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CIT Announces Third Quarter 2018 Results

NEW YORK, Oct. 23, 2018 /PRNewswire/ --

CIT logo

Highlights:

  • Third quarter net income available to common shareholders of $132 million or $1.15 per diluted common share; income from continuing operations available to common shareholders of $129 million or $1.13 per diluted common share

  • Excluding noteworthy items, third quarter income from continuing operations available to common shareholders1 of $131 million or $1.15 per diluted common share

  • Average loans and leases were essentially unchanged compared to the prior quarter and up 2% compared to the year-ago quarter. Average loans and leases in core portfolios2 grew 2% compared to the prior quarter and 8% compared to the year-ago quarter.
  • Completed repurchase of $291 million in common equity in 3Q18, consisting of approximately 5.5 million shares at an average price per share of $52.91
  • Completed the sale of our European railcar leasing business (NACCO) on October 4

CIT Group Inc. (CIT) today reported third quarter net income available to common shareholders of $132 million or $1.15 per diluted common share, compared to net income available to common shareholders of $220 million or $1.61 per diluted common share for the year-ago quarter. Income from continuing operations available to common shareholders for the third quarter was $129 million or $1.13 per diluted common share, compared to income available to common shareholders of $223 million or $1.64 per diluted common share in the year-ago quarter.

Income from continuing operations available to common shareholders excluding noteworthy items for the third quarter was $131 million or $1.15 per diluted common share, compared to $139 million or $1.02 per diluted common share in the year-ago quarter, as lower net finance revenue and an increase in the provision for credit losses were partially offset by higher other non-interest income and lower operating expenses. The increase in income from continuing operations excluding noteworthy items per diluted common share reflects the decline in the average number of diluted common shares outstanding due to significant share repurchases over the past four quarters.

"In the third quarter, we delivered strong performance in all areas of our strategic plan," said CIT Chairwoman and Chief Executive Officer Ellen R. Alemany. "The average core loan and lease portfolio grew 8% year-over-year driven by strong originations as our strategic initiatives gained momentum. In addition, we made significant progress in reducing operating expenses, returning capital and driving greater funding efficiency through continued consumer deposit growth and the extension of debt maturities."

Alemany continued, "In October, we completed the sale of the European rail business, which enabled us to initiate a series of liability management actions to further optimize our funding profile. Collectively, these efforts advance our plan to improve our return on tangible common equity."

Return on Tangible Common Equity (ROTCE)3 for continuing operations was 9.66%. ROTCE for continuing operations excluding noteworthy items3 was 9.78%. Tangible book value per common share at September 30, 2018 was $50.02. The preliminary Common Equity Tier 1 Capital ratio decreased from the prior quarter and remained strong at 12.3%, and the preliminary Total Capital ratio decreased to 15.1% at September 30, 2018.

Financial results for the third quarter in continuing operations included noteworthy items related to our strategic initiatives:

  • $16 million (after tax) ($0.14 per diluted common share) charge in other non-interest income from an impairment to the indemnification asset related to a loss share agreement on assets in our Legacy Consumer Mortgage (LCM) portfolio in the Consumer Banking segment.
  • $11 million (after tax) ($0.09 per diluted common share) benefit from a release of a valuation reserve in other non-interest income related to assets held for sale in China in the Non-strategic Portfolios (NSP) segment.
  • $6 million (after tax) ($0.05 per diluted common share) benefit in net finance revenue from the suspension of the depreciation of assets related to NACCO that were in assets held for sale.
  • $3 million (after tax) ($0.02 per diluted common share) in debt extinguishment costs related to the redemption of $500 million in unsecured senior debt.

Selected Financial Highlights

Select Financial Highlights*













3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18



3Q17






























Net finance revenue(1)

$

389



$

389



$

401



$

0



0

%



$

(11)



-3

%


Non-interest income


86




135




63




(49)



-36

%




23



36

%


Total net revenue


476




524




464




(49)



-9

%




12



3

%


Non-interest expenses


267




287




331




(20)



-7

%




(64)



-19

%


Income from continuing operations before credit provision


209




238




133




(29)



-12

%




76



57

%


Provision for credit losses


38




33




30




5



16

%




8



27

%


Income from continuing operations before benefit (provision) for income
taxes


171




205




103




(34)



-17

%




68



66

%


Provision (benefit) for income taxes


41




57




(120)




(16)



-28

%




161


NM



Income from continuing operations


129




147




223




(18)



