.
18
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Provision for Credit Losses
The provision for credit losses of $78 million increased $6 million, or 8%, from $72 million in third quarter 2017, reflecting strategic growth in high-quality commercial and retail assets. Third quarter 2018 results reflected an $8 million reserve release, compared to a $7 million reserve build in third quarter 2017, largely due to continued improvements in both the commercial credit risk profile and retail product mix. Third quarter 2018 net charge-offs of $86 million were $21 million higher than third quarter 2017 of $65 million, primarily reflecting lower commercial recoveries and seasoning in unsecured retail and education portfolios.
The provision for credit losses of $241 million increased $3 million compared to $238 million in the first nine months of 2017, reflecting moderately lower reserve growth partially offset by slightly higher net charge-offs. The first nine months of 2018 results reflected a $9 million reserve build, compared to an $11 million reserve build in the first nine months of 2017. Net charge-offs for the first nine months of 2018 of $232 million were $5 million higher than first nine months 2017 due to higher retail charge-offs, partially offset by lower commercial charge-offs. On an Underlying basis,* total credit-related costs decreased $23 million, primarily due to the impact of 2017 aircraft lease impairments.
The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ALLL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.
Noninterest Expense
The following table presents the significant components of our noninterest expense:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(in millions) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | |||||||||||||||||||||
Salaries and employee benefits(1)(3) | $474 | $438 | $36 | 8 | % | $1,397 | $1,316 | $81 | 6 | % | |||||||||||||||||||
Outside services(3) | 107 | 99 | 8 | 8 | 312 | 286 | 26 | 9 | |||||||||||||||||||||
Occupancy | 81 | 78 | 3 | 4 | 241 | 239 | 2 | 1 | |||||||||||||||||||||
Equipment expense | 70 | 65 | 5 | 8 | 201 | 196 | 5 | 3 | |||||||||||||||||||||
Amortization of software | 47 | 45 | 2 | 4 | 139 | 134 | 5 | 4 | |||||||||||||||||||||
Other operating expense(1)(2)(3) | 131 | 133 | (2 | ) | (2 | ) | 378 | 405 | (27 | ) | (7 | ) | |||||||||||||||||
Noninterest expense | $910 | $858 | $52 | 6 | % | $2,668 | $2,576 | $92 | 4 | % | |||||||||||||||||||
(1) Salaries and employee benefits and other operating expense amounts reflect the impact of the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
(2) Amounts for the nine months ended September 30, 2017 include $15 million of aircraft operating lease impairment charges.
(3) Amounts for the three and nine months ended September 30, 2018 include $9 million of pre-tax FAMC integration costs, of which $5 million is included in salaries and employee benefits, $1 million is included in outside services and $3 million is included in other operating expense.
Noninterest expense of $910 million increased $52 million, or 6%, from third quarter 2017, driven by $25 million of FAMC costs, primarily in salaries and employee benefits, and $9 million of FAMC integration costs. Additionally, higher salaries and employee benefits, outside services, equipment expense, occupancy and higher amortization of software were partially offset by lower other operating expense. Excluding FAMC integration costs, Underlying noninterest expense* increased $43 million, or 5%.
Noninterest expense of $2.7 billion increased $92 million, or 4%, from the first nine months of 2017, reflecting higher salaries and employee benefits, driven by higher revenue-based incentives and merit increases, as well as higher outside services expense, including continued investments to drive growth, $25 million of FAMC costs, primarily in salaries and employee benefits, and $9 million of FAMC integration costs. These increases were partially offset by lower other operating expense. Excluding FAMC integration costs and the impact of 2017 aircraft operating lease impairments, Underlying noninterest expense* increased $98 million, or 4%.
Income Tax Expense
Income tax expense was $133 million and $165 million in third quarter 2018 and 2017, respectively. Our effective income tax rates in third quarter 2018 and 2017 were 23.2% and 32.2%, respectively. The decrease in the effective income tax rate was driven by the impact of December 2017 tax reform.
Income tax expense was $370 million and $423 million in the first nine months of 2018 and 2017, respectively. Our effective income tax rates in the first nine months of 2018 and 2017 were 22.8% and 30.0%, respectively. The
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
decrease in the effective income tax rate was driven by the impact of December 2017 tax reform, partially offset by the prior year beneficial settlement of certain state tax matters.
At September 30, 2018, our net deferred tax liability was $430 million, compared with $571 million at December 31, 2017. The decrease in the net deferred tax liability was attributable to the tax effect of interest rate driven net unrealized losses on securities and derivatives. For further discussion, see Note 16 “Income Taxes” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.
Business Operating Segments
The following tables present certain financial data of our business operating segments, Other and consolidated: