UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
September 30, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From
(Not Applicable)
Commission File Number 001-36636
(Exact name of the registrant as specified in its charter)
Delaware | 05-0412693 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
One Citizens Plaza, Providence, RI 02903
(Address of principal executive offices, including zip code)
(401) 456-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value per share | CFG | New York Stock Exchange |
Depositary Shares, representing 6.350% Non-Cumulative Perpetual Preferred Stock, Series D | CFG PrD | New York Stock Exchange |
Depositary Shares, representing 5.000% Non-Cumulative Perpetual Preferred Stock, Series E | CFG PrE | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
There were 434,718,941 shares of Registrant’s common stock ($0.01 par value) outstanding on October 30, 2019.
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Table of Contents | ||||
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CITIZENS FINANCIAL GROUP, INC.
GLOSSARY OF ACRONYMS AND TERMS
The following is a list of common acronyms and terms we regularly use in our financial reporting:
ACL | Allowance for Credit Losses | |
Acquisitions | Refers to acquisitions after second quarter 2018, including Franklin American Mortgage Company, Clarfeld Financial Advisors, LLC and Bowstring Advisors LLC | |
AFS | Available for Sale | |
ALLL | Allowance for Loan and Lease Losses | |
ALM | Asset and Liability Management | |
AOCI | Accumulated Other Comprehensive Income (Loss) | |
ATM | Automated Teller Machine | |
Board or Board of Directors | The Board of Directors of Citizens Financial Group, Inc. | |
bps | Basis Points | |
CBNA | Citizens Bank, National Association | |
CCAR | Comprehensive Capital Analysis and Review | |
CCB | Capital Conservation Buffer | |
CCMI | Citizens Capital Markets, Inc. | |
CET1 | Common Equity Tier 1 | |
CET1 capital ratio | Common Equity Tier 1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach | |
Citizens, CFG, the Company, we, us, or our | Citizens Financial Group, Inc. and its Subsidiaries | |
CLTV | Combined Loan to Value | |
Dodd-Frank Act | The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | |
EGRRCPA | Economic Growth, Regulatory Relief and Consumer Protection Act | |
EPS | Earnings Per Share | |
Exchange Act | The Securities Exchange Act of 1934 | |
FAMC | Franklin American Mortgage Company | |
FAMC acquisition | The August 1, 2018 acquisition of Franklin American Mortgage Company | |
Fannie Mae (FNMA) | Federal National Mortgage Association | |
FDIC | Federal Deposit Insurance Corporation | |
FHLB | Federal Home Loan Bank | |
FICO | Fair Isaac Corporation (credit rating) | |
FRB | Board of Governors of the Federal Reserve System and, as applicable, Federal Reserve Bank(s) | |
Freddie Mac (FHLMC) | Federal Home Loan Mortgage Corporation | |
FTE | Fully Taxable Equivalent | |
FTP | Funds Transfer Pricing | |
GAAP | Accounting Principles Generally Accepted in the United States of America | |
Ginnie Mae (GNMA) | Government National Mortgage Association | |
GSE | Government Sponsored Entity | |
HTM | Held To Maturity | |
Last-of-Layer | Last-of-layer is a fair value hedge of the interest rate risk of a portfolio of similar assets by using the last dollar amount within that portfolio of prepayable assets as the hedged item | |
LCR | Liquidity Coverage Ratio | |
LHFS | Loans Held for Sale | |
LIBOR | London Interbank Offered Rate | |
LIHTC | Low Income Housing Tax Credit | |
LTV | Loan to Value | |
MBS | Mortgage-Backed Securities | |
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CITIZENS FINANCIAL GROUP, INC.
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 | |
NM | Not meaningful | |
OCC | Office of the Comptroller of the Currency | |
OCI | Other Comprehensive Income (Loss) | |
Parent Company | Citizens Financial Group, Inc. (the Parent Company of Citizens Bank, National Association and other subsidiaries) | |
ROTCE | Return on Average Tangible Common Equity | |
RPA | Risk Participation Agreement | |
SBA | Small Business Administration | |
SEC | United States Securities and Exchange Commission | |
SVaR | Stressed Value at Risk | |
TDR | Troubled Debt Restructuring | |
Tier 1 capital ratio | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach | |
Tier 1 leverage ratio | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by quarterly adjusted average assets as defined under the U.S. Basel III Standardized approach | |
Total capital ratio | Total capital, which includes Common Equity Tier 1 capital, tier 1 capital and allowance for credit losses and qualifying subordinated debt that qualifies as tier 2 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach | |
VaR | Value at Risk | |
VIE | Variable Interest Entities | |
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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 meaning of the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.”
Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
• | Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; |
• | The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment; |
• | Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals; |
• | Our ability to meet heightened supervisory requirements and expectations; |
• | Liabilities and business restrictions resulting from litigation and regulatory investigations; |
• | Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms; |
• | The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale; |
• | Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; |
• | The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; |
• | Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services; |
• | A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and |
• | Management’s ability to identify and manage these and other risks. |
In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.
More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2018.
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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 $164.4 billion in assets as of September 30, 2019. Our mission is to help our customers, colleagues and communities reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. 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. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center as well as the convenience of approximately 2,900 ATMs and approximately 1,100 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.
The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Item 1 of this Form 10-Q, as well as other information contained in this document and our Annual Report on Form 10-K for the year ended December 31, 2018.
Key Performance Metrics Used by Management and Non-GAAP Financial Measures
As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and statement of operations, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally.
The primary line items we use in our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense, net income and net income available to common stockholders. The primary line items we use in our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives.
We consider various measures when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including:
• | Return on average common equity, which we define as annualized net income available to common stockholders divided by average common equity; |
• | Return on average tangible common equity, which we define as annualized net income available to common stockholders divided by average common equity excluding average goodwill (net of related deferred tax liability) and average other intangibles; |
• | Return on average total assets, which we define as annualized net income divided by average total assets; |
• | Return on average total tangible assets, which we define as annualized net income divided by average total assets excluding average goodwill (net of related deferred tax liability) and average other intangibles; |
• | Efficiency ratio, which we define as the ratio of our total noninterest expense to the sum of net interest income and total noninterest income. We measure our efficiency ratio to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to our income. A decrease in our efficiency ratio represents improvement; |
• | Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense; |
• | Net interest margin, which we calculate by dividing annualized net interest income for the period by average total interest-earning assets, is a key measure that we use to evaluate our net interest income; and |
• | CET1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
This document contains non-GAAP financial measures denoted as “Underlying” results. Underlying results for any given reporting period exclude certain items that may occur in that period which Management does not consider indicative of the Company’s on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by our Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and accordingly, are useful to consider in addition to our GAAP financial results.
Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.
Non-GAAP measures are denoted throughout the MD&A by the use of the term Underlying and/or are followed by an asterisk (*). For additional information regarding our non-GAAP financial measures and reconciliations, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations”.
FINANCIAL PERFORMANCE
Third Quarter 2019 compared with Third Quarter 2018 - Key Highlights
Third quarter 2019 net income of $449 million increased 1% from $443 million in third quarter 2018, with earnings per diluted common share of $0.97, up 7% from $0.91 per diluted common share in third quarter 2018. Third quarter 2019 ROTCE of 12.4% compared to 13.3% in third quarter 2018.
There were $4 million after-tax, or $0.01 per diluted common share, of notable items recorded in third quarter 2019 tied to integration costs associated with Acquisitions as well as costs related to strategic initiatives. In third quarter 2018 there were $7 million after-tax, or $0.02 per diluted common share, of notable items tied to integration costs associated with the FAMC acquisition.
Three Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||
(in millions) | Noninterest expense | Income tax expense | Net Income | Noninterest expense | Income tax expense | Net Income | |||||||||||||||||
Reported results (GAAP): | $973 | $115 | $449 | $910 | $133 | $443 | |||||||||||||||||
Less notable items: | |||||||||||||||||||||||
Total integration costs | 4 | (1 | ) | (3 | ) | 9 | (2 | ) | (7 | ) | |||||||||||||
Other notable items(1) | 15 | (14 | ) | (1 | ) | — | — | — | |||||||||||||||
Total notable items | 19 | (15 | ) | (4 | ) | 9 | (2 | ) | (7 | ) | |||||||||||||
Underlying results* (non-GAAP) | $954 | $130 | $453 | $901 | $135 | $450 | |||||||||||||||||
(1) Other notable items include noninterest expense of $15 million related to our TOP programs and other efficiency initiatives and an income tax benefit of $10 million related to an operational restructure.
* 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 $432 million decreased $4 million, or 1%, compared to $436 million in third quarter 2018. |
◦ | On an Underlying basis,* net income available to common stockholders of $436 million decreased $7 million, or 2%, from third quarter 2018. |
• | Total revenue of $1.6 billion increased $74 million, or 5%, from third quarter 2018, reflecting strength in noninterest income and relatively stable net interest income. |
◦ | Net interest income of $1.1 billion was relatively stable compared to third quarter 2018, driven by growth in interest earning assets of 3%. |
◦ | Net interest margin of 3.10% decreased 10 basis points compared to 3.20% in third quarter 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were only partially offset |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates.
– | Net interest margin on a fully taxable-equivalent basis of 3.12% decreased by 10 basis points, compared to 3.22% in third quarter 2018. |
– | Average loans and leases of $117.3 billion increased $3.3 billion, or 3%, from $114.0 billion in third quarter 2018, reflecting a $1.7 billion increase in commercial loans and leases and a $1.6 billion increase in retail loans. |
– | Average deposits of $123.9 billion increased $6.9 billion, or 6%, from $117.0 billion in third quarter 2018, reflecting growth in savings, term deposits, checking with interest and money market accounts, partially offset by a decline in demand deposits. |
◦ | Noninterest income of $493 million increased $77 million, or 19%, from third quarter 2018, driven by strong results in mortgage banking and card fees and growth in trust and investment services fees and foreign exchange and interest rate products. Noninterest income in third quarter 2019 also included $7 million associated with a lease restructuring transaction. |
• | Noninterest expense of $973 million increased $63 million, or 7%, compared to $910 million in third quarter 2018, driven by higher salaries and employee benefits, which included the impact of annual merit increases, investments in growth initiatives and higher revenue-based incentives, outside services, and equipment and software expense. |
◦ | On an Underlying basis,* noninterest expense increased $53 million, or 6%, from third quarter 2018, reflecting continued investments in growth initiatives as well as $10 million associated with a lease restructuring transaction. |
• | The efficiency ratio of 59.4% compared to 58.2% in third quarter 2018. |
◦ | On an Underlying basis,* the efficiency ratio of 58.2% compared to 57.6% in third quarter 2018. |
• | Provision for credit losses of $101 million increased $23 million, or 29%, from $78 million in third quarter 2018, reflecting a small number of uncorrelated losses in commercial and continued seasoning in retail growth portfolios. Key credit metrics continued to reflect overall strong credit quality. Provision for credit losses in third quarter 2019 also included $5 million associated with a lease restructuring transaction. |
• | ROTCE of 12.4% compared to 13.3% in third quarter 2018. |
◦ | On an Underlying basis,* ROTCE of 12.6% compared to 13.5% in third quarter 2018 and reflected an approximately 75 basis point drag from higher tangible equity value, given the positive impact of lower long-term rates on securities valuations. |
• | Tangible book value per common share of $31.48 increased 14% from third quarter 2018. Fully diluted average common shares outstanding decreased 30.5 million shares, or 6%, over the same period. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
First Nine Months 2019 compared with First Nine Months 2018 - Key Highlights
Net income of $1.3 billion increased 7% from the first nine months of 2018, with earnings per diluted common share of $2.83, up 10% from $2.57 per diluted common share over the first nine months of 2018. ROTCE of 12.7% improved from 12.6% in the first nine months of 2018.
There were $13 million after-tax, or $0.03 per diluted common share, of notable items in the first nine months of 2019 tied to integration costs related to Acquisitions as well as costs related to strategic initiatives. In the first nine months of 2018 there were $7 million after-tax, or $0.01 per diluted common share, of notable items tied to integration costs associated with the FAMC acquisition.
Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||
(in millions) | Noninterest expense | Income tax expense | Net Income | Noninterest expense | Income tax expense | Net Income | |||||||||||||||||
Reported results (GAAP) | $2,861 | $369 | $1,341 | $2,668 | $370 | $1,256 | |||||||||||||||||
Less notable items: | |||||||||||||||||||||||
Total integration costs | 16 | (4 | ) | (12 | ) | 9 | (2 | ) | (7 | ) | |||||||||||||
Other notable items(1) | 15 | (14 | ) | (1 | ) | — | — | — | |||||||||||||||
Total notable items | 31 | (18 | ) | (13 | ) | 9 | (2 | ) | ($7 | ) | |||||||||||||
Underlying results* (non-GAAP) | $2,830 | $387 | $1,354 | $2,659 | $372 | $1,263 | |||||||||||||||||
(1) Other notable items include noninterest expense of $15 million related to our TOP programs and other efficiency initiatives and an income tax benefit of $10 million related to an operational restructure.
* 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 $1.3 billion increased $49 million, or 4%, compared to $1.2 billion in the first nine months of 2018. Earnings per diluted common share increased $0.26, or 10%, from the first nine months of 2018. |
◦ | On an Underlying basis,* net income available to common stockholders of $1.3 billion increased by 4%, led by 7% revenue growth with 3% growth in net interest income. |
◦ | On an Underlying basis,* earnings per diluted common share of $2.86 increased $0.28, or 11%, from $2.58 for the first nine months of 2018. |
• | Total revenue of $4.9 billion increased $319 million, or 7%, from the first nine months of 2018, driven by strong net interest and noninterest income growth. |
◦ | Net interest income of $3.5 billion increased $111 million, or 3%, compared to $3.4 billion in the first nine months of 2018, given 4% growth in average interest-earning assets, which offset the impacts of lower net interest margin, reflecting the impacts of a challenging rate and yield-curve environment. |
◦ | Net interest margin of 3.18% decreased 2 basis points from 3.20% in the first nine months of 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates. |
– | Net interest margin on a fully taxable-equivalent basis of 3.19% decreased by 2 basis points, compared to 3.21% in the first nine months of 2018. |
– | Average loans and leases of $117.6 billion increased $4.9 billion, or 4%, from $112.7 billion in the first nine months of 2018, reflecting a $3.4 billion increase in commercial loans and leases and a $1.5 billion increase in retail loans. |
– | Average deposits of $122.5 billion increased $7.3 billion, or 6%, from $115.2 billion in the first nine months of 2018, reflecting growth in term deposits, savings and checking with interest, partially offset by declines in money market accounts and demand deposits. |
◦ | Noninterest income of $1.4 billion increased $208 million, or 18%, from the first nine months of 2018, driven by strength in capital markets fees, foreign exchange and interest rate products, card fees and leasing income, as well as higher mortgage banking fees and higher trust and investment services fees driven by Acquisitions. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
• | Noninterest expense of $2.9 billion increased $193 million, or 7%, from $2.7 billion in the first nine months of 2018, reflecting higher salaries and employee benefits, outside services, and equipment and software expense, driven by the impact of Acquisitions, partially offset by lower other operating expense largely tied to a reduction in FDIC insurance. |
◦ | On an Underlying basis,* noninterest expense increased 6% from the first nine months of 2018. |
• | The efficiency ratio of 58.9% compared to 58.8% for the first nine months of 2018, and ROTCE of 12.7% compared to 12.6%. |
◦ | On an Underlying basis,* operating leverage was 1%, the efficiency ratio of 58.3% compared to 58.6% for the first nine months of 2018 and ROTCE of 12.9% compared to 12.7%. |
• | Provision for credit losses of $283 million increased $42 million, or 17%, from $241 million for the first nine months of 2018, reflecting 4% average loan growth as well as a small number of uncorrelated losses in commercial and continued seasoning in retail growth portfolios and $5 million associated with a lease restructuring transaction, partially offset by stable credit quality. |
• | Tangible book value per common share of $31.48 increased 14% from the first nine months of 2018. Fully diluted average common shares outstanding decreased 28.0 million shares, or 6%, over the same period. |
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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, 2019 and 2018 and the summary Consolidated Balance Sheet data as of September 30, 2019 and December 31, 2018 are derived from our unaudited interim Consolidated Financial Statements, included in Part I, Item 1 — Financial Statements of this Report. Our historical results are not necessarily indicative of the results expected for any future period.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions, except per share amounts) | 2019 | 2018 | 2019 | 2018 | |||||||||||
OPERATING DATA: | |||||||||||||||
Net interest income | $1,145 | $1,148 | $3,471 | $3,360 | |||||||||||
Noninterest income | 493 | 416 | 1,383 | 1,175 | |||||||||||
Total revenue | 1,638 | 1,564 | 4,854 | 4,535 | |||||||||||
Provision for credit losses | 101 | 78 | 283 | 241 | |||||||||||
Noninterest expense | 973 | 910 | 2,861 | 2,668 | |||||||||||
Income before income tax expense | 564 | 576 | 1,710 | 1,626 | |||||||||||
Income tax expense | 115 | 133 | 369 | 370 | |||||||||||
Net income | $449 | $443 | $1,341 | $1,256 | |||||||||||
Net income available to common stockholders | $432 | $436 | $1,291 | $1,242 | |||||||||||
Net income per common share - basic | $0.97 | $0.92 | $2.84 | $2.57 | |||||||||||
Net income per common share - diluted | $0.97 | $0.91 | $2.83 | $2.57 | |||||||||||
OTHER OPERATING DATA(1): | |||||||||||||||
Return on average common equity | 8.35 | % | 8.82 | % | 8.50 | % | 8.44 | % | |||||||
Return on average tangible common equity | 12.44 | 13.29 | 12.72 | 12.64 | |||||||||||
Return on average total assets | 1.10 | 1.13 | 1.11 | 1.09 | |||||||||||
Return on average total tangible assets | 1.15 | 1.18 | 1.16 | 1.14 | |||||||||||
Efficiency ratio | 59.40 | 58.20 | 58.94 | 58.84 | |||||||||||
Operating leverage(2) | (2.16 | ) | 2.21 | (0.18 | ) | 3.79 | |||||||||
Net interest margin, FTE(3) | 3.12 | 3.22 | 3.19 | 3.21 | |||||||||||
Effective income tax rate | 20.46 | 23.16 | 21.58 | 22.77 | |||||||||||
(1) See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.
(2) “Operating leverage” represents the period-over-period percent change in total revenue, less the period-over-period percent change in noninterest expense.
(3) Net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%.
12
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(dollars in millions) | September 30, 2019 | December 31, 2018 | |||||
BALANCE SHEET DATA: | |||||||
Total assets | $164,362 | $160,518 | |||||
Loans held for sale, at fair value | 1,993 | 1,219 | |||||
Other loans held for sale | 22 | 101 | |||||
Loans and leases | 117,880 | 116,660 | |||||
Allowance for loan and lease losses | (1,263 | ) | (1,242 | ) | |||
Total securities | 25,602 | 25,075 | |||||
Goodwill | 7,044 | 6,923 | |||||
Total liabilities | 142,511 | 139,701 | |||||
Total deposits | 124,714 | 119,575 | |||||
Federal funds purchased and securities sold under agreements to repurchase | 867 | 1,156 | |||||
Other short-term borrowed funds | 210 | 161 | |||||
Long-term borrowed funds | 12,806 | 15,925 | |||||
Total stockholders’ equity | 21,851 | 20,817 | |||||
OTHER BALANCE SHEET DATA: | |||||||
Asset Quality Ratios: | |||||||
Allowance for loan and lease losses as a percentage of loans and leases | 1.07 | % | 1.06 | % | |||
Allowance for loan and lease losses as a percentage of nonperforming loans and leases | 159.32 | 155.99 | |||||
Nonperforming loans and leases as a percentage of loans and leases | 0.67 | 0.68 | |||||
Capital Ratios: | |||||||
CET1 capital ratio(1) | 10.3 | % | 10.6 | % | |||
Tier 1 capital ratio | 11.1 | 11.3 | |||||
Total capital ratio | 13.0 | 13.3 | |||||
Tier 1 leverage ratio | 9.9 | 10.0 | |||||
(1) See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.
13
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Market Risk — Non-Trading Risk,” included in this Report and “—Risk Governance” as described in our 2018 Form 10-K.
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, | |||||||||||||||||||||||
2019 | 2018 | Change | |||||||||||||||||||||
(dollars in millions) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Yields/ Rates (bps) | |||||||||||||||
Assets | |||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks | $1,474 | $8 | 2.09 | % | $1,604 | $7 | 1.85 | % | ($130 | ) | 24 bps | ||||||||||||
Taxable investment securities | 25,635 | 153 | 2.38 | 25,225 | 167 | 2.65 | 410 | (27 | ) | ||||||||||||||
Non-taxable investment securities | 5 | — | 2.60 | 6 | — | 2.60 | (1 | ) | — | ||||||||||||||
Total investment securities | 25,640 | 153 | 2.38 | 25,231 | 167 | 2.65 | 409 | (27 | ) | ||||||||||||||
Commercial | 41,476 | 442 | 4.17 | 39,592 | 419 | 4.14 | 1,884 | 3 | |||||||||||||||
Commercial real estate | 12,892 | 155 | 4.70 | 12,656 | 147 | 4.56 | 236 | 14 | |||||||||||||||
Leases | 2,615 | 19 | 2.85 | 3,028 | 21 | 2.74 | (413 | ) | 11 | ||||||||||||||
Total commercial loans and leases | 56,983 | 616 | 4.23 | 55,276 | 587 | 4.16 | 1,707 | 7 | |||||||||||||||
Residential mortgages | 19,405 | 171 | 3.53 | 18,147 | 164 | 3.62 | 1,258 | (9 | ) | ||||||||||||||
Home equity loans | 906 | 14 | 6.21 | 1,168 | 18 | 5.93 | (262 | ) | 28 | ||||||||||||||
Home equity lines of credit | 12,182 | 156 | 5.08 | 12,925 | 152 | 4.66 | (743 | ) | 42 | ||||||||||||||
Home equity loans serviced by others | 330 | 7 | 8.48 | 444 | 8 | 7.45 | (114 | ) | 103 | ||||||||||||||
Home equity lines of credit serviced by others | 83 | 1 | 4.56 | 118 | 2 | 4.89 | (35 | ) | (33 | ) | |||||||||||||
Automobile | 12,036 | 129 | 4.25 | 12,379 | 117 | 3.74 | (343 | ) | 51 | ||||||||||||||
Education | 9,459 | 141 | 5.89 | 8,481 | 124 | 5.78 | 978 | 11 | |||||||||||||||
Credit cards | 2,103 | 53 | 9.93 | 1,909 | 52 | 10.77 | 194 | (84 | ) | ||||||||||||||
Other retail | 3,770 | 68 | 7.25 | 3,124 | 63 | 8.10 | 646 | (85 | ) | ||||||||||||||
Total retail loans | 60,274 | 740 | 4.88 | 58,695 | 700 | 4.73 | 1,579 | 15 | |||||||||||||||
Total loans and leases | 117,257 | 1,356 | 4.56 | 113,971 | 1,287 | 4.46 | 3,286 | 10 | |||||||||||||||
Loans held for sale, at fair value | 1,970 | 19 | 3.71 | 1,228 | 14 | 4.49 | 742 | (78 | ) | ||||||||||||||
Other loans held for sale | 134 | 2 | 6.42 | 129 | 2 | 6.44 | 5 | (2 | ) | ||||||||||||||
Interest-earning assets | 146,475 | 1,538 | 4.15 | 142,163 | 1,477 | 4.11 | 4,312 | 4 | |||||||||||||||
Allowance for loan and lease losses | (1,226 | ) | (1,255 | ) | 29 | ||||||||||||||||||
Goodwill | 7,044 | 6,926 | 118 | ||||||||||||||||||||
Other noninterest-earning assets | 9,817 | 7,790 | 2,027 | ||||||||||||||||||||
Total assets | $162,110 | $155,624 | $6,486 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||||||
Checking with interest | $23,422 | $52 | 0.88 | % | $21,780 | $36 | 0.67 | % | $1,642 | 21 | |||||||||||||
Money market accounts | 37,161 | 116 | 1.24 | 36,593 | 95 | 1.03 | 568 | 21 | |||||||||||||||
Regular savings | 13,442 | 20 | 0.59 | 10,198 | 3 | 0.12 | 3,244 | 47 | |||||||||||||||
Term deposits | 20,951 | 109 | 2.05 | 18,764 | 80 | 1.68 | 2,187 | 37 | |||||||||||||||
Total interest-bearing deposits | 94,976 | 297 | 1.24 | 87,335 | 214 | 0.98 | 7,641 | 26 | |||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) | 487 | 2 | 1.19 | 643 | 2 | 0.93 | (156 | ) | 26 | ||||||||||||||
Other short-term borrowed funds | 113 | — | 2.46 | 748 | 4 | 2.27 | (635 | ) | 19 | ||||||||||||||
Long-term borrowed funds | 12,134 | 94 | 3.07 | 14,284 | 109 | 3.01 | (2,150 | ) | 6 | ||||||||||||||
Total borrowed funds | 12,734 | 96 | 3.00 | 15,675 | 115 | 2.90 | (2,941 | ) | 10 | ||||||||||||||
Total interest-bearing liabilities | 107,710 | 393 | 1.45 | 103,010 | 329 | 1.27 | 4,700 | 18 | |||||||||||||||
Demand deposits | 28,945 | 29,703 | (758 | ) | |||||||||||||||||||
Other liabilities | 3,789 | 2,769 | 1,020 | ||||||||||||||||||||
Total liabilities | 140,444 | 135,482 | 4,962 | ||||||||||||||||||||
Stockholders’ equity | 21,666 | 20,142 | 1,524 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $162,110 | $155,624 | $6,486 | ||||||||||||||||||||
Interest rate spread | 2.70 | % | 2.84 | % | (14) | ||||||||||||||||||
Net interest income and net interest margin | $1,145 | 3.10 | % | $1,148 | 3.20 | % | (10) | ||||||||||||||||
Net interest income and net interest margin, FTE(2) | $1,150 | 3.12 | % | $1,154 | 3.22 | % | (10) | ||||||||||||||||
Memo: Total deposits (interest-bearing and demand) | $123,921 | $297 | 0.95 | % | $117,038 | $214 | 0.73 | % | $6,883 | 22 bps | |||||||||||||
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs.
(2) Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. The FTE impact is predominantly attributable to commercial loans for the periods presented.
15
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Quarterly Results: Net interest income of $1.1 billion was stable with third quarter 2018, given 3% growth in interest-earning assets and a 10 basis point decrease in net interest margin.
Net interest margin of 3.10% decreased 10 basis points compared to 3.20% in third quarter 2018, as an increase in funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates was partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and higher short-term rates. Net interest margin on an FTE basis of 3.12% declined 10 basis points from 3.22% in third quarter 2018. Average interest-earning asset yields of 4.15% increased 4 basis points from 4.11% in third quarter 2018, and average interest-bearing liability costs of 1.45% increased 18 basis points from 1.27% in third quarter 2018.
Average interest-earning assets of $146.5 billion in third quarter 2019 increased $4.3 billion, or 3%, from third quarter 2018, driven by a $3.3 billion increase in loans and leases and a $742 million increase in loans held for sale, primarily driven by the impact of the FAMC acquisition. Commercial loans and leases increased $1.7 billion, or 3%, while retail loans increased $1.6 billion, or 3%. Total commercial loan and leases results reflected strength in commercial loans, driven by geographic, product and client-focused expansion strategies as well as strength in commercial real estate, partially offset by planned reductions in commercial leases. Retail loan growth was driven by mortgage, unsecured and education finance, partially offset by a planned reduction in auto and lower home equity.
Third quarter 2019 average deposits of $123.9 billion increased $6.9 billion, or 6%, from third quarter 2018, reflecting growth in term, savings, money market accounts and checking with interest. These results were partially offset by a decline in demand deposits.
Average borrowed funds of $12.7 billion decreased $2.9 billion, or 19%, from third quarter 2018, driven by a $2.2 billion decrease in long-term borrowings, a $635 million decrease in other short-term borrowed funds and a $156 million decrease in federal funds purchased and repurchase agreements, reflecting improved funding mix from deposit growth, partially offset by an increase in senior debt. Total borrowed funds costs of $96 million decreased $19 million from third quarter 2018. The total borrowed funds cost of 3.00% increased 10 basis points from 2.90% in third quarter 2018 due to an increase in short-term rates and a mix shift to long-term senior debt.
16
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the major components of net interest income and net interest margin:
Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | Change | |||||||||||||||||||||
(dollars in millions) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Yields/ Rates (bps) | |||||||||||||||
Assets: | |||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks | $1,400 | $23 | 2.15 | % | $1,616 | $21 | 1.75 | % | ($216 | ) | 40 bps | ||||||||||||
Taxable investment securities | 25,466 | 483 | 2.53 | 25,284 | 500 | 2.64 | 182 | (11 | ) | ||||||||||||||
Non-taxable investment securities | 5 | — | 2.60 | 6 | — | 2.60 | (1 | ) | — | ||||||||||||||
Total investment securities | 25,471 | 483 | 2.53 | 25,290 | 500 | 2.64 | 181 | (11 | ) | ||||||||||||||
Commercial | 41,597 | 1,373 | 4.35 | 38,990 | 1,181 | 3.99 | 2,607 | 36 | |||||||||||||||
Commercial real estate | 13,179 | 486 | 4.86 | 12,096 | 400 | 4.36 | 1,083 | 50 | |||||||||||||||
Leases | 2,744 | 59 | 2.86 | 3,071 | 62 | 2.68 | (327 | ) | 18 | ||||||||||||||
Total commercial loans and leases | 57,520 | 1,918 | 4.40 | 54,157 | 1,643 | 4.00 | 3,363 | 40 | |||||||||||||||
Residential mortgages | 19,245 | 522 | 3.61 | 17,603 | 473 | 3.58 | 1,642 | 3 | |||||||||||||||
Home equity loans | 971 | 44 | 6.09 | 1,253 | 55 | 5.86 | (282 | ) | 23 | ||||||||||||||
Home equity lines of credit | 12,354 | 473 | 5.12 | 13,129 | 434 | 4.42 | (775 | ) | 70 | ||||||||||||||
Home equity loans serviced by others | 358 | 21 | 7.95 | 481 | 26 | 7.33 | (123 | ) | 62 | ||||||||||||||
Home equity lines of credit serviced by others | 91 | 3 | 4.94 | 130 | 4 | 4.14 | (39 | ) | 80 | ||||||||||||||
Automobile | 12,030 | 374 | 4.16 | 12,681 | 342 | 3.60 | (651 | ) | 56 | ||||||||||||||
Education | 9,256 | 412 | 5.94 | 8,380 | 357 | 5.69 | 876 | 25 | |||||||||||||||
Credit cards | 2,048 | 158 | 10.31 | 1,864 | 150 | 10.74 | 184 | (43 | ) | ||||||||||||||
Other retail | 3,688 | 204 | 7.39 | 2,980 | 179 | 8.06 | 708 | (67 | ) | ||||||||||||||
Total retail loans | 60,041 | 2,211 | 4.92 | 58,501 | 2,020 | 4.61 | 1,540 | 31 | |||||||||||||||
Total loans and leases | 117,561 | 4,129 | 4.67 | 112,658 | 3,663 | 4.32 | 4,903 | 35 | |||||||||||||||
Loans held for sale, at fair value | 1,514 | 45 | 3.92 | 709 | 23 | 4.27 | 805 | (35 | ) | ||||||||||||||
Other loans held for sale | 161 | 8 | 6.41 | 193 | 9 | 6.32 | (32 | ) | 9 | ||||||||||||||
Interest-earning assets | 146,107 | 4,688 | 4.26 | 140,466 | 4,216 | 3.99 | 5,641 | 27 | |||||||||||||||
Allowance for loan and lease losses | (1,239 | ) | (1,246 | ) | 7 | ||||||||||||||||||
Goodwill | 7,034 | 6,900 | 134 | ||||||||||||||||||||
Other noninterest-earning assets | 9,442 | 7,362 | 2,080 | ||||||||||||||||||||
Total assets | $161,344 | $153,482 | $7,862 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity: | |||||||||||||||||||||||
Checking with interest | $23,444 | $161 | 0.92 | % | $21,877 | $96 | 0.59 | % | $1,567 | 33 | |||||||||||||
Money market accounts | 35,873 | 340 | 1.27 | 36,689 | 239 | 0.87 | (816 | ) | 40 | ||||||||||||||
Regular savings | 13,134 | 58 | 0.59 | 9,907 | 5 | 0.07 | 3,227 | 52 | |||||||||||||||
Term deposits | 21,456 | 333 | 2.07 | 17,710 | 200 | 1.51 | 3,746 | 56 | |||||||||||||||
Total interest-bearing deposits | 93,907 | 892 | 1.27 | 86,183 | 540 | 0.84 | 7,724 | 43 | |||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) | 648 | 7 | 1.45 | 598 | 4 | 0.78 | 50 | 67 | |||||||||||||||
Other short-term borrowed funds | 72 | 1 | 2.58 | 509 | 7 | 2.00 | (437 | ) | 58 | ||||||||||||||
Long-term borrowed funds | 13,076 | 317 | 3.22 | 14,535 | 305 | 2.78 | (1,459 | ) | 44 | ||||||||||||||
Total borrowed funds | 13,796 | 325 | 3.13 | 15,642 | 316 | 2.68 | (1,846 | ) | 45 | ||||||||||||||
Total interest-bearing liabilities | 107,703 | 1,217 | 1.51 | 101,825 | 856 | 1.12 | 5,878 | 39 | |||||||||||||||
Demand deposits | 28,601 | 29,031 | (430 | ) | |||||||||||||||||||
Other liabilities | 3,637 | 2,551 | 1,086 | ||||||||||||||||||||
Total liabilities | 139,941 | 133,407 | 6,534 | ||||||||||||||||||||
Stockholders’ equity | 21,403 | 20,075 | 1,328 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $161,344 | $153,482 | $7,862 | ||||||||||||||||||||
Interest rate spread | 2.75 | % | 2.87 | % | (12) | ||||||||||||||||||
Net interest income and net interest margin | $3,471 | 3.18 | % | $3,360 | 3.20 | % | (2) | ||||||||||||||||
Net interest income and net interest margin, FTE(2) | $3,488 | 3.19 | % | $3,377 | 3.21 | % | (2) | ||||||||||||||||
Memo: Total deposits (interest-bearing and demand) | $122,508 | $892 | 0.97 | % | $115,214 | $540 | 0.63 | % | $7,294 | 34 bps | |||||||||||||
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs.
(2) Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. The FTE impact is predominantly attributable to commercial loans for the periods presented.
17
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Year-To-Date Results: Net interest income of $3.5 billion increased $111 million, reflecting 4% average interest-earning asset growth partially offset by a 2 basis point decrease in net interest margin.
Net interest margin of 3.18% decreased 2 basis points compared to 3.20% in the first nine months of 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates. Net interest margin on an FTE basis of 3.19% also decreased 2 basis points compared to 3.21% in the first nine months of 2018. Average interest-earning asset yields of 4.26% increased 27 basis points from 3.99% in the first nine months of 2018, while average interest-bearing liability costs of 1.51% increased 39 basis points from 1.12% in the first nine months of 2018.
Average interest-earning assets of $146.1 billion increased $5.6 billion, or 4%, from the first nine months of 2018, driven by a $3.4 billion increase in average commercial loans and leases and a $1.5 billion increase in average retail loans, partially offset by a $35 million decrease in average total investment securities and interest-bearing cash and due from banks and deposits in banks. Total commercial loan and lease growth was driven by commercial and commercial real estate. Retail loan growth was driven by residential mortgage, education, credit cards and other retail.
Average deposits of $122.5 billion increased $7.3 billion from the first nine months of 2018, reflecting growth in term deposits, checking with interest, and savings, partially offset by a decline in money market accounts and demand deposits. Total interest-bearing deposit costs of $892 million increased $352 million, or 65%, from $540 million in the first nine months of 2018, primarily due to rising short-term rates and average deposit growth.
Average total borrowed funds of $13.8 billion decreased $1.8 billion from the first nine months of 2018, reflecting a decrease in other short-term borrowed funds and a decrease in long-term borrowed funds, partially offset by an increase in federal funds purchased and repurchase agreements. Total borrowed funds costs of $325 million increased $9 million from the first nine months of 2018. The total borrowed funds cost of 3.13% increased 45 basis points from 2.68% in the first nine months of 2018 due to an increase in short-term rates and a mix shift to long-term senior debt.
Noninterest Income
18
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the significant components of our noninterest income:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(in millions) | 2019 | 2018 | Change | Percent | 2019 | 2018 | Change | Percent | |||||||||||||||||||||
Service charges and fees | $128 | $131 | ($3 | ) | (2 | %) | $377 | $382 | ($5 | ) | (1 | %) | |||||||||||||||||
Card fees | 67 | 61 | 6 | 10 | 190 | 182 | 8 | 4 | |||||||||||||||||||||
Capital markets fees | 39 | 47 | (8 | ) | (17 | ) | 150 | 134 | 16 | 12 | |||||||||||||||||||
Trust and investment services fees | 50 | 45 | 5 | 11 | 150 | 128 | 22 | 17 | |||||||||||||||||||||
Mortgage banking fees | 117 | 49 | 68 | 139 | 222 | 101 | 121 | 120 | |||||||||||||||||||||
Letter of credit and loan fees | 34 | 32 | 2 | 6 | 100 | 94 | 6 | 6 | |||||||||||||||||||||
Foreign exchange and interest rate products | 35 | 31 | 4 | 13 | 106 | 92 | 14 | 15 | |||||||||||||||||||||
Securities gains, net | 3 | 3 | — | — | 15 | 13 | 2 | 15 | |||||||||||||||||||||
Other income (1) | 20 | 17 | 3 | 18 | 73 | 49 | 24 | 49 | |||||||||||||||||||||
Noninterest income | $493 | $416 | $77 | 19 | % | $1,383 | $1,175 | $208 | 18 | % | |||||||||||||||||||
(1) Includes net impairment losses recognized in earnings on available for sale debt securities, bank-owned life insurance income and other income.
Quarterly Results: Noninterest income increased $77 million from third quarter 2018, driven by higher mortgage banking fees, reflecting higher origination volumes that drove an increase in production revenue, card fees, driven by the benefit of higher purchase volumes, trust and investment services fees and foreign exchange and interest rate products. Other income included $7 million associated with a lease restructuring transaction.
Year-To-Date Results: Noninterest income increased $208 million from the first nine months of 2018, driven by higher mortgage banking fees and higher trust and investment services fees driven by Acquisitions. Strength in capital market fees, and foreign exchange and interest rate products reflected the benefit of investments to broaden and enhance our capabilities. Results also reflected increased higher other income due to increased leasing income, including $7 million associated with a lease restructuring transaction, and asset dispositions tied to balance sheet optimization and efficiency initiatives.
Noninterest Expense
The following table presents the significant components of our noninterest expense:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
(in millions) | 2019 | 2018 | Change | Percent | 2019 | 2018 | Change | Percent | |||||||||||||||||||||
Salaries and employee benefits | $508 | $474 | $34 | 7 | % | $1,524 | $1,397 | $127 | 9 | % | |||||||||||||||||||
Equipment and software expense | 130 | 117 | 13 | 11 | 381 | 340 | 41 | 12 | |||||||||||||||||||||
Outside services | 128 | 107 | 21 | 20 | 356 | 312 | 44 | 14 | |||||||||||||||||||||
Occupancy | 80 | 81 | (1 | ) | (1 | ) | 245 | 241 | 4 | 2 | |||||||||||||||||||
Other operating expense | 127 | 131 | (4 | ) | (3 | ) | 355 | 378 | (23 | ) | (6 | ) | |||||||||||||||||
Noninterest expense | $973 | $910 | $63 | 7 | % | $2,861 | $2,668 | $193 | 7 | % | |||||||||||||||||||
19
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Quarterly Results: Noninterest expense increased $63 million from third quarter 2018, driven by higher salaries and employee benefits, which included the impact of annual merit increases, investments in growth initiatives and higher revenue-based incentives, outside services, and equipment and software expense. Other operating expense included $10 million associated with a lease restructuring transaction. Underlying noninterest expense* increased $53 million, or 6%, reflecting continued investments in growth initiatives.
Year-To-Date Results: Noninterest expense increased $193 million, or 7%, from the first nine months of 2018, reflecting higher salaries and employee benefits, outside services, and equipment and software expense, driven by the impact of Acquisitions, partially offset by lower other operating expense largely tied to a reduction in FDIC insurance. Underlying noninterest expense* increased $171 million, or 6%, reflecting continued investments in growth initiatives.
Provision for Credit Losses