8-K 1 d695244d8k.htm FORM 8-K Form 8-K

 

 

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): January 22, 2019

 

 

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 8.01   Other Events.

On January 18, 2019, Citizens Financial Group, Inc. (“CFG” or “Citizens”) reported fourth quarter net income of $465 million, or $0.96 per diluted common share, compared with fourth quarter 2017 net income of $666 million, or $1.35 per diluted common share. Fourth quarter 2018 results reflect a net $9 million after-tax reduction, or ($0.02) per fully diluted share, from notable items compared with a net $317 million after-tax benefit, or $0.64 per share, in fourth quarter 2017. Fourth quarter 2018 Return on Average Tangible Common Equity* (“ROTCE”) of 13.8% compares with fourth quarter 2017 of 19.9%.

Full year 2018 net income available to common stockholders of $1.7 billion and diluted EPS of $3.52 compares with $1.6 billion and diluted EPS of $3.25 in 2017. 2018 ROTCE* of 12.9% compares with 12.3% in 2017. 2018 results reflect a net $16 million after-tax reduction, or ($0.04) per fully diluted share, from notable items compared with a net $340 million after-tax benefit, or $0.67 per share, in 2017.

Excluding notable items, on an Underlying basis,* fourth quarter 2018 net income available to common stockholders of $459 million, or $0.98 per diluted share, increased 32% and 38%, respectively, from fourth quarter 2017 and increased 4% and 5%, respectively, from third quarter 2018. Underlying fourth quarter 2018 ROTCE* of 14.1% improved from 10.4% in fourth quarter 2017 and 13.5% in third quarter 2018. On an Underlying basis,* full year 2018 net income available to common stockholders of $1.7 billion increased 32% and diluted EPS of $3.56 increased 38% from 2017 levels. On an Underlying basis,* 2018 ROTCE of 13.1% compares with 9.8% in 2017.

 

*Please see important information on Key Performance Metrics and Non-GAAP Financial Measures, as applicable, at the end of this report for an explanation of our use of these metrics and non-GAAP financial measures and their reconciliation to GAAP financial measures. Where there is a reference to “Underlying” results in a paragraph, all measures that follow these references are on the same basis, when applicable. References to “Underlying results excluding FAMC” exclude the impact of the August 1, 2018 FAMC acquisition and notable items, as applicable. Additional information regarding the impact of the FAMC acquisition and notable items may be found in the Notable Items 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’ board of directors has declared a 19% increase in its quarterly cash dividend to $0.32 per common share. The first quarter dividend is now 45% higher than a year ago. The dividend is payable on February 14, 2019 to shareholders of record at the close of business on January 31, 2019.

Fourth Quarter 2018 vs. Third Quarter 2018

Key Highlights

 

   

Fourth quarter highlights include ROTCE of 13.8% and Underlying ROTCE* of 14.1%. Underlying results excluding the impact of notable items and Franklin American Mortgage Company (“FAMC”)* reflect revenue growth of 2%, driven by strength in noninterest income and net interest income given average loan growth of 2% and a three basis point improvement in net interest margin.

 

   

Fourth quarter 2018 results reflect a net $9 million after-tax reduction, or ($0.02) per fully diluted share, from notable items compared with a net $7 million after-tax reduction, or ($0.02) per share, in third quarter 2018.

 

   

Results reflect an efficiency ratio of 59.7%, which includes the impact of $45 million of notable expense items and a 93 basis point impact tied to the FAMC acquisition. Excluding the impact of notable items and FAMC, the Underlying efficiency ratio* improved by 118 basis points to 55.8% given strong expense discipline with positive operating leverage of 2.1%.

 

   

Tangible book value per common share of $28.73 increased by 4%. Fully diluted average common shares outstanding decreased by 8.5 million shares.

Results

 

 

   

Total revenue of $1.6 billion increased 2%, reflecting strength in noninterest income and net interest income.

 

   

Net interest income of $1.2 billion increased $24 million, reflecting 2% average loan growth and a three basis point improvement in net interest margin to 3.22% from third quarter levels.

 

   

Net interest margin of 3.22% reflects improved yields on interest-earning assets, including the benefit of higher short-term interest rates and balance sheet optimization, partially offset by higher funding costs.

 

   

Noninterest income of $421 million increased $5 million. Excluding the impact of notable items and FAMC,* noninterest income of $393 million remained relatively stable, as strength in foreign exchange and interest rate products and letter of credit and loan fees was largely offset by a reduction in mortgage banking and capital markets fees.

 

   

Noninterest expense of $951 million increased $41 million driven by a $46 million increase tied to the FAMC acquisition and notable items. Excluding the impact of notable items and FAMC,* noninterest expense of $871 million decreased by $5 million as a reduction in other operating expense, largely tied to a reduction in FDIC insurance expense, and lower occupancy expense were partially offset by seasonally higher outside services and an increase in salaries and employee benefits tied to growth initiatives.

 

   

Provision for credit losses of $85 million increased modestly from relatively low third quarter levels.

 

   

Preferred dividends increased $8 million reflecting the impact of second and fourth quarter issuances.

 

   

Efficiency ratio of 59.7%; 56.7% on an Underlying basis,* compares with 57.6% in third quarter 2018.

 

   

ROTCE of 13.8%, improved from 13.3% in the third quarter 2018; ROTCE of 14.1% on an Underlying basis,* compares with 13.5% in third quarter 2018.

 

2


Balance Sheet

 

   

Average interest-earning assets increased $1.6 billion, reflecting a $1.9 billion, or 2%, increase in loans, with strength in commercial and retail.

 

   

Average deposits increased $727 million, given growth in savings and term.

 

   

Nonperforming loans and leases (“NPLs”) to total loans and leases ratio of 0.68% improved from 0.73%, reflecting a reduction in commercial NPLs. Allowance coverage of NPLs increased to 156% from 149%.

 

   

Net charge-offs of 29 basis points were stable with third quarter levels.

 

   

Capital strength remains robust, with a preliminary common equity tier 1 (“CET1”) risk-based capital ratio of 10.6%.

 

   

Repurchased 8.25 million shares of common stock in the quarter, and including common dividends, returned $427 million in capital to shareholders.

 

   

Average loan-to-deposit ratio remained relatively stable at 98.4%; Period-end loan-to-deposit ratio improved to 97.6%.

Fourth Quarter 2018 vs. Fourth Quarter 2017

Key Highlights

 

   

Fourth quarter results reflect a 32% decrease in net income available to common stockholders driven by the fourth quarter 2017 benefit of Tax Legislation and other notable items. Underlying net income available to common stockholders* increased 32%, led by revenue growth of 9%, with a 9% increase in net interest income and a 10% increase in noninterest income.

 

   

Including the impact of notable items, results reflect operating leverage of 1.5%, an efficiency ratio of 59.7% and ROTCE of 13.8%.* Excluding the impact of notable items and FAMC,* operating leverage of 5.0% reflects continued strong focus on top-line growth and expense management, while the efficiency ratio improved by 2.7% to 55.8% and ROTCE improved by 3.6% to 14.0%.*

 

   

Fully diluted average common shares outstanding decreased by 24.7 million shares.

Results

 

   

Total revenue increased $109 million, or 7%; on an Underlying basis,* total revenue increased $131 million, or 9%. Total revenue, excluding the impact of notable items and FAMC,* increased $95 million, or 6%.

 

   

Net interest income increased 9% given 5% growth in average loans and a 14 basis point improvement in net interest margin.

 

   

Net interest margin of 3.22% reflects improved loan yields driven by the continued focus on balance sheet optimization and the benefit of higher rates, partially offset by an increase in funding costs.

 

   

Noninterest income of $421 million increased $17 million. Excluding the impact of notable items and FAMC,* noninterest income increased 2% as strength in card fees, letter of credit and loan fees and capital markets fees was partially offset by a reduction in mortgage banking fees, and other income.

 

   

Noninterest expense increased 6% from fourth quarter 2017 driven by the $40 million impact of the FAMC acquisition and notable items. Excluding the impact of notable items and FAMC,* noninterest expense increased 2%, driven by a $24 million increase in salaries and employee benefits tied to the impact of our strategic growth initiatives and an increase in amortization of software and equipment and outside services expense. These increases were partially offset by lower other operating expense, largely due to lower FDIC insurance and pension costs, as well as lower occupancy expense.

 

3


   

Provision for credit losses was relatively stable with fourth quarter 2017 levels, reflecting strong overall portfolio credit quality.

 

   

ROTCE of 13.8% compares with 19.9% for fourth quarter 2017. Underlying ROTCE of 14.1% improved by 3.7% from 10.4%.*

Balance Sheet

 

   

Average interest-earning assets increased $5.3 billion, or 4%, driven by loan growth of 5%, which reflects a 2% increase in retail and a 8% increase in commercial. Interest-earning assets, excluding the impact of FAMC,* increased 3%.

 

   

Average deposits increased $4.0 billion, or 4%, on strength in term, savings, demand deposits and checking with interest. Citizens Access deposits ended the year at $3.0 billion and averaged $2.0 billion for the quarter.

 

   

NPLs to total loans and leases ratio of 0.68% improved from 0.79%, reflecting a decrease in retail and commercial. Allowance coverage of NPLs of 156% improved from 142%.

 

   

Net charge-offs of 29 basis points of loans remained relatively stable with fourth quarter 2017 levels, reflecting continued risk discipline and a strong economy.

2018 vs. 2017

Key Highlights

 

   

Full year 2018 net income available to common stockholders of $1.7 billion increased $54 million, or 3%, while diluted EPS of $3.52 compares with $3.25 in 2017.

 

   

2018 results reflect a net $16 million after-tax reduction, or ($0.04) per fully diluted share, from notable items compared with a net $340 million after-tax benefit, or $0.67 per share, in 2017.

 

   

On an Underlying basis,* full year 2018 net income available to common stockholders of $1.7 billion increased 32% and diluted EPS of $3.56 increased 38% from 2017 levels.

 

   

ROTCE of 12.9% improved by 0.6%. Underlying ROTCE of 13.1% increased by 3.3%.*

Results

 

   

Total revenue of $6.1 billion increased $421 million, or 7%. Underlying revenue growth* of $432 million, or 8%, was driven by a 9% increase in net interest income and a 5% increase in noninterest income. Total Underlying revenue, excluding the impact of FAMC,* of $6.1 billion, increased $370 million, or 6%.

 

   

Net interest income results reflect 4% average loan growth and a 17 basis point improvement in net interest margin.

 

   

Noninterest income of $1.6 billion increased 4%. Excluding the impact of notable items and FAMC,* noninterest income increased 1%, reflecting strength in foreign exchange and interest rate products, trust and investment services fees and card fees, partly offset by lower capital markets fees, mortgage fees and other income.

 

   

Noninterest expense of $3.6 billion increased 4% driven by the $59 million impact of the FAMC acquisition and notable items. On an Underlying basis, excluding the impact of FAMC,* noninterest expense of $3.5 billion increased 3%.

 

   

Efficiency ratio of 59.1% improved 181 basis points. On an Underlying basis,* the efficiency ratio of 58.1% improved by 1.8%. On an Underlying basis and excluding the impact of FAMC, the efficiency ratio of 57.7% improved by 2.2% and positive operating leverage was 4.0%.

 

4


   

Capital strength remains robust, with a common equity tier 1 (“CET1”) risk-based capital ratio of 10.6%, compared with 11.2% at year-end 2017.

 

   

Tangible book value per common share was $28.73, up 5%.

 

   

Returned $1.5 billion to common shareholders including dividends and share repurchases, a 31% increase.

Year-over-Year update on Plan Execution

Consumer Banking

 

   

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, including 5% growth in demand deposits.

 

   

Citizens Access™, our new digital platform has attracted $3.0 billion in deposits through fourth quarter 2018; 96% of the balances are new to Citizens.

 

   

Wealth management business continues to add capabilities highlighted by the acquisition of Clarfeld Financial Advisors LLC which closed in January, 2019. Continued progress with managed money revenue up 24% and financial advisors up 6%.

 

   

Continued progress on integration of FAMC, while overall conforming mortgage origination mix improved to 80% in 4Q18.

Commercial Banking

 

   

Continued strong balance sheet performance with average loan growth of 6%, driven by our geographic, product and client-focused expansion strategies as well as strength in Commercial Real Estate. Average deposits up 2%.

 

   

Continue to benefit from investments to drive growth and diversification in fee income, highlighted by a 56% increase in M&A fees, a 16% increase in foreign exchange and interest rate products and a 18% increase in Commercial card fees. Achieved record number of Lead/Joint Lead Arranger transactions in loan syndications, up 9%.Capital Markets revenues held up reasonably well given weak debt capital markets conditions in fourth quarter 2018.

Efficiency and balance sheet optimization initiatives

 

   

Continued good progress on Tapping Our Potential (TOP) V Program, which is on track to meet end of 2019 run-rate pre-tax benefit of approximately $90-$100 million.

 

   

Balance Sheet Optimization initiatives to shift loan portfolio mix to higher-return categories continue to deliver benefits, with an estimated impact of approximately 5 basis points on net interest margin for full-year over year.

 

5


Earnings highlights: Reported Results:

 

    Quarterly trends     Full Year  
                      4Q18 change from                 2018 change  
($s in millions, except per share data)   4Q18     3Q18     4Q17     3Q18     4Q17     2018     2017     from 2017  

 

   

 

 

   

 

 

   

 

 

 
Earnings                     $     $     $     $     $  
Net interest income   $ 1,172     $ 1,148     $ 1,080     $ 24     $ 92     $ 4,532     $ 4,173     $ 359  
Noninterest income     421       416       404       5       17       1,596       1,534       62  
Total revenue     1,593       1,564       1,484       29       109       6,128       5,707       421  
Noninterest expense     951       910       898       41       53       3,619       3,474       145  
Pre-provision profit     642       654       586       (12     56       2,509       2,233       276  
Provision for credit losses     85       78       83       7       2       326       321       5  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net income     465       443       666       22       (201     1,721       1,652       69  
Preferred dividends     15       7       —         8       15       29       14       15  
Net income available to common stockholders   $ 450     $ 436     $ 666     $ 14     $ (216   $ 1,692     $ 1,638     $ 54  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
After-tax notable Items     (9     (7     317       (2     (326     (16     340       (356

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Underlying net income available to common stockholders*   $     459     $     443     $     349     $     16     $     110     $     1,708     $     1,298     $     410  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Average common shares outstanding                

Basic (in millions)

    467.3       476.0       492.1       (8.6     (24.8     478.8       502.2       (23.3

Diluted (in millions)

    469.1       477.6       493.8       (8.5     (24.7     480.4       503.7       (23.3
Diluted earnings per share   $ 0.96     $ 0.91     $ 1.35     $ 0.05     $ (0.39   $ 3.52     $ 3.25     $ 0.27  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Underlying diluted earnings per share*   $ 0.98     $ 0.93     $ 0.71     $ 0.05     $ 0.27     $ 3.56     $ 2.58     $ 0.98  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Key performance metrics*                
Net interest margin     3.22   %      3.19   %      3.08   %      3  bps      14  bps      3.19   %      3.02   %      17  bps 
Effective income tax rate     16.5       23.2       (32.4     (671     4,885       21.2       13.6       754  
Efficiency ratio     60       58       61       149       (83     59       61       (181
Underlying efficiency ratio*     57       58       59       (92     (180     58       60       (183
Return on average common equity     9.2       8.8       13.5       34       (430     8.6       8.3       27  
Return on average tangible common equity     13.8       13.3       19.9       56       (607     12.9       12.3       59  
Underlying return on average tangible common equity*     14.1       13.5       10.4       61       368       13.1       9.8       327  
Return on average total assets     1.17       1.13       1.75       4       (58     1.11       1.10       1  
Underlying return on average total tangible assets     1.24   %      1.20   %      0.96   %      4  bps      28  bps      1.17   %      0.91   %      26  bps 

 

       

 

 

   
Capital adequacy(1,2)                
Common equity tier 1 capital ratio     10.6   %      10.8   %      11.2   %          10.6   %      11.2   %   
Total capital ratio     13.3       13.4       13.9           13.3       13.9    
Tier 1 leverage ratio     10.0   %      9.9   %      10.0   %          10.0   %      10.0   %   

 

       

 

 

   
Asset quality(2)                
Total nonperforming loans and leases as a % of total loans and leases     0.68   %      0.73   %      0.79   %      (5 ) bps      (11 ) bps      0.68   %      0.79   %      (11 ) bps 
Allowance for loan and lease losses as a % of loans and leases     1.06       1.08       1.12       (2     (6     1.06       1.12       (6
Allowance for loan and lease losses as a % of nonperforming loans and leases     156       149       142       7       NM       156       142       NM  
Net charge-offs as a % of average loans and leases     0.29   %      0.30   %      0.28   %      (1 ) bps      1  bps      0.28   %      0.28   %        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.

Notable items:

Fourth quarter and full year 2018 and 2017 results reflect notable items largely related to the impact of 2017 tax reform and our Tapping Our Potential (“TOP”) initiatives which have been excluded from reported results to better reflect Underlying operating results.* Fourth quarter 2018 reported results include the impact of a further benefit resulting from December 2017 Tax Legislation partially offset by other notable items, primarily associated with TOP and real estate efficiency initiatives.

 

Notable items* - primarily tax/ TOP   4Q18     4Q17     FY2018     FY2017  
($s in millions, except per share data)     Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS  

 

   

 

 

   

 

 

   

 

 

 

Tax and tax-related notable items*

                       

Tax notable items*

  $     $ 29     $ 0.06     $     $ 331     $ 0.67     $     $ 29     $ 0.06     $     $ 354     $ 0.70  

Colleague bonus - Salaries & benefits

                      (12     (7     (0.02                       (12     (7     (0.02

Foundation grant - Other expense

                      (10     (6     (0.01                       (10     (6     (0.01

 

   

 

 

   

 

 

   

 

 

 

Net tax and tax-related notable items*

  $     $ 29     $ 0.06     $ (22   $ 318     $ 0.64     $     $ 29     $ 0.06     $ (22   $ 341     $ 0.67  

 

   

 

 

   

 

 

   

 

 

 

Other notable items

                       

Noninterest income

  $ (1   $ (1   $     $ 17     $ 10     $ 0.02     $ (1   $ (1   $     $ 17     $ 10     $ 0.02  

Salaries & benefits

    (2     (2     (0.01     (5     (3     (0.01     (2     (2     (0.01     (5     (3     (0.01

Occupancy

    (14     (10     (0.02                       (14     (10     (0.02                  

Equipment

    (3     (2                             (3     (2                        

Outside services

    (14     (11     (0.02     (12     (7     (0.01     (14     (11     (0.02     (12     (7     (0.01

Other expense

                      (1     (1                             (1     (1      

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense - TOP efficiency & other actions

  $ (33   $ (25   $ (0.05   $ (18   $ (11   $ (0.02   $ (33   $ (25   $ (0.05   $ (18   $ (11   $ (0.02

 

   

 

 

   

 

 

   

 

 

 
Total notable items, ex-FAMC integration costs   $ (34   $ 3     $ 0.01     $ (23   $ 317     $ 0.64     $ (34   $ 3     $ 0.01     $ (23   $ 340     $ 0.67  

 

   

 

 

   

 

 

   

 

 

 

Additionally, fourth quarter and full year 2018 results reflect integration costs tied to the August 1, 2018 FAMC acquisition as detailed in the table below.

 

6


Notable items - FAMC Integration costs*   4Q18     3Q18     FY2018  
 

 

 

   

 

 

   

 

 

 
($s in millions, except per share data)   Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS  

 

   

 

 

   

 

 

 

FAMC integration costs

                 

Noninterest income

  $ (4   $ (3   $ (0.01   $ —      $ —      $ —      $ (4   $ (3   $ (0.01

Salaries & benefits

    (4     (3     (0.01     (5     (4     (0.01     (9     (7     (0.02

Occupancy

    (2     (1     —        —        —        —        (2     (1     —   

Outside services

    (5     (4     (0.01     (1     (1     —        (6     (5     (0.01

Other expense

    (1     (1     —        (3     (2     (0.01     (4     (3     (0.01

 

   

 

 

   

 

 

 

Noninterest expense

  $ (12   $ (9   $ (0.02   $ (9   $ (7   $ (0.02   $ (21   $ (16   $ (0.04

 

   

 

 

   

 

 

 

Total FAMC integration costs

  $ (16   $ (12   $ (0.03   $ (9   $ (7   $ (0.02   $ (25   $ (19   $ (0.05

 

   

 

 

   

 

 

 

Total notable items*

  $ (50   $ (9   $ (0.02   $ (9   $ (7   $ (0.02   $ (59   $ (16   $ (0.04

 

   

 

 

   

 

 

 

 

Total notable items*   4Q18     3Q18     4Q17     FY2018     FY2017  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
($s in millions, except per share data)   Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS     Pre-tax     After-tax     EPS  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total notable items*   $ (50   $ (9   $ (0.02   $ (9   $ (7   $ (0.02   $ (23   $ 317     $ 0.64     $ (59   $ (16   $ (0.04   $ (23   $ 340     $ 0.67  

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides information on Underlying results excluding the impact of notable items and the FAMC acquisition.*

Underlying results/impact of the FAMC acquisition:*

 

     Quarterly Trends     Full Year  
  

 

 

   

 

 

 
                       4Q18 change from                 2018 change  
        

 

 

       

 

 

 
($s in millions, except per share data)    4Q18     3Q18     4Q17     3Q18     4Q17     2018     2017     from 2017  

 

   

 

 

   

 

 

   

 

 

 
Net interest income    $ 1,172     $ 1,148     $ 1,080       2   %      9   %    $   4,532     $   4,173       9   % 
Noninterest income      426       416       387       2       10       1,601       1,528       5  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total revenue    $ 1,598     $ 1,564     $ 1,467       2   %      9   %    $   6,133     $   5,701       8   % 
FAMC impact      36       26       —        38       NM       62       —         NM  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Revenue excluding FAMC impact    $ 1,562     $ 1,538     $ 1,467       2   %      6   %    $   6,071     $   5,701       6   % 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Noninterest expense    $     951     $     910     $     898       5   %      6   %    $   3,619     $   3,474       4   % 
Notable items tied to FAMC and other*      45       9       40       NM       13       54       55       (2

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Underlying noninterest expense*      906       901       858       1   %      6   %      3,565       3,419       4   % 
Base FAMC impact      35       25       —         40       NM       60       —         NM  

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Underlying noninterest expense excluding FAMC*    $ 871     $ 876     $ 858       (1 )  %      2   %    $   3,505     $   3,419       3   % 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Pre-provision profit    $ 642     $ 654     $ 586       (2 )  %      10   %    $   2,509     $   2,233       12   % 
Underlying pre-provision profit *      692       663       609       4       14       2,568       2,282       13  
Underlying pre-provision profit excluding FAMC*      691       662       609       4       13       2,566       2,282       12  
Provision for credit losses      85       78       83       9       2       326       321       2  
Net income available to common stockholders      450       436       666       3       (32     1,692       1,638       3  
Underlying net income available to common stockholders*      459       443       349       4       32       1,708       1,298       32  
Key performance metrics*                 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Diluted EPS    $ 0.96     $ 0.91     $ 1.35       5   %      (29 )%    $ 3.52     $ 3.25       8   % 
Underlying EPS*    $ 0.98     $ 0.93     $ 0.71       5       38     $ 3.56     $ 2.58       38  
Efficiency ratio      60   %      58   %      61   %      149  bps      (83 ) bps      59   %      61   %      (181 ) bps 
Underlying efficiency ratio*      57       58       59       (92     (180     58       60       (183
Underlying efficiency ratio excluding FAMC*      56   %      57   %      59   %      (118 ) bps      (273 ) bps      58   %      60   %      (222 ) bps 

Operating leverage

           (2.6 )  %      1.5   %          3.2   % 

Underlying operating leverage*

           1.6       3.4           3.3  
Underlying operating leverage excluding FAMC*            2.1   %      5.0   %          4.0   % 

 

7


Discussion of results:

 

Net interest income                      4Q18 change from  
($s in millions)    4Q18     3Q18     4Q17     3Q18     4Q17  

 

   

 

 

   

 

 

 
                       $     %     $     %  
        

 

 

   

 

 

 

Interest income:

              

Interest and fees on loans and leases and loans held for sale

   $ 1,362     $ 1,303     $ 1,130       $ 59           $ 232        21 

Investment securities

     172       167       156                    16        10   

Interest-bearing deposits in banks

     8       7                   14              60   

 

   

 

 

     

 

 

   

Total interest income

   $ 1,542     $ 1,477     $ 1,291      $ 65           $ 251        19 

 

   

 

 

     

 

 

   

Interest expense:

                    

Deposits

   $ 245     $ 214     $ 130      $ 31        14     $ 115        88 
Federal funds purchased and securities sold under agreements to repurchase      2       2       1       —        —              100 

Other short-term borrowed funds

     15       19       9       (4)       (21)             67   

Long-term borrowed funds

     108       94       71       14        15        37        52   

 

   

 

 

     

 

 

   

Total interest expense

   $ 370     $ 329     $ 211      $ 41        12     $         159       75 

 

   

 

 

     

 

 

   

Net interest income

   $         1,172     $         1,148     $         1,080      $         24           $ 92      

 

   

 

 

     

 

 

   

Net interest margin

     3.22  %      3.19  %      3.08  %      bps        14  bps   

 

   

 

 

     

 

 

   

Fourth quarter 2018 net interest income of $1.2 billion increased $24 million, or 2%, from third quarter 2018, given a 2% increase in average loans and loans held for sale and a three basis point improvement in net interest margin to 3.22%. The improvement in net interest margin reflects higher loan yields tied to higher rates, partially offset by increased deposit and funding costs.

Compared with fourth quarter 2017, net interest income increased $92 million, or 9%, driven by 5% average loan growth and a 14 basis point improvement in net interest margin. 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 3.23%.

 

Noninterest Income                         4Q18 change from  
($s in millions)    4Q18      3Q18      4Q17      3Q18     4Q17  

 

    

 

 

   

 

 

 
                                  $                      %                     $                      %          
           

 

 

   

 

 

 

Service charges and fees

   $ 131       $ 131      $ 131       $ —         —     $ —         — 

Card fees

     62         61        56                            11   

Capital markets fees

     45         47        42        (2)        (4)               

Trust and investment services fees

     43         45        42        (2)        (4)               

Mortgage banking fees

     51         49        28                     23         82   

Letter of credit and loan fees

     34         32        31                            10   

Foreign exchange and interest rate products

     34         31        32               10                

Securities gains, net

            3        2               100               200   

Other income(1)

     15         17        40        (2)        (12)       (25)        (63)  

 

    

 

 

      

 

 

    

Noninterest income

   $ 421       $ 416      $ 404       $           $ 17        

Notable items*

   $ (5)      $      $ 17       $ (5)        (100)      $ (22)        (129)  

 

    

 

 

      

 

 

    

Underlying noninterest income*

   $ 426       $ 416      $ 387       $ 10            $ 39         10 

FAMC impact

   $ 33       $ 24      $ —        $        38     $ 33         NM  

 

    

 

 

      

 

 

    

Underlying Noninterest income excluding FAMC*

   $         393       $         392      $         387       $        —     $       

 

    

 

 

      

 

 

    

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

Noninterest income of $421 million increased $5 million, or 1%, from third quarter 2018, driven by the $9 million impact of the FAMC acquisition largely in mortgage banking fees. Underlying noninterest income, excluding the impact of FAMC,* remained relatively stable as strength in foreign exchange and interest rate products and letter of credit and loan fees was largely offset

 

8


by a reduction in mortgage banking and capital markets fees tied to overall market conditions. Securities gains of $6 million were partially offset by a $2 million net loss in foreign exchange and interest rate products tied to credit valuation adjustments, related to interest rate moves during fourth quarter 2018.

Compared to fourth quarter 2017, noninterest income increased $17 million, or 4%, including a $33 million impact of the FAMC acquisition. Underlying noninterest income, excluding the impact of FAMC,* increased $6 million, or 2%, driven by strength in card fees, letter of credit and loan fees, capital markets fees and foreign exchange and interest rate products. These increases were partially offset by lower mortgage banking fees and other income, reflecting a reduction in leasing income.

 

  Noninterest expense                                           4Q18 change from                            
  ($s in millions)   4Q18       3Q18       4Q17       3Q18      4Q17

 

   

 

 

    

 

 

                                $                         %                          $                          %          
       

 

 

    

 

 

Salaries and employee benefits

  $         483       $         474       $         450         $ 9         2  %        $ 33        7  %

Outside services

    135         107         118         28         26            17        14    

Occupancy

    92         81         80         11         14            12        15    

Equipment expense

    74         70         67         4         6            7        10    

Amortization of software

    50         47         46         3         6            4        9    

Other operating expense

    117         131         137         (14)        (11)           (20)       (15)   

 

   

 

 

      

 

 

    

Noninterest expense

  $ 951       $ 910       $ 898         $ 41         5  %        $ 53        6  %

 

   

 

 

      

 

 

    

Notable items

  $ 45       $ 9       $ 40         $ 36         NM        $ 5        13  %

 

   

 

 

      

 

 

    

Underlying, as applicable

                                                         

 

   

 

 

      

 

 

    

 

Salaries and employee benefits*

  $ 477       $ 469       $ 433         $ 8         2  %        $ 44        10  %

Outside services*

    116         106         106         10         9            10        9    

Occupancy*

    76       $ 81         80         (5)        (6)           (4)       (5)   

Equipment expense*

    71       $ 70         67         1         1            4        6    

Amortization of software

    50       $ 47         46         3         6            4        9    

Other operating expense*

    116         128         126         (12)        (9)           (10)       (8)   

 

   

 

 

      

 

 

    

Underlying noninterest expense*

  $ 906       $ 901       $ 858         $ 5         1  %        $ 48        6  %

FAMC expense impact

    35         25         —         $ 10         40  %        $ 35        NM

 

   

 

 

      

 

 

    

Underlying noninterest expense excluding FAMC*

  $ 871       $ 876       $ 858         $ (5)        (1) %        $ 13        2  %

 

   

 

 

      

 

 

    

Noninterest expense of $951 million increased $41 million, or 5%, from third quarter 2018, driven by the $46 million increase tied to the FAMC acquisition and notable items, largely in salaries and employee benefits. Underlying noninterest expense, excluding the impact of FAMC,* of $871 million decreased by $5 million, as a reduction in other operating expense, tied largely to a reduction in FDIC insurance expense, and lower occupancy expense were partially offset by seasonally higher outside services and an increase in salaries and employee benefits tied to growth initiatives. Results reflect continued focus on expense discipline and the benefit of TOP efficiency initiatives.

Compared with fourth quarter 2017, noninterest expense increased $53 million, or 6%, driven by the impact of the FAMC acquisition and notable items. Underlying noninterest expense, excluding the impact of FAMC,* increased $13 million, or 2%, largely reflecting a $24 million increase in salaries and employee benefits tied to the impact of our strategic growth initiatives, as well as an increase in amortization of software and equipment and outside services expense. These increases were partially offset by lower other expense, largely tied to a reduction in FDIC insurance and pension costs, as well as lower occupancy expense.

The fourth quarter 2018 effective tax rate of 16.5%, including the impact of notable items tied to the true-up of December 2017 Tax Legislation, decreased from 23.2% for third quarter 2018 and increased from (32.4)% for fourth quarter 2017. On an Underlying basis, excluding notable items,* the effective tax rate was 21.9% for fourth quarter 2018 and 33.7% for fourth quarter 2017.

 

9


Consolidated balance

sheet review(1)

                     4Q18 change from  
        

 

 

 
($s in millions)    4Q18     3Q18     4Q17         3Q18      4Q17  

 

   

 

 

    

 

 

 
                       $     %      $     %  
        

 

 

    

 

 

 

Total assets

   $ 160,518     $ 158,598     $ 152,336           $ 1,920       1 %         $ 8,182       5 %   

Total loans and leases

     116,660       114,720       110,617           1,940       2            6,043       5      

Loans held for sale, at fair value

     1,219       1,303       497           (84 )        (6)           722       145      

Deposits

     119,575       117,075       115,089           2,500       2            4,486       4       

Average interest-earning assets

     143,770       142,163       138,429           1,607       1            5,341       4       

Stockholders’ equity

     20,817       20,276       20,270           541       3            547       3       

Stockholders’ common equity

     19,977       19,733       20,023           244       1            (46     —       

Tangible common equity

   $ 13,389     $ 13,117     $ 13,489           $ 272       2 %         $ (100     (1) %   

Loan-to-deposit ratio (period-end)(2)

     97.6     %      98.0     %      96.1         (43 )  bps         145   bps   

Loans to deposits ratio (avg balances)(2)

     98.4       97.4       97.1           103    bps         131   bps   

Common equity tier 1 capital ratio(3)

     10.6       10.8       11.2               

Total capital ratio(3)

     13.3     %      13.4     %      13.9             

 

   

 

 

 

1) Represents period end unless otherwise noted.

2) Includes loans held for sale.

3) Current reporting period regulatory capital ratios are preliminary.

Total assets of $160.5 billion at December 31, 2018 increased $1.9 billion, or 1%, compared with September 30, 2018 driven by an increase in loans. Compared with December 31, 2017, total assets increased $8.2 billion, or 5%, driven by a $6.6 billion increase in loans and leases and loans held for sale, including a $1.5 billion increase tied to the FAMC acquisition, largely $653 million in loans held for sale and a $600 million mortgage servicing rights portfolio in non-interest earning assets.

 

Interest-earning assets                         4Q18 change from  
           

 

 

 
($s in millions)    4Q18      3Q18      4Q17      3Q18      4Q17  

 

    

 

 

    

 

 

 
Period-end interest-earning assets                         $     %      $     %  
           

 

 

    

 

 

 

Investments and interest-bearing deposits

   $ 28,216      $ 28,642      $ 27,970      $ (426     (1) %      $ 246       1   %  

Commercial loans and leases

     56,783        55,405        52,031        1,378       2            4,752       9       

Retail loans

     59,877        59,315        58,586        562       1            1,291       2       

Total loans and leases

     116,660        114,720        110,617        1,940       2            6,043       5       

Loans held for sale, at fair value

     1,219        1,303        497        (84     (6)           722       145       

Other loans held for sale

     101        27        221        74       NM            (120     (54)      

Total loans and leases and loans held for sale

     117,980        116,050        111,335        1,930       2            6,645       6       

 

    

 

 

      

 

 

   

Total period-end interest-earning assets

   $   146,196      $   144,692      $   139,305      $     1,504       1  %      $     6,891       5   %  

 

    

 

 

      

 

 

   

Average interest-earning assets

                  

Investments and interest-bearing deposits

   $ 26,553      $ 26,835      $ 27,212      $ (282     (1) %      $ (659     (2)  %  

Commercial loans and leases

     56,310        55,276        52,310        1,034       2            4,000       8       

Retail loans

     59,583        58,695        58,140        888       2            1,443       2       

Total loans and leases

     115,893        113,971        110,450        1,922       2            5,443       5       

Loans held for sale, at fair value

     1,245        1,228        482        17       1            763       158       

Other loans held for sale

     79        129        285        (50     (39)           (206     (72)      

Total loans and leases and loans held for sale

     117,217        115,328        111,217        1,889       2            6,000       5       

 

    

 

 

      

 

 

   

Total average interest-earning assets

   $ 143,770      $ 142,163      $ 138,429      $ 1,607       1 %       $ 5,341       4   %  

 

    

 

 

      

 

 

   

Period-end interest earning assets of $146.2 billion increased $1.5 billion, or 1%, from September 30, 2018 as a $1.9 billion, or 2%, increase in loans and leases driven by particular strength in commercial, was partially offset by a $426 million decrease in investments and interest-bearing deposits, largely reflecting lower debt securities. Compared with December 31, 2017, period-end interest earning assets increased $6.9 million, or 5%, driven by loan and lease growth of $6.0 billion, or 5%, with growth in commercial and retail, and an increase in loans held for sale reflecting the impact of the FAMC acquisition. At the end of fourth quarter 2018, the average effective duration of the securities portfolio decreased to 4.4 years compared with 4.7 years at September 30, 2018, given lower long-term rates that drove an increase in securities prepayment speeds. At December 31, 2017, the securities portfolio duration was 3.9 years, reflecting the impact of lower rates and higher prepayment speeds.

 

10


Average interest-earning assets of $143.8 billion in fourth quarter 2018 increased $1.6 billion, or 1%, from third quarter 2018 driven by loan and lease growth of $1.9 billion, or 2%, with growth in commercial and retail. Commercial loan growth largely reflects strength in commercial loans and commercial real estate, partially offset by planned reductions in commercial leases. Retail loan growth reflects strength in residential mortgage, unsecured and education, partially offset by planned reductions in auto and lower home equity.

Compared with fourth quarter 2017, average interest-earning assets increased $5.3 billion, or 4%, driven by a $4.0 billion, or 8%, increase in commercial loans and leases, a $1.4 billion, or 2%, increase in retail loans and a $557 million increase in loans held for sale, reflecting the impact of the FAMC acquisition. Results also reflect a $659 million decrease in investments and interest-bearing deposits, largely reflecting the impact of higher rates. Commercial loan results reflect strength in commercial loans and commercial real estate, partially offset by the planned reductions in commercial leases. Retail loan growth was driven by mortgage, unsecured and education, partially offset by planned reductions in auto and lower home equity. Excluding the impact of FAMC,* average loan growth was 5%.

 

                                        4Q18 change from  
 ($s in millions)      4Q18        3Q18        4Q17               3Q18              4Q17  

 

        

 

 

        

 

 

 
 Period-end deposits                                       $        %              $        %  
                     

 

 

        

 

 

 

 Demand deposits

     $ 29,458        $ 29,785        $ 29,279             $ (327)          (1)  %            $ 179           1  %  

 Checking with interest

       23,067          22,323          22,229             744           3                 838           4       

 Savings

       12,007          10,523          9,518             1,484           14                 2,489           26      

 Money market accounts

       35,701          35,613          37,454             88           —                 (1,753)          (5)     

 Term deposits

       19,342          18,831          16,609             511           3                 2,733           16      

 

        

 

 

             

 

 

      

 Total period-end deposits

     $     119,575        $     117,075        $     115,089             $     2,500           2   %            $     4,486           4  %  

 

        

 

 

             

 

 

      

 Average deposits

                                      

 Demand deposits

     $ 29,824        $ 29,703        $ 28,868             $ 121           —   %            $ 956           3  %  

 Checking with interest

       21,792          21,780          21,459             12           —                 333           2      

 Savings

       11,220          10,198          9,473             1,022           10                 1,747           18      

 Money market accounts

       35,929          36,593          37,483             (664)          (2)                (1,554)          (4)     

 Term deposits

       19,000          18,764          16,470             236           1                 2,530           15      

 

        

 

 

             

 

 

      

 Total average deposits

     $ 117,765        $ 117,038        $ 113,753             $ 727           1   %            $     4,012           4  %  

 

        

 

 

             

 

 

      

Total period-end deposits of $119.6 billion at December 31, 2018 increased $2.5 billion from September 30, 2018, reflecting an increase in savings, checking with interest, term deposits and money market accounts, partially offset by a decrease in commercial demand deposits. Compared with December 31, 2017, period-end total deposits increased $4.5 billion, or 4%, driven by growth in term deposits, savings, checking with interest and demand deposits, partially offset by a decrease in money market accounts. The increase in demand deposits includes $476 million tied to the FAMC acquisition. Excluding the impact of FAMC,* year-over-year deposit growth was 3%. Citizens Access deposits were $3.0 billion at the end of 2018, up from $1.0 billion at September 30, 2018.

Fourth quarter 2018 average deposits of $117.8 billion increased $727 million, or 1%, from third quarter 2018, reflecting growth in savings, term deposits and demand deposits, partially offset by a reduction in money market accounts. Compared with fourth quarter 2017, average deposits increased $4.0 billion, or 4%, reflecting growth in term, savings, demand deposits and checking with interest, partially offset by a decline in money market accounts. The increase in demand deposits includes $675 million tied to the FAMC acquisition. Excluding the impact of FAMC,* year-over-year average deposit growth was 3%. Citizens Access contributed average deposits of $2.0 billion in fourth quarter 2018 compared with $551 million in third quarter 2018.

 

11


 Borrowed funds                                4Q18 change from        
           

 

 

 
 ($s in millions)    4Q18      3Q18      4Q17       3Q18    4Q17  

 

    

 

 

  

 

 

 
 Period-end borrowed funds                                 $                      %                    $                     %          
           

 

 

  

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

   $ 1,156      $ 374      $ 815         $ 782       209   %       $ 341       42 %   

Other short-term borrowed funds

     1,653        2,006        1,856         (353)      (18)           (203     (11)     

Long-term Borrowed funds

                         

    FHLB advances

     7,508        8,012        3,761         (504)      (6)           3,747       100      

    Senior debt

     5,277        5,977        6,017         (699)      (12)           (740     (12)     

    Subordinated debt and other debt

     1,648        1,650        1,988         (2)      —            (340     (17)     

 

    

 

 

       

 

 

   

Total borrowed funds

   $   17,242      $   18,019      $   14,436         $ (776)      (4)  %       $ 2,805       19 %   

 

    

 

 

       

 

 

   

Average borrowed funds

   $ 16,735      $ 15,675      $ 14,775         $   1,060       7   %       $ 1,960       13 %   

 

    

 

 

       

 

 

   

Total borrowed funds of $17.2 billion at December 31, 2018 decreased $776 million from September 30, 2018, primarily driven by the maturity of $750 million of senior debt. Compared with December 31, 2017, total borrowed funds increased $2.8 billion, or 19%, driven by an increase in long-term FHLB advances including the funding of the FAMC acquisition, partially offset by a $340 million decrease of subordinated debt and other debt, reflecting redemptions.

Average borrowed funds of $16.7 billion increased $1.1 billion, or 7%, from third quarter 2018 and increased $2.0 billion, or 13% compared with the fourth quarter 2017.

 

 Capital                            4Q18 change from  
 ($s and shares in millions except per share data)    4Q18          3Q18          4Q17          3Q18      4Q17  

 

     

 

 

    

 

 

 
 Period-end capital                                    $                     %                      $                     %          
            

 

 

    

 

 

 

 Stockholders’ equity

   $   20,817          $   20,276          $   20,270          $ 541       3  %         $ 547       3   %  

 Stockholders’ common equity

     19,977            19,733            20,023          244       1             (46     —       

 Tangible common equity

     13,389            13,117            13,489          272       2             (100     (1)      

 Tangible book value per common share

   $ 28.73          $ 27.66          $ 27.48          $ 1.07       4             $ 1.25       5       

 Common shares - at end of period

     466.0            474.1            490.8          (8.1     (2)            (24.8     (5)      

 Common shares - average (diluted)

     469.1            477.6            493.8          (8.5     (2)  %        (24.7     (5) %   

 Common equity tier 1 capital ratio(1)

     10.6  %        10.8  %        11.2      %         

 Total capital ratio(1)

     13.3            13.4            13.9              

 Tier 1 leverage ratio(1)

     10.0  %        9.9  %        10.0      %         

 

     

 

 

    

 

 

 

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

At December 31, 2018, our Basel III capital ratios remained well in excess of applicable regulatory requirements with a CET1 capital ratio of 10.6% compared with 10.8% at September 30, 2018 and 11.2% at December 31, 2017, and a total capital ratio of 13.3% compared with total capital ratios of 13.4% as of September 30, 2018 and 13.9% as of December 31, 2017. Our capital ratios continue to reflect progress towards our objective of aligning our capital profile with that of peer regional banks, while maintaining a strong capital base to continue to drive future performance.

Tangible book value per common share of $28.73 increased 4% from third quarter 2018 and 5% from fourth quarter 2017.

During the fourth quarter 2018, the company repurchased 8.25 million shares of common stock at a weighted-average price of $36.38, and including common dividends, returned $427 million to shareholders. These results compare with $529 million returned to common shareholders in third quarter 2018 and $424 million in fourth quarter 2017.

In 2018, the company repurchased 25.8 million shares of common stock at a weighted-average price of $39.77, and including common dividends, returned $1.5 billion to common shareholders, up 31% from 2017. Comparables for 2017 were repurchases of 22.4 million shares of common stock at a weighted-average price of $36.67, and including common dividends, $1.14 billion returned to common shareholders.

 

12


Credit quality review                             4Q18 change from
($s in millions)    4Q18      3Q18      4Q17          3Q18      4Q17

 

      

 

 

    

 

 

                                  $                          %                  $                          %        
             

 

 

    

 

 

Nonperforming loans and leases      $ 797           $ 832           $ 871            $     (35)                (4)  %         $     (74)              (8) %
Net charge-offs      85             86             78            (1)                (1)             7               9    
Provision for credit losses      85             78             83            7                 9              2               2    
Allowance for loan and lease losses      $   1,242           $   1,242           $   1,236            $ —                 —   %         $ 6               —  %
Total nonperforming loans and leases as a % of total loans and leases      0.68   %        0.73   %        0.79       %      (5) bps            (11) bps      
Net charge-offs as % of total loans and leases      0.29             0.30             0.28            (1) bps            1  bps      
Allowance for loan and lease losses as a % of total loans and leases      1.06   %        1.08   %        1.12       %      (2) bps            (6) bps      
Allowance for loan and lease losses as a % of nonperforming loans and leases      156.0   %        149.3   %        142.0       %      670  bps            NM           

 

      

 

 

Overall credit quality remains strong, reflecting growth in high quality retail loans and a broadly stable risk profile in commercial portfolios. Nonperforming loans and leases of $797 million decreased $35 million, or 4%, from September 30, 2018, reflecting a $57 million decrease in commercial, given payoffs and returns to accruing status, partially offset by a $22 million increase in retail, driven by seasonal increases in home equity, credit card and auto, as well as the expected seasoning of the retail unsecured portfolio. Compared to December 31, 2017, nonperforming loans and leases decreased $74 million, or 8%, reflecting a $64 million decrease in commercial, given a reduction in nonperforming commodities-related credits, and a $10 million decrease in retail, largely in home equity. The nonperforming loans and leases to total loans and leases ratio of 0.68% at December 31, 2018 improved five basis points from 0.73% at September 30, 2018 and improved 11 basis points from 0.79% at December 31, 2017.

Net charge-offs of $85 million were relatively stable compared with third quarter 2018, reflecting an $8 million decrease in commercial, reflecting higher recoveries, partially offset by a $7 million increase in retail largely driven by expected seasoning in the retail unsecured portfolio. Compared with fourth quarter 2017, net charge-offs increased $7 million, reflecting a $6 million increase in commercial net charge-offs, and relatively stable results in retail as the impact of expected seasoning in unsecured portfolios was offset by improvement in auto. Fourth quarter 2018 net charge-offs of 29 basis points of average loans and leases compares with 30 basis points in third quarter 2018 and 28 basis points in fourth quarter 2017.

Allowance for loan and lease losses of $1.2 billion is stable compared with third quarter 2018 and fourth quarter 2017 levels, reflecting strong overall credit quality that helped offset reserves to fund year-over-year loan growth.

The ratio of the allowance for loan and lease losses to total loans and leases was 1.06% as of December 31, 2018, which was stable compared with 1.08% as of September 30, 2018 and down modestly from 1.12% as of December 31, 2017. The allowance for loan and lease losses to nonperforming loans and leases ratio of 156% as of December 31, 2018 compares to 149% as of September 30, 2018, and 142% as of December 31, 2017, reflecting the decrease in nonperforming loans.

 

13


About Citizens Financial Group, Inc.

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $160.5 billion in assets as of December 31, 2018. Headquartered in Providence, Rhode Island, Citizens offers a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. Citizens helps its 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, Citizens provides 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, Citizens offers 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.

 

14


Key Performance Metrics and Non-GAAP Financial Measures and Reconciliations

(in millions, except share, per-share and ratio data)

Key Performance Metrics:

Our Management uses certain key performance metrics (KPMs) to gauge our progress against strategic and operational goals, as well as to compare our performance against peers. The KPMs are referred to in our Registration Statements on Form S-1 and our external financial reports filed with the Securities and Exchange Commission. The KPMs include:

 

   

Return on average tangible common equity (ROTCE);

   

Return on average total tangible assets (ROTA);

   

Efficiency ratio;

   

Operating leverage; and

   

Common equity tier 1 capital ratio.

Established targets for the KPMs are based on Management-reporting results which are currently referred to by the Company as “Underlying” results. In historical periods, these results may have been referred to as “Adjusted” or “Adjusted/Underlying” results. We believe that Underlying results, which exclude notable items, provide the best representation of our underlying financial progress toward the KPMs as the results exclude items that our Management does not consider indicative of our on-going financial performance. We have consistently shown investors our KPMs on a Management-reporting basis since our initial public offering in September of 2014. KPMs that reflect Underlying results are considered non-GAAP financial measures.

Non-GAAP Financial Measures:

This document contains non-GAAP financial measures denoted as Underlying results. In historical periods, these results may have been referred to as Adjusted or Adjusted/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 in that period and, accordingly, are useful to consider in addition to our GAAP financial results. We further believe the presentation of Underlying results increases comparability of period-to-period results. The following tables present reconciliations of our non-GAAP measures to the most directly comparable GAAP financial measures.

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.

 

15


Key performance metrics, non-GAAP financial measures and reconciliations

(in millions, except share, per-share and ratio data)

 

          QUARTERLY TRENDS     FULL YEAR  
                                      4Q18 Change                 2018 Change  
          4Q18     3Q18     2Q18   1Q18     4Q17     3Q18     4Q17     2018     2017     2017  
                                      $     %     $     %                 $     %  
Noninterest income, Underlying:                            
Noninterest income (GAAP)       $421           $416           $388           $371           $404           $5           1 %        $17           4 %        $1,596           $1,534           $62           4 %  
Less: Notable items       (5)          —        —        —        17           (5)          (100)          (22)          (129)          (5)          6           (11)          (183)    
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Noninterest income, Underlying (non-GAAP)       $426           $416           $388           $371           $387           $10           2 %        $39           10 %        $1,601           $1,528           $73           5 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Total revenue, Underlying:                            
Total revenue (GAAP)     A       $1,593           $1,564           $1,509           $1,462           $1,484           $29           2 %        $109           7 %        $6,128           $5,707           $421           7 %  
Less: Notable items       (5)          —        —        —        17           (5)          (100)          (22)          (129)          (5)          6           (11)          (183)    
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Total revenue, Underlying (non-GAAP)     B       $1,598           $1,564           $1,509           $1,462           $1,467           $34           2 %        $131           9 %        $6,133           $5,701           $432           8 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Noninterest expense, Underlying:                            
Noninterest expense (GAAP)     C       $951           $910           $875           $883           $898           $41           5 %        $53           6 %        $3,619           $3,474           $145           4 %  
Less: Notable items       45           9           —        —        40           36           NM           5           13           54           55           (1)          (2)    
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Noninterest expense, Underlying (non-GAAP)     D       $906           $901           $875           $883           $858           $5           1 %        $48           6 %        $3,565           $3,419           $146           4 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Pre-provision profit:                            
Total revenue (GAAP)     A       $1,593           $1,564           $1,509           $1,462           $1,484           $29           2 %        $109           7 %        $6,128           $5,707           $421           7 %  
Less: Noninterest expense (GAAP)     C       951           910           875           883           898           41           5           53           6           3,619           3,474           145           4      
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Pre-provision profit (GAAP)       $642           $654           $634           $579           $586           ($12)          (2%)        $56           10 %        $2,509           $2,233           $276           12 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Pre-provision profit, Underlying:                            
Total revenue, Underlying (non-GAAP)     B       $1,598           $1,564           $1,509           $1,462           $1,467           $34           2 %        $131           9 %        $6,133           $5,701           $432           8 %  
Less: Noninterest expense, Underlying (non-GAAP)     D       906           901           875           883           858           5           1           48           6           3,565           3,419           146           4      
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Pre-provision profit, Underlying (non-GAAP)       $692           $663           $634           $579           $609           $29           4 %        $83           14 %        $2,568           $2,282           $286           13 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Total credit-related costs, Underlying:                            
Provision for credit losses (GAAP)       $85           $78           $85           $78           $83           $7           9 %        $2           2 %        $326           $321           $5           2 %  
Add: Notable items       —        —        —        —        —        —        —         —        —         —        26           (26)          (100)    
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Total credit-related costs, Underlying (non-GAAP)       $85           $78           $85           $78           $83           $7           9 %        $2           2 %        $326           $347           ($21)          (6%)   
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Income before income tax expense, Underlying:                            
Income before income tax expense (GAAP)     E       $557           $576           $549           $501           $503           ($19)          (3%)        $54           11 %        $2,183           $1,912           $271           14 %  
Less: Income (expense) before income tax expense (benefit) related to notable items       (50)          (9)          —        —        (23)          (41)          NM           (27)          (117)          (59)          (23)          (36)          (157)    
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Income before income tax expense, Underlying (non-GAAP)     F       $607           $585           $549           $501           $526           $22           4 %        $81           15 %        $2,242           $1,935           $307           16 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Income tax expense, Underlying:                            
Income tax expense (benefit) (GAAP)     G       $92           $133           $124           $113           ($163)          ($41)          (31%)        $255           156 %        $462           $260           $202           78%    
Less: Income tax expense (benefit) related to notable items       (41)          (2)          —        —        (340)          (39)          NM           299           88           (43)          (363)          320           88      
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Income tax expense, Underlying (non-GAAP)     H       $133           $135           $124           $113           $177           ($2)          (1%)        ($44)          (25%)        $505           $623           ($118)          (19%)   
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Net income, Underlying:                            
Net income (GAAP)     I       $465           $443           $425           $388           $666           $22           5 %        ($201)          (30%)        $1,721           $1,652           $69           4 %  
Add: Notable items, net of income tax expense (benefit)       9           7           —        —        (317)          2           29           326           103           16           (340)          356           105     
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Net income, Underlying (non-GAAP)     J       $474           $450           $425           $388           $349           $24           5 %        $125           36 %        $1,737           $1,312           $425           32 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Net income available to common stockholders, Underlying:                            
Net income available to common stockholders (GAAP)     K       $450           $436           $425           $381           $666           $14           3 %        ($216)          (32%)        $1,692           $1,638           $54           3 %  
Add: Notable items, net of income tax expense (benefit)       9           7           —        —        (317)          2           29           326           103           16           (340)          356           105     
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   
Net income available to common stockholders, Underlying (non-GAAP)     L       $459           $443           $425           $381           $349           $16           4 %        $110           32 %        $1,708           $1,298           $410           32 %  
   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

16


Key performance metrics, non-GAAP financial measures and reconciliations (continued)

(in millions, except share, per-share and ratio data)

 

 

        QUARTERLY TRENDS     FULL YEAR  
                                      4Q18 Change                 2018 Change  
        4Q18     3Q18     2Q18     1Q18     4Q17     3Q18     4Q17     2018     2017     2017  
                                      $/bps     %     $/bps     %                 $/bps     %  
Operating leverage:                            
Total revenue (GAAP)   A     $1,593       $1,564       $1,509       $1,462       $1,484       $29       1.78  %       $109       7.30  %       $6,128       $5,707       $421       7.37  %  
Less: Noninterest expense (GAAP)   C     951       910       875       883       898       41       4.39           53       5.82           3,619       3,474       145       4.18      
               

 

 

     

 

 

         

 

 

 
Operating leverage                   (2.61%)           1.48  %             3.19  %  
               

 

 

     

 

 

         

 

 

 
Operating leverage, Underlying:                            
Total revenue, Underlying (non-GAAP)   B     $1,598       $1,564       $1,509       $1,462       $1,467       $34       2.08  %       $131       8.89  %       $6,133       $5,701       $432       7.58  %  
Less: Noninterest expense, Underlying (non-GAAP)   D     906       901       875       883       858       5       0.44           48       5.53           3,565       3,419       146       4.30      
               

 

 

     

 

 

         

 

 

 
Operating Leverage, Underlying (non-GAAP)                   1.64  %         3.36  %             3.28  %  
               

 

 

     

 

 

         

 

 

 
Efficiency ratio and efficiency ratio, Underlying:                            
Efficiency ratio   C/A     59.69   %      58.20   %      57.95   %      60.43   %      60.52   %      149      

bps

      (83)      

bps

      59.06   %      60.87   %      (181)      

bps

 
Efficiency ratio, Underlying (non-GAAP)   D/B     56.70       57.62       57.95       60.43       58.50       (92)      

bps

      (180)      

bps

      58.13       59.96       (183)      

bps

 
Effective income tax rate and effective income tax rate, Underlying:                            
Effective income tax rate   G/E     16.45       23.16   %      22.58   %      22.52   %      (32.40)       (671)      

bps

      4,885      

bps

      21.16   %      13.62   %      754      

bps

 
Effective income tax rate, Underlying (non-GAAP)   H/F     21.91       23.20       22.58       22.52       33.68       (129)      

bps

      (1,177)      

bps

      22.55       32.20       (965)      

bps

 
Return on average common equity and return on average common equity, Underlying:                            
Average common equity (GAAP)   M     $19,521       $19,599       $19,732       $19,732       $19,624       ($78)       —%       ($103)       (1%)       $19,645       $19,618       $27       —%  
Return on average common equity   K/M     9.16   %      8.82   %      8.65   %      7.83%       13.46%       34      

bps

      (430)      

bps

      8.62   %      8.35   %      27      

bps

 
Return on average common equity, Underlying (non-GAAP)   L/M     9.33       8.96       8.65       7.83       7.05       37      

bps

      228      

bps

      8.69       6.62       207      

bps

 
Return on average tangible common equity and return on average tangible common equity, Underlying:                            
Average common equity (GAAP)   M     $19,521       $19,599       $19,732       $19,732       $19,624       ($78)       —%       ($103)       (1%)       $19,645       $19,618       $27       —%  
Less: Average goodwill (GAAP)       6,946       6,926       6,887       6,887       6,887       20             59       1       6,912       6,883       29        
Less: Average other intangibles (GAAP)       32       22       2       2       2       10       45       30       NM       14       2       12       NM  
Add: Average deferred tax liabilities related to goodwill (GAAP)       364       360       357       355       531       4       1       (167)       (31)       359       534       (175)       (33)  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 
Average tangible common equity   N     $12,907       $13,011       $13,200       $13,198       $13,266       ($104)       (1%)       ($359)       (3%)       $13,078       $13,267       ($189)       (1%)  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 
Return on average tangible common equity   K/N     13.85   %      13.29   %      12.93   %      11.71       19.92   %      56      

bps

      (607)      

bps

      12.94   %      12.35  %       59      

bps

 
Return on average tangible common equity, Underlying (non-GAAP)   L/N     14.11       13.50       12.93       11.71       10.43       61      

bps

      368      

bps

      13.06       9.79       327      

bps

 
Return on average total assets and return on average total assets, Underlying:                            
Average total assets (GAAP)   O     $157,732       $155,624       $153,253       $151,523       $151,111       $2,108       1%       $6,621       4%       $154,553       $149,953       $4,600       3%  
Return on average total assets   I/O     1.17   %      1.13   %      1.11   %      1.04       1.75   %      4      

bps

      (58)      

bps

      1.11   %      1.10   %      1      

bps

 
Return on average total assets, Underlying (non-GAAP)   J/O     1.19       1.15       1.11       1.04       0.92       4      

bps

      27      

bps

      1.12       0.88       24      

bps

 
Return on average total tangible assets and return on average total tangible assets, Underlying: