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Citizens Financial Group Incri (CFG) SEC Filing 10-Q Quarterly report for the period ending Monday, September 30, 2019

SEC Filings

Citizens Financial Group Incri

CIK: 759944 Ticker: CFG

Exhibit 99.1

 

LOGO

Citizens Financial Group, Inc. Reports Third Quarter Net Income of

$449 million and EPS of $0.97

Underlying net income of $453 million up 1% with EPS of $0.98 up 5% year over year*

Record noninterest income up 19% year over year paced by strong results in

mortgage banking

Tangible book value per share of $31.48 up 14% year over year

PROVIDENCE, RI (October 18, 2019) Citizens Financial Group, Inc. (NYSE: CFG or “Citizens”) today reported third quarter net income of $449 million, up 1% from $443 million in third quarter 2018, with earnings per share of $0.97, up 7% from $0.91 per share in third quarter 2018. Third quarter 2019 results reflect a net $4 million, or $(0.01) per share,

after-tax reduction from notable items compared with a net $7 million, or $(0.02) per share, after-tax reduction in third quarter 2018 and a net $5 million, or $(0.01) per share, after-tax reduction in second quarter 2019.

On an Underlying basis, which excludes notable items,* third quarter 2019 net income available to common stockholders of $436 million decreased 2% from third quarter 2018 and 1% from second quarter 2019. Earnings per common share of $0.98 per share increased 5% from third quarter 2018 and 2% from second quarter 2019. Underlying third quarter 2019 ROTCE* of 12.6% compares with 13.5% in third quarter 2018 and 12.9% in second quarter 2019. Tangible book value per common share of $31.48 increased 14% from third quarter 2018 and 2% from second quarter 2019.

“We are pleased to report a strong quarterly result in spite of a challenging rate environment,” said Chairman and Chief Executive Officer Bruce Van Saun. “Our mortgage business provided a good offset to the pressure on net interest margin, and we feel we did a good job on managing down deposit costs. In addition, we are making solid progress on our TOP 6 program and related strategic initiatives, which bodes well for 2020 and beyond.”

Citizens also announced today that its board of directors declared a fourth quarter 2019 cash dividend of $0.36 per common share. The dividend is payable on November 13, 2019 to stockholders of record at the close of business on October 30, 2019. The quarterly common dividend is up 33% year over year.

 

*

Please see important information on Key Performance Metrics and Non-GAAP Financial Measures, as applicable, at the end of this release for an explanation of our use of these metrics and non-GAAP financial measures and their reconciliation to GAAP financial measures. Where there is a reference to “Underlying” results in a paragraph, all measures that follow these references are on the same basis, when applicable. References to “Underlying results before the impact of Acquisitions” exclude the impact of the acquisitions that occurred after second quarter 2018 and notable items, as applicable. Additional information regarding the impact of Acquisitions and notable items may be found in the Notable Items portion of this release. Throughout this release, references to balance sheet items are on an average basis and loans exclude held for sale unless otherwise noted. References to net interest margin are on a fully taxable equivalent (“FTE”) basis and all references to earnings per share represent fully diluted per common share. References to consolidated and/or commercial loans and loan growth include leases. Loans held for sale are also referred to as LHFS. The “Company” refers to Citizens. Current reporting-period regulatory capital ratios are preliminary. Select totals may not sum due to rounding.


The following information was filed by Citizens Financial Group Incri (CFG) on Friday, October 18, 2019 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
 
 
 
 
 
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
image1-logo.jpg
(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.



 
 
 
 
 
 
image1-logo.jpg
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 3
 
 
 
 
 
 
 5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

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

3

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




4

CITIZENS FINANCIAL GROUP, INC.

 

PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



5

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.

6

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.


7

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

8

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.

9

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.

10

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.

11

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.
chart-0997fd863e4f5587a23.jpg


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
chart-ee710c04a0f759b39bd.jpg

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
chart-b9e578e43f015166b29.jpg
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