Citizens Financial Group Earnings 2019-03-31
CFG 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
March 31, 2019
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From
(Not Applicable)
Commission File Number 001-36636
(Exact name of the registrant as specified in its charter)
Delaware | 05-0412693 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
One Citizens Plaza, Providence, RI 02903
(Address of principal executive offices, including zip code)
(401) 456-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
[ü] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
[ü] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer | [ü] | Accelerated filer | [ ] |
Non-accelerated filer | [ ] | Smaller reporting company | [ ] |
Emerging growth company | [ ] | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ü] No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
Common stock, $0.01 par value per share | CFG | New York Stock Exchange |
Depositary Shares, each representing a 1/40th interest in a share of 6.350% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D | CFG PrD | New York Stock Exchange |
There were 458,355,574 shares of Registrant’s common stock ($0.01 par value) outstanding on May 1, 2019.
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Table of Contents | ||||
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CITIZENS FINANCIAL GROUP, INC.
GLOSSARY OF ACRONYMS AND TERMS
The following listing provides a comprehensive reference of common acronyms and terms we regularly use in our financial reporting:
ACL | Allowance for Credit Losses | |
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 of Directors | The Board of Directors of Citizens Financial Group, Inc. | |
bps | Basis Points | |
Capital Plan Rule | Federal Reserve’s Regulation Y Capital Plan Rule | |
CBNA | Citizens Bank, National Association | |
CCAR | Comprehensive Capital Analysis and Review | |
CCB | Capital Conservation Buffer | |
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 | |
CMO | Collateralized Mortgage Obligation | |
DFAST | Dodd-Frank Act Stress Test | |
Dodd-Frank Act | The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | |
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 | |
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 | |
HELOC | Home Equity Line of Credit | |
HTM | Held To Maturity | |
LCR | Liquidity Coverage Ratio | |
LHFS | Loans Held for Sale | |
LIBOR | London Interbank Offered Rate | |
LIHTC | Low Income Housing Tax Credit | |
LTV | Loan to Value | |
MBS | Mortgage-Backed Securities | |
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CITIZENS FINANCIAL GROUP, INC.
Mid-Atlantic | District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia | |
Midwest | Illinois, Indiana, Michigan, and Ohio | |
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
MSRs | Mortgage Servicing Rights | |
New England | Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont | |
NM | Not meaningful | |
NSFR | Net Stable Funding Ratio | |
OCC | Office of the Comptroller of the Currency | |
OCI | Other Comprehensive Income (Loss) | |
Parent Company | Citizens Financial Group, Inc. (the Parent Company of Citizens Bank, National Association and other subsidiaries) | |
ROTCE | Return on Average Tangible Common Equity | |
RPA | Risk Participation Agreement | |
SBA | Small Business Administration | |
SBO | Serviced by Others portfolio | |
SEC | United States Securities and Exchange Commission | |
SVaR | Stressed Value at Risk | |
TDR | Troubled Debt Restructuring | |
Tier 1 capital ratio | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach | |
Tier 1 leverage ratio | Tier 1 capital, which includes Common Equity Tier 1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital, divided by quarterly adjusted average assets as defined under the U.S. Basel III Standardized approach | |
Total capital ratio | Total capital, which includes Common Equity Tier 1 capital, tier 1 capital and allowance for credit losses and qualifying subordinated debt that qualifies as tier 2 capital, divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach | |
VaR | Value at Risk | |
VIE | Variable Interest Entities | |
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CITIZENS FINANCIAL GROUP, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page | ||
Forward-Looking Statements | ||
Selected Consolidated Financial Data | ||
Results of Operations | ||
Analysis of Financial Condition | ||
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CITIZENS FINANCIAL GROUP, INC.
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.”
Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
• | Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; |
• | The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment; |
• | Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals; |
• | Our ability to meet heightened supervisory requirements and expectations; |
• | Liabilities and business restrictions resulting from litigation and regulatory investigations; |
• | Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms; |
• | The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale; |
• | Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; |
• | The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; |
• | Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services; |
• | A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and |
• | Management’s ability to identify and manage these and other risks. |
In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.
More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2018.
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $161.3 billion in assets as of March 31, 2019. Our mission is to help our customers, colleagues and communities reach their potential. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. We help our customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center and the convenience of approximately 2,900 ATMs and approximately 1,100 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 |
• | Common equity tier 1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
This document contains non-GAAP financial measures denoted as “Underlying” results. “Underlying” results for any given reporting period exclude certain items that may occur in that period which Management does not consider indicative of the Company’s on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by our Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our “Underlying” results in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and accordingly, are useful to consider in addition to our GAAP financial results.
Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.
Non-GAAP measures are denoted throughout the MD&A by the use of the term “Underlying” and/or are followed by an asterisk (*). For additional information regarding our non-GAAP financial measures and reconciliations, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” included in this Report.
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL PERFORMANCE
First Quarter 2019 compared with First Quarter 2018 - Key Highlights
First quarter 2019 net income of $439 million increased 13% from $388 million in first quarter 2018, with earnings per diluted common share of $0.92, up 18% from $0.78 per diluted common share in first quarter 2018. First quarter 2019 ROTCE of 13.0% improved from 11.7% in first quarter 2018.
There were $4 million after-tax, or $0.01 per diluted common share, of notable items recorded in first quarter 2019 tied to integration costs associated with Acquisitions. There were no notable items recorded in first quarter 2018.
Three Months Ended March 31, | |||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||
(in millions) | Noninterest expense | Income tax expense | Net Income | Noninterest expense | Income tax expense | Net Income | |||||||||||||||||
Reported results (GAAP): | $937 | $127 | $439 | $883 | $113 | $388 | |||||||||||||||||
Less notable items: | |||||||||||||||||||||||
Total integration costs | 5 | (1 | ) | (4 | ) | — | — | — | |||||||||||||||
Underlying results* (non-GAAP) | $932 | $128 | $443 | $883 | $113 | $388 | |||||||||||||||||
* 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 $424 million increased $43 million, or 11%, compared to $381 million in first quarter 2018, driven by 9% revenue growth, with 6% growth in net interest income and 15% growth in noninterest income. |
◦ | On an Underlying basis,* net income available to common stockholders increased $47 million, or 12%, to $428 million from first quarter 2018. |
• | Total revenue of $1.6 billion increased $126 million, or 9%, from first quarter 2018, driven by strength in net interest income and noninterest income. |
◦ | Net interest income of $1.2 billion increased $69 million, or 6%, compared to $1.1 billion in first quarter 2018, driven by improvement in net interest margin and 6% average loan growth. |
◦ | Net interest margin of 3.23% increased by four basis points, compared to 3.19% in first quarter 2018, reflecting the benefit of higher short-term interest rates and continued mix shift towards higher-yielding assets, partially offset by an increase in funding costs and the impact of lower long-term rates on securities premium amortization. |
– | Net interest margin on a fully taxable-equivalent basis of 3.25% increased by four basis points, compared to 3.21% in first quarter 2018. |
– | Average loans and leases of $117.6 billion increased $6.5 billion, or 6%, from $111.1 billion in first quarter 2018, reflecting a $5.1 billion increase in commercial loans and leases and a $1.5 billion increase in retail loans. |
– | Average deposits of $120.4 billion increased $7.0 billion, or 6%, from $113.4 billion in first quarter 2018, reflecting strength in term, savings and checking with interest. |
◦ | Noninterest income of $428 million increased $57 million, or 15%, from first quarter 2018, driven by increased capital markets and foreign exchange and interest rate products revenues, reflecting the benefit of investments to broaden and enhance our capabilities. Results also reflected increased mortgage banking, trust and investment services fees, and letter of credit and loan fees. Higher other income reflected asset dispositions tied to balance sheet optimization and efficiency initiatives. |
• | Noninterest expense of $937 million increased $54 million, or 6%, compared to $883 million in first quarter 2018, reflecting increased salaries and employee benefits, which included the impact of annual merit increases, revenue driven incentives and strategic growth initiatives. First quarter 2019 results also included an increase in equipment and software expense reflecting the impact of growth initiatives. These increases were partially offset by lower other operating expense, largely tied to a reduction in FDIC insurance premiums. |
◦ | On an Underlying basis,* noninterest expense increased $49 million, or 6%, from first quarter 2018. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
• | Continued focus on top-line growth and expense management helped deliver positive operating leverage of 2.6% from first quarter 2018, and a 143 basis point improvement in the efficiency ratio to 59.0%. |
◦ | On an Underlying basis,* operating leverage was 3.2% (which included a 179 basis point reduction related to Acquisitions) and the efficiency ratio improved 176 basis points to 58.7% from first quarter 2018. |
• | ROTCE of 13.0% improved 129 basis points from 11.7% in first quarter 2018. |
◦ | On an Underlying basis,* ROTCE improved 141 basis points in first quarter 2019 to 13.1%. |
• | Tangible book value per common share improved to $29.60, up 9%, from first quarter 2018. Fully diluted average common shares outstanding decreased 5%, or 26.7 million shares over the same period. |
• | Provision for credit losses of $85 million increased $7 million, or 9%, from $78 million in first quarter 2018, reflecting expected increases in commercial from a net recovery position in first quarter 2018, expected seasoning in retail unsecured and the impact of loan growth. |
• | Net charge-offs of $89 million increased $19 million, or 27%, from $70 million in first quarter 2018. The ALLL of $1.2 billion remained stable compared to December 31, 2018. |
◦ | ALLL to loans and leases ratio of 1.06% as of March 31, 2019 compared with 1.06% as of December 31, 2018. |
◦ | ALLL to nonperforming loans and leases ratio of 160% as of March 31, 2019, compared with 156% as of December 31, 2018. |
• | The effective income tax rate decreased to 22.4% from 22.5% in first quarter 2018, primarily driven by a reduction in non-deductible FDIC premiums, partially offset by a reduction in excess tax benefits for equity-based compensation. |
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SELECTED CONSOLIDATED FINANCIAL DATA
The summary Consolidated Operating Data for the three months ended March 31, 2019 and 2018 and the summary Consolidated Balance Sheet data as of March 31, 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 March 31, | |||||||
(dollars in millions, except per share amounts) | 2019 | 2018 | |||||
OPERATING DATA: | |||||||
Net interest income | $1,160 | $1,091 | |||||
Noninterest income | 428 | 371 | |||||
Total revenue | 1,588 | 1,462 | |||||
Provision for credit losses | 85 | 78 | |||||
Noninterest expense | 937 | 883 | |||||
Income before income tax expense | 566 | 501 | |||||
Income tax expense | 127 | 113 | |||||
Net income | $439 | $388 | |||||
Net income available to common stockholders | $424 | $381 | |||||
Net income per common share - basic | $0.92 | $0.78 | |||||
Net income per common share - diluted | $0.92 | $0.78 | |||||
OTHER OPERATING DATA(1): | |||||||
Return on average common equity | 8.62 | % | 7.83 | % | |||
Return on average tangible common equity | 13.00 | 11.71 | |||||
Return on average total assets | 1.11 | 1.04 | |||||
Return on average total tangible assets | 1.16 | 1.08 | |||||
Efficiency ratio | 59.00 | 60.43 | |||||
Operating leverage(2) | 2.57 | 2.14 | |||||
Net interest margin(3) | 3.23 | 3.19 | |||||
Effective income tax rate | 22.42 | 22.52 | |||||
(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) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of
days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(dollars in millions) | March 31, 2019 | December 31, 2018 | |||||
BALANCE SHEET DATA: | |||||||
Total assets | $161,342 | $160,518 | |||||
Loans held for sale, at fair value | 1,186 | 1,219 | |||||
Other loans held for sale | 66 | 101 | |||||
Loans and leases | 117,615 | 116,660 | |||||
Allowance for loan and lease losses | (1,245 | ) | (1,242 | ) | |||
Total securities | 25,651 | 25,075 | |||||
Goodwill | 7,040 | 6,923 | |||||
Total liabilities | 139,811 | 139,701 | |||||
Total deposits | 123,916 | 119,575 | |||||
Federal funds purchased and securities sold under agreements to repurchase | 668 | 1,156 | |||||
Other short-term borrowed funds(1) | 11 | 161 | |||||
Long-term borrowed funds(1) | 11,725 | 15,925 | |||||
Total stockholders’ equity | 21,531 | 20,817 | |||||
OTHER BALANCE SHEET DATA: | |||||||
Asset Quality Ratios: | |||||||
Allowance for loan and lease losses as a percentage of loans and leases | 1.06 | % | 1.06 | % | |||
Allowance for loan and lease losses as a percentage of nonperforming loans and leases | 159.68 | 155.99 | |||||
Nonperforming loans and leases as a percentage of loans and leases | 0.66 | 0.68 | |||||
Capital Ratios: | |||||||
CET1 capital ratio(2) | 10.5 | % | 10.6 | % | |||
Tier 1 capital ratio | 11.3 | 11.3 | |||||
Total capital ratio | 13.4 | 13.3 | |||||
Tier 1 leverage ratio | 10.0 | 10.0 | |||||
(1) Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.
(2) See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Income
The following table presents the significant components of our net income:
Three Months Ended March 31, | ||||||||||||||
(dollars in millions) | 2019 | 2018 | Change | Percent | ||||||||||
Net interest income | $1,160 | $1,091 | $69 | 6 | % | |||||||||
Noninterest income | 428 | 371 | 57 | 15 | ||||||||||
Total revenue | 1,588 | 1,462 | 126 | 9 | ||||||||||
Provision for credit losses | 85 | 78 | 7 | 9 | ||||||||||
Noninterest expense | 937 | 883 | 54 | 6 | ||||||||||
Income before income tax expense | 566 | 501 | 65 | 13 | ||||||||||
Income tax expense | 127 | 113 | 14 | 12 | ||||||||||
Net income | $439 | $388 | $51 | 13 | ||||||||||
Net income available to common stockholders | $424 | $381 | $43 | 11 | % | |||||||||
Return on average common equity | 8.62 | % | 7.83 | % | 79 | bps | ||||||||
Return on average tangible common equity(1) | 13.00 | % | 11.71 | % | 129 | bps | ||||||||
(1) See “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations” for definitions of our key performance metrics.
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 Annual Report on Form 10-K for the year ended December 31, 2018.
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CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table presents the major components of net interest income and net interest margin:
Three Months Ended March 31, | |||||||||||||||||||||||
2019 | 2018 | Change | |||||||||||||||||||||
(dollars in millions) | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Income/ Expense | Yields/ Rates | Average Balances | Yields/ Rates | |||||||||||||||
Assets: | |||||||||||||||||||||||
Interest-bearing cash and due from banks and deposits in banks | $1,497 | $8 | 2.19 | % | $1,442 | $6 | 1.61 | % | $55 | 58 bps | |||||||||||||
Taxable investment securities | 25,136 | 166 | 2.64 | 25,433 | 168 | 2.64 | (297 | ) | — | ||||||||||||||
Non-taxable investment securities | 5 | — | 2.60 | 6 | — | 2.60 | (1 | ) | — | ||||||||||||||
Total investment securities | 25,141 | 166 | 2.64 | 25,439 | 168 | 2.64 | (298 | ) | — | ||||||||||||||
Commercial | 41,562 | 460 | 4.43 | 37,960 | 357 | 3.77 | 3,602 | 66 | |||||||||||||||
Commercial real estate | 13,272 | 165 | 4.98 | 11,549 | 119 | 4.11 | 1,723 | 87 | |||||||||||||||
Leases | 2,873 | 21 | 2.85 | 3,114 | 20 | 2.61 | (241 | ) | 24 | ||||||||||||||
Total commercial loans and leases | 57,707 | 646 | 4.48 | 52,623 | 496 | 3.77 | 5,084 | 71 | |||||||||||||||
Residential mortgages | 19,094 | 175 | 3.67 | 17,162 | 153 | 3.56 | 1,932 | 11 | |||||||||||||||
Home equity loans | 1,039 | 16 | 6.05 | 1,342 | 19 | 5.76 | (303 | ) | 29 | ||||||||||||||
Home equity lines of credit | 12,552 | 159 | 5.13 | 13,353 | 138 | 4.20 | (801 | ) | 93 | ||||||||||||||
Home equity loans serviced by others | 385 | 7 | 7.75 | 520 | 9 | 7.31 | (135 | ) | 44 | ||||||||||||||
Home equity lines of credit serviced by others | 99 | 1 | 4.97 | 142 | 1 | 3.98 | (43 | ) | 99 | ||||||||||||||
Automobile | 12,070 | 120 | 4.04 | 13,015 | 112 | 3.47 | (945 | ) | 57 | ||||||||||||||
Education | 9,069 | 134 | 5.99 | 8,283 | 114 | 5.58 | 786 | 41 | |||||||||||||||
Credit cards | 1,998 | 53 | 10.76 | 1,828 | 48 | 10.70 | 170 | 6 | |||||||||||||||
Other retail | 3,636 | 70 | 7.83 | 2,847 | 56 | 7.97 | 789 | (14 | ) | ||||||||||||||
Total retail loans | 59,942 | 735 | 4.96 | 58,492 | 650 | 4.49 | 1,450 | 47 | |||||||||||||||
Total loans and leases | 117,649 | 1,381 | 4.72 | 111,115 | 1,146 | 4.15 | 6,534 | 57 | |||||||||||||||
Loans held for sale, at fair value | 1,035 | 11 | 4.35 | 420 | 4 | 3.84 | 615 | 51 | |||||||||||||||
Other loans held for sale | 191 | 4 | 7.03 | 255 | 4 | 6.21 | (64 | ) | 82 | ||||||||||||||
Interest-earning assets | 145,513 | 1,570 | 4.34 | 138,671 | 1,328 | 3.85 | 6,842 | 49 | |||||||||||||||
Allowance for loan and lease losses | (1,243 | ) | (1,236 | ) | (7 | ) | |||||||||||||||||
Goodwill | 7,018 | 6,887 | 131 | ||||||||||||||||||||
Other noninterest-earning assets | 9,127 | 7,201 | 1,926 | ||||||||||||||||||||
Total assets | $160,415 | $151,523 | $8,892 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity: | |||||||||||||||||||||||
Checking with interest | $22,987 | $52 | 0.91 | % | $21,665 | $26 | 0.48 | % | $1,322 | 43 bps | |||||||||||||
Money market accounts | 35,209 | 110 | 1.26 | 37,084 | 65 | 0.71 | (1,875 | ) | 55 | ||||||||||||||
Regular savings | 12,626 | 17 | 0.56 | 9,627 | 1 | 0.05 | 2,999 | 51 | |||||||||||||||
Term deposits | 21,127 | 108 | 2.08 | 16,503 | 53 | 1.30 | 4,624 | 78 | |||||||||||||||
Total interest-bearing deposits | 91,949 | 287 | 1.27 | 84,879 | 145 | 0.69 | 7,070 | 58 | |||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase (1) | 640 | 2 | 1.24 | 645 | 1 | 0.68 | (5 | ) | 56 | ||||||||||||||
Other short-term borrowed funds (2) | 58 | — | 2.75 | 588 | 2 | 1.67 | (530 | ) | 108 | ||||||||||||||
Long-term borrowed funds (2) | 14,736 | 121 | 3.27 | 14,442 | 89 | 2.46 | 294 | 81 | |||||||||||||||
Total borrowed funds | 15,434 | 123 | 3.18 | 15,675 | 92 | 2.36 | (241 | ) | 82 | ||||||||||||||
Total interest-bearing liabilities | 107,383 | 410 | 1.54 | 100,554 | 237 | 0.95 | 6,829 | 59 | |||||||||||||||
Demand deposits | 28,465 | 28,544 | (79 | ) | |||||||||||||||||||
Other liabilities | 3,584 | 2,446 | 1,138 | ||||||||||||||||||||
Total liabilities | 139,432 | 131,544 | 7,888 | ||||||||||||||||||||
Stockholders’ equity | 20,983 | 19,979 | 1,004 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $160,415 | $151,523 | $8,892 | ||||||||||||||||||||
Interest rate spread | 2.80 | % | 2.90 | % | (10) | ||||||||||||||||||
Net interest income and net interest margin(3) | $1,160 | 3.23 | % | $1,091 | 3.19 | % | 4 bps | ||||||||||||||||
Net interest income and net interest margin, FTE(4) | $1,166 | 3.25 | % | $1,096 | 3.21 | % | 4 bps | ||||||||||||||||
Memo: Total deposits (interest-bearing and demand) | $120,414 | $287 | 0.97 | % | $113,423 | $145 | 0.52 | % | $6,991 | 45 bps | |||||||||||||
(1) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. See “—Analysis of Financial Condition — Derivatives” for further information.
(2) Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of
days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.
(4) Net interest income and net interest margin is presented on a fully taxable-equivalent ("FTE") basis using the federal statutory tax rate of 21%. In the fully taxable-equivalent presentation of net interest income and net interest margin, interest income on tax-exempt assets is increased to make it fully equivalent to interest income earned on taxable assets. The FTE impact is predominantly attributable to commercial loans for the periods presented.
14
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net interest margin of 3.23% increased four basis points compared to 3.19% in first quarter 2018, driven by higher interest-earning asset yields given higher interest rates and continued mix shift toward more attractive risk-adjusted return portfolios. These results were partially offset by higher funding costs and the impact of lower long-term rates on securities premium amortization. Net interest margin on an FTE basis of 3.25% also increased four basis points compared to 3.21% in first quarter 2018. Average interest-earning asset yields of 4.34% increased 49 basis points from 3.85% in first quarter 2018, while average interest-bearing liability costs of 1.54% increased 59 basis points from 0.95% in first quarter 2018.
Average interest-earning assets of $145.5 billion increased $6.8 billion, or 5%, from first quarter 2018, driven by a $5.1 billion increase in average commercial loans and leases and a $1.5 billion increase in average retail loans, partially offset by a $243 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by commercial and commercial real estate. Retail loan growth was driven by residential mortgage, education, credit cards and other retail.
Average deposits of $120.4 billion increased $7.0 billion from first quarter 2018, reflecting growth in term deposits, checking with interest, and savings. Total interest-bearing deposit costs of $287 million increased $142 million, or 98%, from $145 million in first quarter 2018, primarily due to rising rates.
Average total borrowed funds of $15.4 billion decreased $241 million from first quarter 2018, reflecting a decrease in other short-term borrowed funds and a decrease in federal funds purchased and repurchase agreements, partially offset by an increase in long-term borrowed funds, primarily senior debt. Total borrowed funds costs of $123 million increased $31 million from first quarter 2018. The total borrowed funds cost of 3.18% increased 82 basis points from 2.36% in first quarter 2018 due to an increase in long-term rates and a mix shift to long-term senior debt.
Noninterest Income
The following table presents the significant components of our noninterest income:
Three Months Ended March 31, | ||||||||||||||
(in millions) | 2019 | 2018 | Change | Percent | ||||||||||
Service charges and fees | $123 | $124 | ($1 | ) | (1 | %) | ||||||||
Card fees | 59 | 61 | (2 | ) | (3 | ) | ||||||||
Capital markets fees | 54 | 39 | 15 | 38 | ||||||||||
Trust and investment services fees | 47 | 40 | 7 | 18 | ||||||||||
Mortgage banking fees | 43 | 25 | 18 | 72 | ||||||||||
Letter of credit and loan fees | 33 | 30 | 3 | 10 | ||||||||||
Foreign exchange and interest rate products | 36 | 27 | 9 | 33 | ||||||||||
Securities gains, net | 8 | 8 | — | — | ||||||||||
Other income (1) | 25 | 17 | 8 | 47 | ||||||||||
Noninterest income | $428 | $371 | $57 | 15 | % | |||||||||
(1) Includes net impairment losses recognized in earnings on available for sale debt securities, bank-owned life insurance income and other income.
15
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Noninterest income increased $57 million from first quarter 2018 driven by increased capital markets and foreign exchange and interest rate products revenues, reflecting the benefit of investments to broaden and enhance our capabilities. Results also reflected increased mortgage banking, trust and investment services fees, and letter of credit and loan fees. Higher other income reflected asset dispositions tied to balance sheet optimization and efficiency initiatives.
Provision for Credit Losses
The provision for credit losses of $85 million increased $7 million compared to $78 million in first quarter 2018, reflecting moderately higher losses. First quarter 2019 results reflected a $4 million ACL release, compared to an $8 million ACL build in first quarter 2018. Net charge-offs for first quarter 2019 of $89 million were $19 million higher than first quarter 2018 due to an increase in commercial losses, which reflected the impact of a commercial real estate credit and a reduction in commercial recoveries.
The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ACL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.
16
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Noninterest Expense
The following table presents the significant components of our noninterest expense:
Three Months Ended March 31, | ||||||||||||||
(in millions) | 2019 | 2018 | Change | Percent | ||||||||||
Salaries and employee benefits | $509 | $470 | $39 | 8 | % | |||||||||
Equipment and software expense(1) | 125 | 113 | 12 | 11 | ||||||||||
Outside services | 110 | 99 | 11 | 11 | ||||||||||
Occupancy | 83 | 81 | 2 | 2 | ||||||||||
Other operating expense | 110 | 120 | (10 | ) | (8 | ) | ||||||||
Noninterest expense | $937 | $883 | $54 | 6 | % | |||||||||
(1) In the first quarter of 2019, we combined our presentation of equipment expense and amortization of software into equipment and software expense. Prior periods have been adjusted to conform with the current period presentation.
Noninterest expense increased $54 million from first quarter 2018, driven by an increase in salaries and employee benefits, which included the impact of annual merit increases, revenue driven incentives and strategic growth initiatives. First quarter 2019 results included an increase in equipment and software expense, which also reflected the impact of growth initiatives. These increases were partially offset by lower other operating expense, largely tied to a reduction in FDIC insurance premiums. Underlying noninterest expense* increased $49 million, or 6%.
17
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Tax Expense
Income tax expense was $127 million and $113 million in first quarter 2019 and 2018, respectively. Our effective income tax rates in first quarter 2019 and 2018 were 22.4% and 22.5%, respectively. The decrease in the effective income tax rate was driven by a reduction in non-deductible FDIC insurance premiums, partially offset by a reduction in excess tax benefits for equity-based compensation.
18
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Business Operating Segments
The following tables present certain financial data of our business operating segments, Other and consolidated:
As of and for the Three Months Ended March 31, 2019 | |||||||||||||||
(dollars in millions) | Consumer Banking | Commercial Banking | Other(4) | Consolidated | |||||||||||
Net interest income | $788 | $372 | $— | $1,160 | |||||||||||
Noninterest income | 247 | 150 | 31 | 428 | |||||||||||
Total revenue | 1,035 | 522 | 31 | 1,588 | |||||||||||
Noninterest expense | 700 | 209 | 28 | 937 | |||||||||||
Profit before provision for credit losses | 335 | 313 | 3 | 651 | |||||||||||
Provision for credit losses | 67 | 21 | (3 | ) | 85 | ||||||||||
Income before income tax expense (benefit) | 268 | 292 | 6 | 566 | |||||||||||
Income tax expense (benefit) | 66 | 65 | (4 | ) | 127 | ||||||||||
Net income | $202 | $227 | $10 | $439 | |||||||||||
Loans and leases (period-end)(1) | $62,339 | $54,267 | $2,261 | $118,867 | |||||||||||
Average Balances: | |||||||||||||||
Total assets | $65,007 | $55,630 | $39,778 | $160,415 | |||||||||||
Total loans and leases(1) | 62,163 | 54,436 | 2,276 | 118,875 | |||||||||||
Deposits | 82,569 | 29,823 | 8,022 | 120,414 | |||||||||||
Interest-earning assets | 62,216 | 54,724 | 28,573 | 145,513 | |||||||||||
Key Performance Metrics: | |||||||||||||||
Net interest margin(2)(3) | 5.14 | % | 2.76 | % | NM | 3.23 | % | ||||||||
Efficiency ratio | 67.62 | 40.11 | NM | 59.00 | |||||||||||
Loans-to-deposits ratio (average balances) | 74.27 | 181.23 | NM | 97.70 | |||||||||||
Return on average total tangible assets(2) | 1.26 | 1.66 | NM | 1.16 | |||||||||||
(1) Includes LHFS.
(2) Ratios for the period ended March 31, 2019 are presented on an annualized basis.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior period have been adjusted to conform with the current period presentation.
(4) Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense, not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”
19
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
As of and for the Three Months Ended March 31, 2018 | ||||||||||||||||
(dollars in millions) | Consumer Banking | Commercial Banking | Other(5) | Consolidated | ||||||||||||
Net interest income | $733 | $357 | $1 | $1,091 | ||||||||||||
Noninterest income | 222 | 125 | 24 | 371 | ||||||||||||
Total revenue | 955 | 482 | 25 | 1,462 | ||||||||||||
Noninterest expense | 656 | 208 | 19 | 883 | ||||||||||||
Profit before provision for credit losses | 299 | 274 | 6 | 579 | ||||||||||||
Provision for credit losses | 72 | (4 | ) | 10 | 78 | |||||||||||
Income (loss) before income tax expense (benefit) | 227 | 278 | (4 | ) | 501 | |||||||||||
Income tax expense (benefit) | 57 | 63 | (7 | ) | 113 | |||||||||||
Net income | $170 | $215 | $3 | $388 | ||||||||||||
Loans and leases (period-end)(1) | $59,795 | $49,868 | $2,562 | $112,225 | ||||||||||||
Average Balances: | ||||||||||||||||
Total assets | $61,348 | $50,393 | $39,782 | $151,523 | ||||||||||||
Total loans and leases(1) | 59,942 | — | 49,285 | 2,563 | 111,790 | |||||||||||
Deposits | 75,416 | 30,766 | 7,241 | 113,423 | ||||||||||||
Interest-earning assets | 59,994 | 49,479 | 29,198 | 138,671 | ||||||||||||
Key Performance Metrics | ||||||||||||||||
Net interest margin(2)(3) | 4.96 | % | 2.93 | % | NM | 3.19 | % | |||||||||
Efficiency ratio | 68.72 | 43.07 | NM | 60.43 | ||||||||||||
Loans-to-deposits ratio (average balances)(4) | 79.14 | 158.84 | NM | 97.96 | ||||||||||||
Return on average total tangible assets(2) | 1.12 | 1.73 | NM | 1.08 | ||||||||||||
(1) Includes LHFS.
(2) Ratios for the period ended March 31, 2018 are presented on an annualized basis.
(3) In the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior period have been adjusted to conform with the current period presentation.
(4) We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.
(5) Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense, not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”
We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and related revenues, provision for credit losses and expenses. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets not directly allocated to a business operating segment, community development, non-core assets (including legacy Royal Bank of Scotland Group plc aircraft loan and leasing), and other unallocated assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.” In addition, Other includes goodwill not directly allocated to a business operating segment and any associated goodwill impairment charges. For impairment testing purposes, we allocate all goodwill to our Consumer Banking and/or Commercial Banking reporting units. There have been no significant changes in our methodologies used to allocate items to our business operating segments as described in “—Results of Operations — Business Operating Segments” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.
20
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Consumer Banking
As of and for the Three Months Ended March 31, | ||||||||||||||
(dollars in millions) | 2019 | 2018 | Change | Percent | ||||||||||
Net interest income | $788 | $733 | $55 | 8 | % | |||||||||
Noninterest income | 247 | 222 | 25 | 11 | ||||||||||
Total revenue | 1,035 | 955 | 80 | 8 | ||||||||||
Noninterest expense | 700 | 656 | 44 | 7 | ||||||||||
Profit before provision for credit losses | 335 | 299 | 36 | 12 | ||||||||||
Provision for credit losses | 67 | 72 | (5 | ) | (7 | ) | ||||||||
Income before income tax expense | 268 | 227 | 41 | 18 | ||||||||||
Income tax expense | 66 | 57 | 9 | 16 | ||||||||||
Net income | $202 | $170 | $32 | 19 | ||||||||||
Loans (period-end)(1) | $62,339 | $59,795 | $2,544 | 4 | % | |||||||||
Average Balances: | ||||||||||||||
Total assets | $65,007 | $61,348 | $3,659 | 6 | % | |||||||||
Total loans and leases(1) | 62,163 | 59,942 | 2,221 | 4 | ||||||||||
Deposits | 82,569 | 75,416 | 7,153 | 9 | ||||||||||
Interest-earning assets | 62,216 | 59,994 | 2,222 | 4 | ||||||||||
Key Performance Metrics: | ||||||||||||||
Net interest margin(2) | 5.14 | % | 4.96 | % | 18 | bps | ||||||||
Efficiency ratio | 67.62 | 68.72 | (110 | ) bps | ||||||||||
Loans-to-deposits ratio (average balances)(3) | 74.27 | 79.14 | (487 | ) bps | ||||||||||
Return on average total tangible assets(2) | 1.26 | 1.12 | 14 | bps | ||||||||||
(1) Includes LHFS.
(2) Ratios for the periods ended March 31, 2019 and 2018 are presented on an annualized basis.
(3) We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.
Consumer Banking net interest income of $788 million increased $55 million, or 8%, from first quarter 2018, driven by the benefit of a $2.2 billion increase in average loans led by residential mortgage, student and unsecured retail with higher loan yields that included the benefit of higher rates and continued mix shift towards higher yielding assets, partially offset by an increase in deposit costs. Noninterest income increased $25 million from first quarter 2018, driven by higher mortgage banking fees related to FAMC, and higher trust and investment fees related to our acquisition of Clarfeld. Noninterest expense of $700 million increased $44 million, or 7%, from first quarter 2018, reflecting higher salaries and benefits, outside services and equipment costs. Provision for credit losses of $67 million decreased $5 million, or 7%, reflecting lower charge-offs net of recoveries.
21
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Commercial Banking
As of and for the Three Months Ended March 31, | ||||||||||||||
(dollars in millions) | 2019 | 2018 | Change | Percent | ||||||||||
Net interest income | $372 | $357 | $15 | 4 | % | |||||||||
Noninterest income | 150 | 125 | 25 | 20 | ||||||||||
Total revenue | 522 | 482 | 40 | 8 | ||||||||||
Noninterest expense | 209 | 208 | 1 | 0 | ||||||||||
Profit before provision for credit losses | 313 | 274 | 39 | 14 | ||||||||||
Provision for credit losses | 21 | (4 | ) | 25 | NM | |||||||||
Income before income tax expense | 292 | 278 | 14 | 5 | ||||||||||
Income tax expense | 65 | 63 | 2 | 3 | ||||||||||
Net income | $227 | $215 | $12 | 6 | ||||||||||
Loans and leases (period-end)(1) | $54,267 | $49,868 | $4,399 | 9 | % | |||||||||
Average Balances: | ||||||||||||||
Total assets | $55,630 | $50,393 | $5,237 | 10 | % | |||||||||
Total loans and leases(1) | 54,436 | 49,285 | 5,151 | 10 | ||||||||||
Deposits | 29,823 | 30,766 | (943 | ) | (3 | ) | ||||||||
Interest-earning assets | 54,724 | 49,479 | 5,245 | 11 | ||||||||||
Key Performance Metrics: | ||||||||||||||
Net interest margin(2) | 2.76 | % | 2.93 | % | (17 | ) bps | ||||||||
Efficiency ratio | 40.11 | 43.07 | (296 | ) bps | ||||||||||
Loans-to-deposits ratio (average balances)(3) | 181.23 | 158.84 | 2,239 | bps | ||||||||||
Return on average total tangible assets(2) | 1.66 | 1.73 | (7 | ) bps | ||||||||||
(1) Includes LHFS.
(2) Ratios for the periods ended March 31, 2019 and 2018 are presented on an annualized basis.
(3) We revised our method of calculating the loans-to-deposits ratio in the third quarter of 2018 to exclude LHFS. Prior periods have been adjusted to conform with the current period presentation.
Commercial Banking net interest income of $372 million increased $15 million, or 4%, from $357 million in first quarter 2018, reflecting a $5.2 billion increase in average loans and leases. Noninterest income of $150 million increased $25 million, or 20%, from $125 million in first quarter 2018, reflecting higher foreign exchange and interest rate products fees and capital markets fees. Noninterest expense of $209 million increased $1 million, from $208 million in first quarter 2018, driven by higher salaries and employee benefits expense. Provision for credit losses of $21 million increased $25 million from first quarter 2018, driven by higher net charge-offs in 2019, which reflected the impact of a commercial real estate credit and a reduction in recoveries.
22
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Other
As of and for the Three Months Ended March 31, | ||||||||||||||
(in millions) | 2019 | 2018 | Change | Percent | ||||||||||
Net interest income | $— | $1 | ($1 | ) | (100 | %) | ||||||||
Noninterest income | 31 | 24 | 7 | 29 | ||||||||||
Total revenue | 31 | 25 | 6 | 24 | ||||||||||
Noninterest expense | 28 | 19 | 9 | 47 | ||||||||||
Profit before provision for credit losses | 3 | 6 | (3 | ) | (50 | ) | ||||||||
Provision for credit losses | (3 | ) | 10 | (13 | ) | NM | ||||||||
Income (loss) before income tax benefit | 6 | (4 | ) | 10 | NM | |||||||||
Income tax benefit | (4 | ) | (7 | ) | 3 | 43 | ||||||||
Net income | $10 | $3 | $7 | 233 | ||||||||||
Loans and leases (period-end)(1) | $2,261 | $2,562 | ($301 | ) | (12 | %) | ||||||||
Average Balances: | ||||||||||||||
Total assets | $39,778 | $39,782 | ($4 | ) | 0 | % | ||||||||
Total loans and leases(1) | 2,276 | 2,563 | (287 | ) | (11 | ) | ||||||||
Deposits | 8,022 | 7,241 | 781 | 11 | ||||||||||
Interest-earning assets | 28,573 | 29,198 | (625 | ) | (2 | ) | ||||||||
(1) Includes LHFS.
Other net interest income decreased $1 million due to higher funding costs, declining benefit of swaps, and non-core portfolio runoff, largely offset by residual FTP. Results also reflected an ACL release of $4 million in first quarter 2019, compared to an ACL build of $8 million in first quarter 2018.
23
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
Securities
Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns. The following table presents our securities AFS and HTM:
March 31, 2019 | December 31, 2018 | |||||||||||||||||||||
(in millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Change in Fair Value | |||||||||||||||||
U.S. Treasury and other | $72 | $72 | $24 | $24 | $48 | 200 | % | |||||||||||||||
State and political subdivisions | 5 | 5 | 5 | 5 | — | — | ||||||||||||||||
Mortgage-backed securities, at fair value: | ||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities | 20,768 | 20,497 | 20,211 | 19,634 | 863 | 4 | ||||||||||||||||
Other/non-agency | 916 | 930 | 236 | 232 | 698 | 301 | ||||||||||||||||
Total mortgage-backed securities | 21,684 | 21,427 | 20,447 | 19,866 | 1,561 | 8 | ||||||||||||||||
Total debt securities available for sale, at fair value | $21,761 | $21,504 | $20,476 | $19,895 | $1,609 | 8 | % | |||||||||||||||
Mortgage-backed securities, at cost: | ||||||||||||||||||||||
Federal agencies and U.S. government sponsored entities | $3,345 | $3,267 | $3,425 | $3,293 | ($26 | ) | (1 | %) | ||||||||||||||
Other/non-agency | — | — | 740 | 748 | (748 | ) | (100 | ) | ||||||||||||||
Total mortgage-backed securities | 3,345 | |||||||||||||||||||||