UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 19, 2018

CITIZENS FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		001-36636		05-0412693
(State or other jurisdiction of incorporation )		(Commission File No.)		(IRS Employer Identification No.)

 

One Citizens Plaza Providence, RI		02903
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (401) 456-7000

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[  ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[  ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[  ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[  ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 under the Securities Act (17 CFR 230.405) or Rule 12b-2 under the Exchange Act (17 CFR 240.12b-2).

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. ☐

Item 2.02

Results of Operations and Financial Condition.

On October 19, 2018, Citizens Financial Group, Inc. issued a press release reporting third quarter 2018 earnings and posted on its website the press release, an earnings release presentation, and a financial supplement. Copies of the press release, earnings release presentation, and financial supplement are being furnished as Exhibits 99.1, 99.2 and 99.3, respectively.

 

Item 9.01

Financial Statements and Exhibits.

 

		Exhibit Number		Description
(d)		Exhibit 99.1		Citizens Financial Group, Inc. press release dated October 19, 2018
		Exhibit 99.2		Citizens Financial Group, Inc. earnings release presentation issued October 19, 2018
		Exhibit 99.3		Citizens Financial Group, Inc. financial supplement for third quarter 2018

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: October 19, 2018

Exhibit 99.1

 

Citizens Financial Group, Inc. Reports Third Quarter Net Income of $443 Million

with Diluted EPS of $0.91 up 34% Year over Year; Underlying Net Income of $450 million

and EPS of $0.93, up 37% Year over Year*

Year-over-year revenue growth of 8%

13.3% ROTCE; Underlying ROTCE of 13.5%, up 3.4% year over year*

4.4% year-over-year positive operating leverage, excluding the impact of the

Franklin American Mortgage Company Acquisition*

PROVIDENCE, RI (October 19, 2018) Citizens Financial Group, Inc. (NYSE: CFG or “Citizens”) today reports third quarter net income of $443 million, up 27% from $348 million in third quarter 2017 with earnings per diluted common share of $0.91, up 34% from $0.68 in third quarter 2017. Third quarter 2018 net income increased $18 million, or 4%, from second quarter 2018 and diluted earnings per common share increased $0.03, or 3%. Third quarter 2018 Return on Average Tangible Common Equity* (“ROTCE”) of 13.3% increased 3.2% from third quarter 2017 and increased from 12.9% in second quarter 2018. Third quarter 2018 results reflect the impact of the Franklin American Mortgage Company (“FAMC”) acquisition on August 1, 2018 and include a $7 million after-tax, or $0.02 earnings per share, impact of notable items tied to the FAMC integration.*

Excluding notable items, Underlying* third quarter 2018 net income of $450 million increased $102 million, or 29%, and earnings per diluted common share of $0.93 increased $0.25, or 37%, from third quarter 2017. Third quarter 2018 net income increased $25 million, or 6%, and earnings per diluted common share increased $0.05, or 6%, from second quarter 2018. ROTCE* of 13.5% improved from 10.1% in third quarter 2017 and 12.9% in second quarter 2018.

“We are highly pleased that we continue to execute well and deliver strong top-line growth and positive operating leverage, which has powered underlying year-on-year EPS growth of 37% and ROTCE improvement to 13.5%,” said Chairman and Chief Executive Officer Bruce Van Saun. “We are doing a good job with balance sheet management, as we remain highly prudent and selective on where we deploy capital to support loan growth, and we are building new deposit-gathering capabilities, such as Citizens Access. In addition, we continue to invest in broadening and building our fee-based capabilities, highlighted by the closing of the Franklin American Mortgage Company acquisition, and in the development of robust technology offerings, including strong digital and data capabilities.”

Citizens also announced today that its board of directors declared a fourth quarter 2018 cash dividend of $0.27 per common share. The dividend is payable on November 14, 2018 to stockholders of record at the close of business on October 31, 2018.

 

*

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 reconciliations to GAAP financial measures. “Underlying” results exclude the impact of notable items. 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 excluding FAMC adjust for the impact of the August 1, 2018 FAMC acquisition. Additional information regarding the impact of the FAMC acquisition and notable items may be found in the Discussion of Results portion of this release. Throughout this release, references to consolidated and/or commercial loans and loan growth include leases. Loans held for sale are also referred to as LHFS. Current reporting-period regulatory capital ratios are preliminary. Select totals may not foot due to rounding.

Citizens Financial Group, Inc.

 

Third Quarter 2018 vs. Second Quarter 2018

Key Highlights

 

•

Third quarter highlights include 2% growth in net interest income, reflecting higher loan yields, and 7% growth in noninterest income, driven by growth in mortgage banking fees, service charges and fees, trust and investment services fees, other income and card fees. Mortgage banking fees increased $22 million, driven by the FAMC acquisition.

 

•

Efficiency ratio of 58.2% remained relatively stable, despite the 1.25% increase tied to the FAMC acquisition. Excluding the impact of FAMC, the Underlying efficiency ratio* improved by 100 basis points to 57.0%, given expense discipline, and positive operating leverage was 1.8%.

 

•

ROTCE improved to 13.3% from 12.9%; 13.5% on an Underlying basis.*

 

•

Tangible book value per common share of $27.66 remained relatively stable. Fully diluted average common shares outstanding decreased 8.5 million shares, or 2%.

Results

 

•

Total revenue of $1.6 billion increased 4%, reflecting strength in net interest income and noninterest income.

 

•

Net interest income of $1.1 billion increased $27 million, or 2%, driven by higher loan yields, loan growth and the benefit of day count.

 

•

Net interest margin of 3.19% reflects two basis points of net interest margin expansion, largely tied to higher loan yields, partially offset by a one basis point reduction tied to the FAMC acquisition. Net interest margin, excluding the impact of FAMC,* improved two basis points to 3.20%.

 

•

Noninterest income of $416 million increased $28 million, or 7%, driven by the $24 million impact of the FAMC acquisition, largely in mortgage banking fees, as well as higher service charges and fees and trust and investment services fees. Noninterest income, excluding the impact of FAMC,* of $392 million increased $4 million, or 1%.

 

•

Noninterest expense of $910 million increased $35 million, or 4%, driven by the $34 million impact of the FAMC acquisition and notable items.* Underlying* noninterest expense, excluding the impact of FAMC, of $876 million was stable, reflecting continued execution against our efficiency initiatives.

 

•

Provision for credit losses of $78 million decreased $7 million, or 8%, given a decrease in reserves tied to improvements in credit quality in retail real estate-secured products.

Balance Sheet

 

•

Average interest-earning assets increased $1.6 billion, or 1%, which includes a $790 million increase tied to the FAMC acquisition, largely in loans held for sale. Results also reflect loan growth of 1% with particular strength in retail including residential mortgage, unsecured and education as well as growth in selective commercial categories and commercial real estate.

 

2

Citizens Financial Group, Inc.

 

•

Average deposits grew $1.9 billion, or 2%, with strength in most categories. Results include a $442 million increase tied to the FAMC acquisition and $551 million tied to Citizens Access(TM).

 

•

Nonperforming loans and leases (“NPLs”) to total loans and leases ratio of 0.73% decreased from 0.75%, and the allowance coverage of NPL ratio improved to 149% from 148%.

 

•

Net charge-offs increased modestly to 30 basis points from 27 basis points, driven by seasonally higher retail auto net charge-offs, as well as a modest increase in commercial.

 

•

Capital strength remains robust, with a common equity tier 1 (“CET1”) risk-based capital ratio of 10.8%, which includes an approximately 18 basis point reduction tied to the FAMC acquisition.*

 

•

Repurchased $400 million of common stock at a weighted-average effective price of $39.83, and including common dividends, returned $529 million to stockholders.

Third Quarter 2018 vs. Third Quarter 2017

Key Highlights

 

•

Third quarter results reflect a 28% increase in net income available to common stockholders, driven by 8% revenue growth, with 8% growth in net interest income and 9% growth in noninterest income. Underlying* net income available to common stockholders increased 30%, while revenue, excluding the impact of FAMC,* increased 7%.

 

•

Continued focus on top-line growth and expense management helped deliver 2.2% operating leverage and a 121 basis point improvement in the efficiency ratio to 58.2%. Underlying* operating leverage, excluding the impact of FAMC, was 4.4%, with a 246 basis point improvement in the efficiency ratio to 57.0%.

 

•

ROTCE of 13.3% improved 3.2% from 10.1%. Underlying ROTCE of 13.5% improved 3.4%.*

 

•

Tangible book value per common share improved to $27.66, up 2%. Fully-diluted average common shares outstanding decreased 24.6 million shares, or 5%.

Results

 

•

Total revenue of $1.6 billion increased $121 million, or 8%, driven by strength in net interest income and noninterest income. Total revenue, excluding the impact of FAMC,* of $1.5 billion, increased $95 million, or 7%.

 

•

Net interest income increased $86 million, or 8%, driven by a 14 basis point improvement in net interest margin and 4% average loan growth. Net interest margin, excluding the impact of FAMC,* improved 15 basis points to 3.20%.

 

•

Noninterest income of $416 million increased $35 million, or 9%, driven by strength in mortgage banking and trust and investment services fees. Noninterest income, excluding the impact of FAMC,* of $392 million, increased$11 million, or 3%, reflecting higher trust and investment services fees, foreign exchange and interest rate products fees and card fees.

 

•

Noninterest expense increased $52 million, or 6%, driven by the $34 million impact of the FAMC acquisition and notable items.* Underlying* noninterest expense, excluding the impact of FAMC,* increased $18 million, or 2%, driven by higher salary and employee benefits tied to higher revenue-based compensation and the impact of our strategic-growth initiatives.

 

3

Citizens Financial Group, Inc.

 

•

Provision for credit losses of $78 million increased $6 million, or 8%, reflecting higher commercial net charge-offs from third quarter 2017 levels that included higher recoveries in the prior period and higher retail net charge-offs tied to expected seasoning in unsecured products.

Balance Sheet

 

•

Average interest-earning assets increased $4.7 billion, or 3%, driven by 4% loan growth, reflecting a 6% increase in commercial loans and a 2% increase in retail loans, partially offset by a $423 million, or 2% reduction in investments. The FAMC acquisition added $790 million in average interest-earning assets. Interest-earning assets, excluding the impact of FAMC,* increased 3%.

 

•

Average deposits increased $4.1 billion, or 4%, driven by strength in term, demand and savings.

 

•

NPL ratio of 0.73% improved from 0.85%, reflecting improvement in commercial NPLs. Allowance coverage of NPLs of 149% improved from 131%.

 

•

Net charge-offs of 30 basis points increased 6 basis points, given higher net charge-offs in commercial from third quarter 2017 levels that included higher recoveries in the prior period, as well as seasoning in retail growth portfolios.

Year-Over-Year Update on Plan Execution

Consumer Banking segment

 

•

Continued balance sheet momentum, with 3% average loan growth, highlighted by improving mix toward more attractive risk-adjusted return categories and 4% average deposit growth.

 

•

Successful launch of Citizens Access™, a nationwide, digital-deposit platform with approximately $1.0 billion raised through third quarter 2018. All key metrics tracking favorable to, or on, plan.

 

•

Closed the previously announced FAMC transaction, which is expected to expand origination capabilities, help drive scale in servicing and generate increased fee income. The FAMC transaction added a $612 million mortgage servicing rights portfolio; conforming mix improved to 74%.

 

•

Continued progress in Wealth with 18% fee growth; managed money revenue up 23%, assets under management up 15% and number of financial advisors up 5%.

Commercial Banking segment

 

•

Continued strong balance sheet performance with average loan growth of 7%, driven by our geographic-expansion strategies and our focus on Industry Verticals as well as by strength in Private Equity and in Commercial Real Estate. Average deposits up 2% with solid growth in savings and demand deposits.

 

•

Continue to benefit from investments to drive fee income, highlighted by a 30% increase in foreign exchange and interest rate products and an 18% increase in Commercial card fees. Capital Markets’ pipeline remains robust.

 

4

Citizens Financial Group, Inc.

 

Efficiency and balance sheet optimization initiatives

 

•

Launched TOP V Program, which includes efficiency and revenue initiatives, targeting pre-tax benefit of approximately $90 – $100 million by end of 2019. TOP IV Program initiatives are largely complete; on track to deliver end of 2018 run-rate pre-tax benefit of approximately $105 – $110 million.

 

•

Continued progress on Balance Sheet Optimization (“BSO”) designed to improve the loan portfolio mix toward higher-return categories and help manage deposit costs. BSO delivered approximately 4 basis points of the 14 basis point net interest margin improvement year over year, or 5 basis points excluding the impact of FAMC.*

 

Earnings highlights														3Q18 change from
($s in millions, except per share data)		3Q18				2Q18				3Q17				2Q18								3Q17
Earnings														$				%				$				%
Net interest income		$	1,148			$	1,121			$	1,062			$	27				2	%		$	86				8	%
Noninterest income			416				388				381				28				7				35				9
Total revenue			1,564				1,509				1,443				55				4				121				8
Noninterest expense			910				875				858				35				4				52				6
Pre-provision profit			654				634				585				20				3				69				12
Provision for credit losses			78				85				72				(7	)			(8	)			6				8
Pre-tax net income			576				549				513				27				5				63				12
Net income			443				425				348				18				4				95				27
Preferred dividends			7				—				7				7				100				—				—
Net income available to common stockholders		$	436			$	425			$	341			$	11				3	%		$	95				28	%
After-tax Notable Items*			7				—				—				7				NM				7				NM
Underlying net income available to common stockholders*		$	443			$	425			$	341			$	18				4	%		$	102				30	%
Average common shares outstanding
Basic (in millions)			476.0				484.7				500.9				(8.8	)			(2	)%			(24.9	)			(5	)%
Diluted (in millions)			477.6				486.1				502.2				(8.5	)			(2	)			(24.6	)			(5	)
Diluted earnings per share		$	0.91			$	0.88			$	0.68			$	0.03				3	%		$	0.23				34	%
Underlying diluted earnings per share*		$	0.93			$	0.88			$	0.68			$	0.05				6	%		$	0.25				37	%
Key performance metrics*
Net interest margin			3.19	%			3.18	%			3.05	%			1	bps							14 bps
Effective income tax rate			23.2				22.6				32.2				58								(902	)
Efficiency ratio			58				58				59				25								(121	)
Underlying efficiency ratio*			58				58				59				(33	)							(179	)
Return on average common equity			8.8				8.7				6.9				17								195
Return on average tangible common equity			13.3				12.9				10.1				36								316
Underlying return on average tangible common equity*			13.5				12.9				10.1				57								337
Return on average total assets			1.13				1.11				0.92				2								21
Underlying return on average total tangible assets*			1.20	%			1.16	%			0.96	%			4	bps							24	bps
Capital adequacy(1,2)
Common equity tier 1 capital ratio			10.8	%			11.2	%			11.1	%
Total capital ratio			13.4				13.8				13.8
Tier 1 leverage ratio			9.9	%			10.2	%			9.9	%
Asset quality(2)
Total nonperforming loans and leases as a % of total loans and leases			0.73	%			0.75	%			0.85	%			(2	) bps							(12	) bps
Allowance for loan and lease losses as a % of loans and leases			1.08				1.10				1.11				(2	)							(3	)
Allowance for loan and lease losses as a % of nonperforming loans and leases			149				148				131				109								NM
Net charge-offs as a % of average loans and leases			0.30	%			0.27	%			0.24	%			3	bps							6	bps

 

1)	Current reporting-period regulatory capital ratios are preliminary.

2)	Capital adequacy and asset-quality ratios calculated on a period-end basis, except net charge-offs.

 

5

Citizens Financial Group, Inc.

 

Discussion of Results:

Third quarter 2018 net income available to common stockholders of $436 million increased $11 million, or 3%, and fully diluted earnings per common share increased $0.03 to $0.91, up 3% compared to second quarter 2018 results, reflecting growth in revenue and expense as well as a reduction in provision expense. Third quarter 2018 results reflect solid revenue growth and higher noninterest expense largely tied to the FAMC acquisition as well as lower provision expense. The FAMC acquisition contributed $2 million of net interest income, $24 million of noninterest income and $25 million of noninterest expense, as well as $790 million of average interest-earning assets and $442 million in average deposits. Additionally, CFG recorded $9 million pre-tax, or $7 million after-tax, of notable items tied to the FAMC integration. Third quarter 2018 EPS reflect an 8.5 million reduction in fully diluted average common shares outstanding compared to second quarter 2018.

Compared with second quarter 2018, third quarter 2018 reported results were highlighted by revenue growth of 4%, with net interest income growth of 2% and net interest margin of 3.19%, given 1% loan growth and one basis point of net interest margin expansion. Results also reflect noninterest income growth of 7% and a 4% increase in noninterest expense, a relatively stable efficiency ratio of 58.2%, and relatively stable operating leverage. Provision for credit losses decreased 8%, given a decrease in reserves tied to improvements in credit quality in retail real estate-secured products. ROTCE improved to 13.3% from 12.9%.*

Compared with third quarter 2017, net income available to common stockholders increased $95 million, or 28%, and fully diluted earnings per share increased $0.23, or 34%. Fully diluted average common shares outstanding were lower by 24.6 million shares given buyback activity. Results were highlighted by revenue growth of 8% with net interest income growth of 8%, given 4% loan growth and 14 basis points of net interest margin to 3.19%. Results also reflect noninterest income growth of 9% and a 6% increase in noninterest expense, 2.2% operating leverage and a 1.2% improvement in the efficiency ratio to 58.2%. Provision for credit losses increased 8%, reflecting higher commercial net charge-offs from third quarter 2017 levels that included higher recoveries in the prior period, and higher retail net charge-offs tied to expected seasoning in unsecured products. ROTCE of 13.3% improved 3.2% from 10.1%.*

 

6

Citizens Financial Group, Inc.

 

Underlying results/FAMC impact														3Q18 change from
($s in millions, except per share data)		3Q18				2Q18				3Q17				2Q18				3Q17
Net interest income		$	1,148			$	1,121			$	1,062				2	%			8	%
Noninterest income			416				388				381				7				9
Total revenue		$	1,564				1,509				1,443				4	%			8	%
FAMC impact			26				—				—				NM				NM
Revenue excluding FAMC impact		$	1,538				1,509				1,443				2	%			7	%
Noninterest expense		$	910			$	875			$	858				4	%			6	%
Notable items tied to FAMC*			9				—				—				NM				NM
Underlying noninterest expense*			901			$	875			$	858				3	%			5
Base FAMC impact			25				—				—				NM				NM
Underlying noninterest expense excluding FAMC*		$	876			$	875			$	858				—	%			2	%
Pre-provision profit		$	654			$	634			$	585				3	%			12	%
Underlying pre-provision profit *			663				634				585				5				13
Underlying pre-provision profit excluding FAMC*			662				634				585				4				13
Provision for credit losses			78				85				72				(8	)			8
Net income available to common stockholders			436				425				341				3				28
Underlying net income available to common stockholders*			443				425				341				4				30
Key performance metrics*
Diluted EPS		$	0.91			$	0.88			$	0.68				3	%			34	%
Underlying EPS*		$	0.93			$	0.88			$	0.68				6				37
Efficiency ratio			58	%			58	%			59	%			25	bps			(121	) bps
Underlying efficiency ratio*			58				58				59				(33	)			(179	)
Underlying efficiency ratio excluding FAMC *			57	%			58	%			59	%			(100	) bps			(246	) bps
Operating leverage															(0.4	)%			2.2	%
Underlying operating leverage*															0.6				3.3
Underlying operating leverage excluding FAMC*															1.8	%			4.4	%

On an Underlying basis,* which excludes the impact of notable items, third quarter 2018 net income available to common stockholders of $443 million increased $18 million, or 4%, and fully diluted earnings per common share increased $0.05, or 6%, compared to second quarter 2018.

On an Underlying basis and excluding the impact of the FAMC acquisition,* results were highlighted by 2% revenue growth with a 2% increase in net interest income and two basis points of net interest margin expansion to 3.20%, as well as noninterest income growth of 1%. Results reflect continued strong execution against our efficiency initiatives, with relatively stable noninterest expense, a 1% improvement in the efficiency ratio to 57.0% and operating leverage of 1.8%. ROTCE of 13.4% improved from 12.9%.*

On an Underlying basis,* which excludes the impact of notable items, net income available to common shareholders increased $102 million, or 30%, and fully diluted earnings per common share increased $0.25, or 37%, compared to third quarter 2017. ROTCE improved to 13.5% from 10.1%.

On an Underlying basis and excluding the impact of FAMC,* year-over-year results were highlighted by continued strong top line growth, with revenue growth of 7%, led by net interest income growth of 8% and net interest margin expansion of 15 basis points to 3.20% and noninterest income growth of 3%. Noninterest expense growth of 2% reflects strong expense discipline, as the efficiency ratio improved 246 basis points to 57.0%, with positive operating leverage of 4.4%.

 

7

Citizens Financial Group, Inc.

 

Net interest income														3Q18 change from
($s in millions)		3Q18				2Q18				3Q17				2Q18								3Q17
														$				%				$				%
Interest income:
Interest and fees on loans and leases and loans held for sale		$	1,303			$	1,238			$	1,104			$	65				5	%		$	199				18	%
Investment securities			167				165				155				2				1				12				8
Interest-bearing deposits in banks			7				8				5				(1	)			(13	)			2				40
Total interest income		$	1,477			$	1,411			$	1,264			$	66				5	%		$	213				17	%
Interest expense:
Deposits		$	214			$	181			$	123			$	33				18	%		$	91				74	%
Federal funds purchased and securities sold under agreements to repurchase			2				1				1				1				100				1				100	%
Other short-term borrowed funds			19				14				7				5				36				12				171
Long-term borrowed funds			94				94				71				—				—				23				32
Total interest expense		$	329			$	290			$	202			$	39				13	%		$	127				63	%
Net interest income		$	1,148			$	1,121			$	1,062			$	27				2	%		$	86				8	%
Net interest margin			3.19	%			3.18	%			3.05	%			1	bps							14	bps

Third quarter 2018 net interest income of $1.1 billion increased $27 million, or 2%, from second quarter 2018, given a 1% increase in average loans and loans held for sale and a one basis point improvement in net interest margin to 3.19%. The improvement in net interest margin reflects higher loan yields tied to higher rates, partially offset by increased deposit and funding costs. Net interest margin, excluding the impact of FAMC,* improved two basis points to 3.20%.

Compared with third quarter 2017, net interest income increased $86 million, or 8%, driven by a 14 basis point improvement in net interest margin and 4% average loan growth. The improvement in net interest margin reflects higher interest-earning asset yields given higher rates and continued mix shift towards higher-yielding assets, partially offset by higher deposit and funding costs. Net interest margin, excluding the impact of FAMC,* improved 15 basis points to 3.20%.

 

Noninterest Income														3Q18 change from
($s in millions)		3Q18				2Q18				3Q17				2Q18								3Q17
														$				%				$				%
Service charges and fees		$	131			$	127			$	131			$	4				3	%		$	—				—	%
Card fees			61				60				58				1				2				3				5
Capital markets fees			47				48				53				(1	)			(2	)			(6	)			(11	)
Trust and investment services fees			45				43				38				2				5				7				18
Letter of credit and loan fees			32				32				30				—				—				2				7
Foreign exchange and interest rate products			31				34				24				(3	)			(9	)			7				29
Mortgage banking fees			49				27				27				22				81				22				81
Securities gains, net			3				2				2				1				50				1				50
Other income(1)			17				15				18				2				13				(1	)			(6	)
Noninterest income		$	416			$	388			$	381			$	28				7	%		$	35				9	%
FAMC impact		$	24			$	—			$	—			$	24				NM			$	24				NM
Noninterest income excluding FAMC		$	392			$	388			$	381			$	4				1	%		$	11				3	%

 

1)	Other income includes bank owned life insurance and other income.

Noninterest income of $416 million increased $28 million, or 7%, from second quarter 2018, driven by the $24 million impact of the FAMC acquisition in mortgage banking fees. Noninterest income, excluding the impact of FAMC,* of $392 million increased $4 million, or 1%, largely as seasonally higher service charges and fees and growth in trust and investment services fees, given increased sales volumes and growth in managed money balances were partially offset by a $3 million reduction in foreign exchange and interest rate products fees from record second quarter 2018 levels, reflecting a $3 million adjustment tied to a credit-valuation adjustment methodology change.

 

8

Citizens Financial Group, Inc.

 

Compared to third quarter 2017, noninterest income increased $35 million, or 9%, including a $24 million impact of the FAMC acquisition. Noninterest income, excluding the impact of FAMC,* of $392 million increased $11 million, or 3%, driven by growth in trust and investment services fees, reflecting increased sales volumes and growth in managed money balances, foreign exchange and interest rate products and card fees. These results were partially offset by lower capital markets fees, driven by lower loan syndication fees, in-line with overall market activity.

 

Noninterest expense														3Q18 change from
($s in millions)		3Q18				2Q18				3Q17				2Q18								3Q17
														$				%				$				%
Salaries and employee benefits		$	474			$	453			$	438			$	21				5	%		$	36				8	%
Outside services			107				106				99				1				1				8				8
Occupancy			81				79				78				2				3				3				4
Equipment expense			70				64				65				6				9				5				8
Amortization of software			47				46				45				1				2				2				4
Other operating expense			131				127				133				4				3				(2	)			(2	)
Noninterest expense		$	910			$	875			$	858			$	35				4	%		$	52				6	%
Notable items related to FAMC*		$	9			$	—			$	—			$	9				NM			$	9				NM
Underlying, as applicable
Salaries and employee benefits*		$	469			$	453			$	438			$	16				4	%		$	31				7	%
Underlying outside services*			106			$	106				99				—				—				7				7
Occupancy			81			$	79				78				2				3				3				4
Equipment expense			70			$	64				65				6				9				5				8
Amortization of software			47			$	46				45				1				2				2				4
Other operating expense*			128			$	127				133				1				1				(5	)			(4	)
Underlying noninterest expense*		$	901			$	875			$	858			$	26				3	%		$	43				5	%
FAMC expense impact			25			$	—			$	—				25				NM			$	25				NM
Underlying noninterest expense excluding FAMC*		$	876			$	875			$	858			$	1				—	%		$	18				2	%

Noninterest expense of $910 million increased $35 million, or 4%, from second quarter 2018, including a $25 million impact of the FAMC acquisition, and $9 million of pre-tax notable items tied to integration, largely in salaries and employee benefits. Underlying* noninterest expense, excluding the impact of FAMC, remained relatively stable, reflecting continued focus on expense discipline as stable salaries and employee benefits and a reduction in outside services offset an increase in equipment expense.

Compared with third quarter 2017, noninterest expense increased $52 million, or 6%, driven by the impact of the FAMC acquisition and notable items. Noninterest expense, excluding the impact of FAMC,* increased $18 million, or 2%, reflecting a $15 million increase in salaries and employee benefits tied to higher revenue-based compensation and the impact of our strategic growth initiatives. Results also reflected higher equipment expense, outside services, occupancy and amortization of software tied to investments in our strategic-growth initiatives, partially offset by lower other expense, reflecting lower legal and regulatory costs and insurance costs that more than offset higher advertising costs.

The third quarter 2018 effective tax rate of 23.2% increased modestly from second quarter 2018 and decreased from 32.2% in third quarter 2017, reflecting the impact of December 2017 Tax Legislation.

 

9

Citizens Financial Group, Inc.

 

Consolidated balance sheet review(1)														3Q18 change from
($s in millions)		3Q18				2Q18				3Q17				2Q18								3Q17
														$				%				$				%
Total assets		$	158,598			$	155,431			$	151,356			$	3,167				2	%		$	7,242				5	%
Total loans and leases			114,720				113,407				110,151				1,313				1				4,569				4
Loans held for sale, at fair value			1,303				521				500				782				150				803				161
Deposits			117,075				117,073				113,235				2				—				3,840				3
Average interest-earning assets			142,163				140,525				137,479				1,638				1				4,684				3
Stockholders’ equity			20,276				20,467				20,109				(191	)			(1	)			167				1
Stockholders’ common equity			19,733				19,924				19,862				(191	)			(1	)			(129	)			(1	)
Tangible common equity		$	13,117			$	13,394			$	13,512			$	(277	)			(2	)%		$	(395	)			(3	)%
Loan-to-deposit ratio (period-end)(2)			98.0	%			96.9	%			97.3	%			112	bps							71	bps
Loans to deposits ratio (avg balances)(2)			97.4				98.0				96.9				(63	) bps							45	bps
Common equity tier 1 capital ratio(3)			10.8				11.2				11.1
Total capital ratio(3)			13.4	%			13.8	%			13.8	%

 

1)	Represents period end unless otherwise noted.

2)	Excludes loans held for sale.

3)	Current reporting-period regulatory capital ratios are preliminary.

Total assets of $158.6 billion as of September 30, 2018 increased $3.2 billion, or 2%, from June 30, 2018, reflecting a $1.3 billion, or 1%, increase in loans and leases and a $1.7 billion increase tied to the FAMC acquisition, largely $828 million in loans held for sale and the $612 million mortgage servicing rights portfolio in non-interest earning assets. Compared to September 30, 2017, total assets increased $7.2 billion, or 5%, including the increase tied to the FAMC acquisition. Results also include a $4.6 billion, or 4%, increase in loans and leases, a $1.3 billion, or 5%, increase in investments and interest-bearing deposits as well as a $502 million increase in non-interest-earning assets, partially offset by a decrease in other loans held for sale.

 

Interest-earning assets														3Q18 change from
($s in millions)		3Q18				2Q18				3Q17				2Q18								3Q17
Period-end interest-earning assets														$				%				$				%
Investments and interest-bearing deposits		$	28,642			$	28,495			$	27,368			$	147				1	%		$	1,274				5	%
Commercial loans and leases			55,405				54,888				52,381				517				1				3,024				6
Retail loans			59,315				58,519				57,770				796				1				1,545				3
Total loans and leases			114,720				113,407				110,151				1,313				1				4,569				4
Loans held for sale, at fair value			1,303				521				500				782				150				803				161
Other loans held for sale			27				189				724				(162	)			(86	)			(697	)			(96	)
Total loans and leases and loans held for sale			116,050				114,117				111,375				1,933				2				4,675				4
Total period-end interest-earning assets		$	144,692			$	142,612			$	138,743			$	2,080				1	%		$	5,949				4	%
Average interest-earning assets
Investments and interest-bearing deposits		$	26,835			$	27,004			$	27,258			$	(169	)			(1	)%		$	(423	)			(2	)%
Commercial loans and leases			55,276				54,543				52,151				733				1				3,125				6
Retail loans			58,695				58,313				57,333				382				1				1,362				2
Total loans and leases			113,971				112,856				109,484				1,115				1				4,487				4
Loans held for sale, at fair value			1,228				470				503				758				161				725				144
Other loans held for sale			129				195				234				(66	)			(34	)			(105	)			(45	)
Total loans and leases and loans held for sale			115,328				113,521				110,221				1,807				2				5,107				5
Total average interest-earning assets		$	142,163			$	140,525			$	137,479			$	1,638				1	%		$	4,684				3	%

Period-end investments and interest-bearing deposits of $28.6 billion as of September 30, 2018 increased 1% from June 30, 2018. Compared with September 30, 2017, period-end investments and interest-bearing deposits increased$1.3 billion, or 5%, driven by an increase in cash positions. As of September 30, 2018, the average effective duration of the securities portfolio increased to 4.7 years compared to 4.5 years as of June 30, 2018, given higher long-term rates that drove an expected decrease in securities pre-payment speeds. As of September 30, 2017, the securities portfolio average effective duration was 3.8 years.

 

10

Citizens Financial Group, Inc.

 

Period-end loans and leases and loans held for sale of $116.1 billion as of September 30, 2018 increased $1.9 billion, or 2%, from $114.1 billion as of June 30, 2018, including an $828 million increase in loans held for sale tied to the FAMC acquisition. Results also reflect a $796 million increase in retail loans and a $517 million increase in commercial loans. Excluding the impact of FAMC,* period-end loans and leases and loans held for sale increased 1% from June 30, 2018.

Compared to September 30, 2017, period-end loans and leases and loans held for sale increased $4.7 billion, or 4%, including the impact of the FAMC acquisition. Results also reflect a $3.0 billion increase in commercial loans and leases as well as a $1.5 billion increase in retail loans. Excluding the impact of FAMC,* period-end loans and leases and loans held for sale increased 3% from September 30, 2017.

Average interest-earning assets of $142.2 billion increased $1.6 billion, or 1%, compared to second quarter 2018, and included a $790 million impact from the August 1, 2018 FAMC acquisition. Results reflect a $1.1 billion increase in loans and leases and a $692 million increase in loans held for sale, driven by the $724 million average impact of the FAMC acquisition. Commercial loan growth largely reflects strength in commercial real estate and selective commercial categories. Retail loan growth was driven by strength in residential mortgage, unsecured and education, partially offset by the planned reduction in auto, as well as lower home equity balances. Excluding the impact of FAMC,* average loan growth was 1%.

Compared to third quarter 2017, average interest-earning assets increased $4.7 billion, or 3%, driven by a $4.5 billion increase in loans and leases and a $620 million increase in loans held for sale, driven by the impact of the FAMC acquisition. These results were partially offset by a $423 million decrease in the investment securities portfolio and interest-bearing deposits, largely reflecting the impact of rising rates on securities valuations and lower cash balances. Average loans increased $4.5 billion, driven by a $3.1 billion increase in commercial loans with strength in Commercial Real Estate and in mid-corporate and middle market given geographic and industry expansion strategies, partially offset by the continued planned reduction in leasing. Results also reflected a $1.4 billion increase in retail loans, driven by strength in residential mortgage, education, unsecured and merchant-finance products, partially offset by a planned reduction in auto and lower home equity balances. Excluding the impact of FAMC,* average loan growth was 4%.

 

Deposits														3Q18 change from
($s in millions)		3Q18				2Q18				3Q17				2Q18								3Q17
Period-end deposits														$				%				$				%
Demand deposits		$	29,785			$	29,439			$	28,643			$	346				1	%		$	1,142				4	%
Checking with interest			22,323				22,775				21,756				(452	)			(2	)			567				3
Savings			10,523				9,902				9,470				621				6				1,053				11
Money market accounts			35,613				36,139				37,070				(526	)			(1	)			(1,457	)			(4	)
Term deposits			18,831				18,818				16,296				13				—				2,535				16
Total period-end deposits		$	117,075			$	117,073			$	113,235			$	2				—	%		$	3,840				3	%
Average deposits
Demand deposits		$	29,703			$	28,834			$	28,041			$	869				3	%		$	1,662				6	%
Checking with interest			21,780				22,185				21,909				(405	)			(2	)			(129	)			(1	)
Savings			10,198				9,889				9,491				309				3				707				7
Money market accounts			36,593				36,396				37,535				197				1				(942	)			(3	)
Term deposits			18,764				17,838				15,971				926				5				2,793				17
Total average deposits		$	117,038			$	115,142			$	112,947			$	1,896				2	%		$	4,091				4	%

 

11

Citizens Financial Group, Inc.

 

Total period-end deposits of $117.1 billion as of September 30, 2018 were stable with June 30, 2018, as growth in savings and demand deposits was partially offset by reductions in money market accounts and checking with interest. Compared to September 30, 2017, period-end deposits increased $3.8 billion, or 3%, reflecting growth in term deposits, demand deposits, savings and checking with interest, partially offset by lower money market accounts. The increase in demand deposits includes $624 million tied to the FAMC acquisition. Excluding the impact of FAMC,* sequential period-end deposit growth was relatively stable and year-over-year growth was 3%.

Third quarter 2018 average deposits of $117.0 billion increased $1.9 billion, or 2%, from second quarter 2018, reflecting growth in term deposits, demand deposits, savings and money market accounts, partially offset by lower checking with interest. Compared to third quarter 2017, average deposits increased $4.1 billion, or 4%, reflecting growth in term deposits, demand deposits and savings, partially offset by lower money market accounts and checking with interest. The increase in demand deposits includes $442 million tied to the FAMC acquisition. Excluding the impact of FAMC,* sequential average deposit growth was 1% and year-over-year growth was 3%.

 

Borrowed funds														3Q18 change from
($s in millions)		3Q18				2Q18				3Q17				2Q18								3Q17
Period-end borrowed funds														$				%				$				%
Federal funds purchased and securities sold under agreements to repurchase		$	374			$	326			$	453			$	48				15	%		$	(79	)			(17	)%
Other short-term borrowed funds			2,006				1,499				1,505				507				34				501				33
Long-term Borrowed funds
FHLB advances			8,012				6,010				5,361				2,002				33				2,651				49
Senior debt			5,977				5,981				6,045				(5	)			NM				(68	)			NM
Subordinated debt and other debt			1,650				1,650				1,994				—				NM				(344	)			NM
Total borrowed funds		$	18,019			$	15,466			$	15,358			$	2,553				17	%		$	2,661				17	%
Average borrowed funds		$	15,675			$	15,575			$	14,567			$	100				1	%		$	1,108				8	%

Total period-end borrowed funds of $18.0 billion as of September 30, 2018 increased $2.6 billion, or 17%, compared to June 30, 2018, primarily reflecting a $500 million increase in short-term Federal Home Loan Bank “FHLB” borrowings, and a $2.0 billion increase in long-term FHLB borrowings.

Compared to September 30, 2017, total period-end borrowed funds increased $2.7 billion, or 17%, primarily reflecting a $2.7 billion increase in long-term FHLB borrowings and a $501 million increase in other short-term borrowed funds, partially offset by a $344 million decrease in subordinated debt and other debt.

 

Capital														3Q18 change from
($s and shares in millions except per share data)		3Q18				2Q18				3Q17				2Q18								3Q17
Period-end capital														$				%				$				%
Stockholders’ equity		$	20,276			$	20,467			$	20,109			$	(191	)			(1	)%		$	167				1	%
Stockholders’ common equity			19,733				19,924				19,862				(191	)			(1	)			(129	)			(1	)
Tangible common equity			13,117				13,394				13,512				(277	)			(2	)			(395	)			(3	)
Tangible book value per common share		$	27.66			$	27.67			$	27.05			$	(0.01	)			—			$	0.61				2
Common shares - at end of period			474.1				484.1				499.5				(9.9	)			(2	)			(25.4	)			(5	)
Common shares - average (diluted)			477.6				486.1				502.2				(8.5	)			(2	)%			(24.6	)			(5	)%
Common equity tier 1 capital ratio(1)			10.8	%			11.2	%			11.1	%
Total capital ratio(1)			13.4				13.8				13.8
Tier 1 leverage ratio(1)			9.9	%			10.2	%			9.9	%

 

1)	Current reporting-period regulatory capital ratios are preliminary.

 

12