-12

%




(93)



-42

%


(Loss) income from discontinued operations, net of taxes


2




(21)




(3)




23


NM





5


NM



Net income


132




127




220




5



4

%




(88)



-40

%


Preferred stock dividends


-




9




-




(9)



-100

%




-


NM



Net income available to common shareholders

$

132



$

117



$

220



$

14



12

%



$

(88)



-40

%


Income from continuing operations available to common shareholders

$

129



$

138



$

223



$

(9)



-6

%



$

(93)



-42

%






























Per common share




























Diluted income per common share

$

1.15



$

0.94



$

1.61



$

0.21







$

(0.46)






Tangible book value per common share (TBVPS)(1)

$

50.02



$

49.41



$

48.58



$

0.61







$

1.44






Average diluted common shares outstanding (in thousands)


114,007




124,686




136,126




(10,679)








(22,119)


































Capital adequacy




























CET1 Ratio(3)


12.3

%



13.2

%



14.0

%


-90bps







NM






Total Capital Ratio(3)


15.1

%



16.0

%



15.7

%


-90bps







-60bps


































Asset quality




























Net charge-offs as a % of average loans


0.35

%



0.21

%



0.58

%


14bps







-23bps






Allowance for loan losses as a % of loans


1.57

%



1.59

%



1.47

%


-3bps







9bps


































Key performance metrics




























Net finance margin(1)


3.43

%



3.37

%



3.53

%


7bps







-10bps






Loans and leases to deposit ratio


126

%



121

%



127

%


NM







-89bps






CIT Bank Loans and leases to deposit ratio


101

%



96

%



102

%


NM







NM






Return on average common equity (available to common shareholders,
continuing operations)


8.62

%



8.48

%



12.74

%


14bps







NM






Return on tangible common equity (available to common shareholders,
continuing operations)


9.66

%



9.44

%



14.58

%


22bps







NM






Return on tangible common equity (available to common shareholders,
continuing operations), excluding noteworthy items(2)


9.78

%



8.56

%



9.20

%


NM







58bps






Return on AEA, applicable to common shareholders(1)


1.16

%



1.02

%



1.93

%


14bps







-77bps






Return on AEA, excluding noteworthy items(1)(2)


1.17

%



1.02

%



1.21

%


15bps







-4bps






Net efficiency ratio(1)


54.1

%



49.9

%



57.8

%


NM







NM






Headcount


3,757




3,843




3,966




(86)








(209)






























































(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 26 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.

(2)Excludes noteworthy items. See "Non-GAAP Measurements" at the end of this press release and beginning on page 26 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.

(3)Ratios on fully phased-in basis.

* Certain balances may not sum due to rounding.

Unless otherwise indicated, all references below relate to continuing operations.

Income Statement Highlights:
Income from continuing operations available to common shareholders excluding noteworthy items4 was $131 million compared to $125 million in the prior quarter, primarily reflecting lower operating expense and income tax expense and no semi-annual preferred dividend paid in the current quarter, partially offset by a decline in other non-interest income and higher credit costs.

Net Finance Revenue

Net Finance Revenue*




3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18




3Q17































Interest income

$

474



$

474



$

454



$

-



0

%



$

20



4

%


Rental income on operating leases


264




261




252




3



1

%




12



5

%


Depreciation on operating lease equipment


78




77




71




1



1

%




7



10

%


Maintenance and other operating lease expenses


57




64




58




(7)



-11

%




(1)



-2

%


Net rental income on operating leases


130




121




123




9



8

%




6



5

%


Interest expense


214




205




177




9



4

%




37



21

%


Net finance revenue

$

389



$

389



$

401



$

0



0

%



$

(11)



-3

%


Average earning assets(1)

$

45,377



$

46,230



$

45,454



$

(853)



-2

%



$

(77)



0

%


Net finance margin


3.43

%



3.37

%



3.53

%


7bps







-10bps






Excluding Noteworthy Items(1)




























Net finance revenue

$

381



$

380



$

393



$

0



0

%



$

(12)



-3

%


Average earning assets

$

45,377



$

46,230



$

45,454



$

(853)



-2

%



$

(77)



0

%


Net finance margin


3.36

%



3.29

%



3.46

%


7bps







-10bps


































(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 26 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Net finance revenue5 was $389 million, unchanged from the prior quarter. Net finance revenue in the current and prior quarters included a $9 million benefit from the suspension of depreciation expense related to NACCO because its assets were included in assets held for sale. Excluding noteworthy items, net finance revenue5 was $381 million, compared to $380 million in the prior quarter, as higher net operating lease income, driven by a lease prepayment and lower maintenance costs in Rail, were mostly offset by higher deposit costs.

Net finance revenue as a percentage of average earning assets ("net finance margin5") excluding noteworthy items was 3.36%, a 7 bps increase from 3.29% in the prior quarter. The increase in net finance margin excluding noteworthy items reflects higher yields on commercial loans and an increase in rental income, partially offset by higher deposit costs and the full quarter impact of the sale of the reverse mortgage portfolio.

Net finance revenue in the year-ago quarter included an $8 million benefit from the suspension of depreciation expense related to NACCO because its assets were included in assets held for sale. Excluding noteworthy items, net finance revenue decreased $12 million or 3% compared to the year-ago quarter. The decrease in net finance revenue primarily reflected higher funding costs and lower net purchase accounting accretion, partially offset by higher income on loans in the Commercial Banking segment and on investment securities.

Net finance margin excluding noteworthy items decreased 10 bps compared to the year-ago quarter, reflecting the aforementioned drivers of the decrease in net finance revenue, partially offset by a shift in asset mix from interest-bearing deposits to higher yielding assets.

Other Non-interest Income

Other Non-Interest Income*




3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18




3Q17































Fee revenues

$

28



$

27



$

26



$

2



6

%



$

2



8

%


Factoring commissions


27




24




27




4



16

%




0



1

%


Gains on leasing equipment, net of impairments


14




14




12




(1)



-6

%




1



12

%


Gains on investment securities, net of impairments


4




4




10




(0)



-3

%




(7)



-65

%


BOLI income


7




7




2




(0)



-2

%




5


NM



Other revenues


7




61




(14)




(54)



-88

%




21


NM



Total other non-interest income

$

86



$

135



$

63



$

(49)



-36

%



$

23



36

%






























Total other non-interest income, excluding noteworthy
items(1)

$

97



$

106



$

90



$

(9)



-9

%



$

7



7

%






























(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 26 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Other non-interest income was $86 million compared to $135 million in the prior quarter. Other non-interest income in the current quarter included aggregate noteworthy items of a $10 million net charge in other revenue from a $21 million impairment charge to the indemnification asset related to a loss share agreement on assets in our LCM portfolio in the Consumer Banking segment that was partially offset by an $11 million benefit from a release of a valuation reserve related to assets held for sale in China in the NSP segment. Other non-interest income in the prior quarter included aggregate noteworthy items of a $29 million benefit in other revenues related to the Financial Freedom transaction, primarily a gain on the sale of the reverse mortgage portfolio.

Excluding noteworthy items, other non-interest income6 was $97 million, compared to $106 million in the prior quarter, which included income of $5 million related to the reverse mortgage portfolio in Consumer Banking that was sold in the prior quarter and a $6 million benefit from a release of reserves related to the OneWest acquisition. Factoring commissions increased $4 million from seasonally higher volumes, partially offset by a lower average commission rate. Fee income increased $2 million.

Other non-interest income in the year-ago quarter included noteworthy items totaling $27 million in aggregate charges related to the Financial Freedom transaction, including a $5 million write-down of OREO, a $9 million impairment of reverse mortgage-related assets and a $12 million write down of reverse mortgage loans. Other non-interest income excluding noteworthy items increased by $7 million from the year-ago quarter reflecting higher income from bank-owned life insurance (BOLI).

Operating Expenses

Operating Expenses*




3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18




3Q17































Compensation and benefits

$

137



$

143



$

139



$

(6)



-4

%



$

(2)



-1

%


Technology


32




33




31




(0)



-1

%




2



6

%


Professional fees


17




21




32




(4)



-19

%




(15)



-48

%


Insurance


16




19




19




(3)



-14

%




(3)



-14

%


Net occupancy expense


16




16




16




0



1

%




0



0

%


Advertising and marketing


11




13




14




(3)



-21

%




(3)



-22

%


Other expenses


28




17




18




11



67

%




10



55

%


Operating expenses, excluding restructuring costs and
intangible asset amortization


257




262




268




(4)



-2

%




(11)



-4

%


Intangible asset amortization


6




6




6




0



0

%




(0)



-3

%


Restructuring costs


0




0




3




0


NM





(3)



-100

%


Total operating expenses

$

263



$

268



$

277



$

(4)



-2

%



$

(14)



-5

%


Net efficiency ratio(1)


54.1

%



49.9

%



57.8

%


NM







NM


































Total operating expenses, excluding noteworthy items and
intangible asset amortization(1)

$

257



$

262



$

268



$

(4)



-2

%



$

(11)



-4

%


Net efficiency ratio, excluding noteworthy items and
intangible asset amortization(1)


53.9

%



53.8

%



55.5

%


12bps







NM


































(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 26 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Operating expenses excluding noteworthy items and intangible asset amortization7 in the current quarter was $257 million, a decrease from $262 million in the prior quarter, driven primarily by decreases in employee costs and professional fees, partially offset by a $5 million reversal of a non-income tax-related reserve in the prior quarter.

Operating expenses in the year-ago quarter included $3 million in restructuring charges. Compared to the year-ago quarter, operating expenses excluding noteworthy items and intangible asset amortization decreased $11 million or 4%, primarily reflecting lower professional fees, partially offset by higher other non-income tax expenses.

The net efficiency ratio7 increased to 54% compared to 50% in the prior quarter. The net efficiency ratio excluding noteworthy items7 was 54%, unchanged from the prior quarter, as the decrease in other non-interest income was offset by the decrease in operating expenses. Compared to the year-ago quarter, the net efficiency ratio excluding noteworthy items improved from 56%, primarily due to the decrease in operating expenses and increase in other non-interest income, partially offset by the decrease in net finance revenue.

Debt Extinguishment Costs
We recognized $3 million in debt extinguishment costs associated with the redemption of $500 million of unsecured senior debt from the proceeds of the issuance of $500 million in unsecured senior debt earlier in the quarter. In the prior quarter, we recognized $19 million in debt extinguishment costs associated with the redemption of $883 million of unsecured senior debt from the proceeds of the issuance of $1 billion in unsecured senior debt in the first quarter 2018. In the year-ago quarter, we recognized $54 million in debt extinguishment costs associated with the repayment of $800 million of unsecured senior debt.

Income Taxes
The provision for income taxes in the current quarter of $41 million included an aggregate of $5 million in discrete tax benefits. The provision for income taxes in the prior quarter of $57 million included an aggregate of $2 million in discrete tax expense, and the benefit for income taxes in the year-ago quarter of $120 million included a $140 million deferred tax benefit from a restructuring of an international legal entity.

The effective tax rate in the current quarter was 24%. Excluding discrete tax items and noteworthy items, the effective tax rate was 28% in the current quarter and 27% in the prior and year-ago quarters.

Balance Sheet Highlights:
Earning Assets

Earning Assets*




3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18




3Q17































Loans (including assets held for sale)

$

30,700



$

29,517



$

29,632



$

1,183



4

%



$

1,068



4

%


Operating lease equipment, net (including assets held for
sale)


8,065




8,001




7,760




64



1

%




306



4

%


Loans and leases


38,765




37,518




37,392




1,247



3

%




1,373



4

%


Interest-bearing cash


1,200




3,267




2,659




(2,067)



-63

%




(1,459)



-55

%


Investment securities and securities purchased under
agreement to resell


6,540




6,107




5,745




432



7

%




795



14

%


Indemnification asset


27




71




172




(44)



-62

%




(145)



-84

%


Credit balances of factoring clients


(1,672)




(1,431)




(1,699)




(242)



-17

%




26



2

%


Total earning assets(1)

$

44,859



$

45,533



$

44,269



$

(673)



-1

%



$

591



1

%


Average earning assets(1)

$

45,377



$

46,230



$

45,454



$

(853)



-2

%



$

(77)



0

%






























(1)See "Non-GAAP Measurements" at the end of this press release and beginning on page 26 for a reconciliation of non-GAAP to GAAP financial information and noteworthy items.



* Certain balances may not sum due to rounding.



Total earning assets decreased 1% compared to the prior quarter, primarily reflecting the deployment of interest-bearing cash into certain liability management and capital actions. Total earning assets increased 1% compared to the year-ago quarter, primarily reflecting growth in loans and leases, partially offset by a decrease in interest-bearing cash. Total loans and leases increased 3% from the prior quarter and 4% from the year-ago quarter, primarily reflecting the growth in commercial loans.

Average earning assets decreased 2% from the prior quarter, primarily reflecting the deployment of interest-bearing cash into certain liability management and capital actions. Average earning assets compared to the year-ago quarter declined slightly, reflecting a decline in interest-bearing cash and run-off of legacy portfolios, partially offset by growth in the core portfolios and the investment portfolio.

Average loans and leases were essentially unchanged in the quarter, as growth in Commercial Finance, North America Rail and Business Capital within the Commercial Banking segment and in Other Consumer Lending within the Consumer Banking segment was offset by the sale of the reverse mortgage portfolio and run-off of the LCM portfolio. Average loans and leases in the core portfolio grew by 2% compared to the prior quarter. Continued strong growth in funded volume across core divisions in both Commercial Banking and Consumer Banking was the key driver of core portfolio growth in the quarter. Average loans and leases in the core portfolio grew 8% compared to the year-ago quarter, driven by growth in Business Capital and Commercial Finance divisions of Commercial Banking and the Other Consumer Lending division of Consumer Banking.

Cash and Investment Securities
Interest-bearing cash and investment securities (including securities purchased under agreements to resell) were $7.7 billion at Sept. 30, 2018, and consisted of $1.2 billion of interest-bearing cash and $6.5 billion of investment securities. In addition, there was approximately $0.2 billion of non-interest-bearing cash.

Of the interest-bearing cash and investment securities, $6.8 billion was at CIT Bank, N.A. (CIT Bank) and $0.6 billion was at the financial holding company, while the remaining $0.3 billion consisted of amounts held at the operating subsidiaries and restricted balances.

Deposits and Borrowings

Deposits and Borrowings*




3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18




3Q17































Noninterest-bearing checking

$

1,296



$

1,290



$

1,360



$

7



1

%



$

(64)



-5

%


Interest-bearing checking


1,768




2,078




2,658




(310)



-15

%




(890)



-33

%


Other money markets/sweeps


4,795




4,976




4,928




(181)



-4

%




(133)



-3

%


Savings and online money market accounts


8,268




9,125




5,892




(858)



-9

%




2,376



40

%


Time deposits


14,507




13,537




14,584




970



7

%




(77)



-1

%


Other


192




175




173




17



9

%




19



11

%


Total deposits

$

30,825



$

31,181



$

29,595



$

(356)



-1

%



$

1,230



4

%


Unsecured borrowings

$

4,238



$

4,238



$

3,748



$

(1)



0

%



$

490



13

%


Secured borrowings


4,437




4,621




4,783




(185)



-4

%




(347)



-7

%


Total borrowings

$

8,674



$

8,860



$

8,531



$

(185)



-2

%



$

143



2

%






























* Certain balances may not sum due to rounding.



Deposits at Sept. 30, 2018 represented approximately 78% of CIT's funding, unchanged from June 30, 2018, as declines in savings and online money market accounts and interest-bearing checking accounts were offset by growth in time deposits in the online and retail channels. Average deposits increased by $275 million or 1% compared to the prior quarter, driven by growth in the consumer-based direct bank. The loans and leases-to-deposits ratio at CIT Bank was 101% at Sept. 30, 2018, compared to 96% at June 30, 2018. For CIT Group, the loans and leases-to-deposits ratio was 126% at Sept. 30, 2018, compared to 121% at June 30, 2018.

The weighted average rate on average outstanding deposits in the current quarter increased 15 bps to 1.58% from 1.43% in the prior quarter. Compared to the year-ago quarter, the weighted average rate on average outstanding deposits increased 36 bps from 1.22%. The rate increases from the prior and year-ago quarter both primarily reflect increases in average savings accounts and time deposits in the online and retail channels, partially offset by a reduction in higher-cost brokered deposits.

Unsecured borrowings comprised 11% of the funding mix at Sept. 30, 2018, unchanged from the level at June 30, 2018. During the quarter the $500 million in unsecured debt due in 2019 was redeemed with the proceeds of the issuance of $500 million in unsecured senior debt due in 2024.

The weighted average coupon on our unsecured senior and subordinated debt was 5.05% at Sept. 30, 2018, with a weighted average maturity of approximately 4.9 years, compared to 4.95% at June 30, 2018, with a weighted average maturity of approximately 4.5 years.

Secured borrowings decreased primarily due to a decrease in FHLB borrowings and comprised 11% of the funding mix at Sept. 30, 2018, compared to 11% at June 30, 2018. A portion of the net proceeds from the sale of NACCO, which closed in October 2018, will be used to terminate a Dutch subsidiary's total return swap facility (TRS) and redeem the railcar securitization that serves as the TRS's reference obligation, which will reduce total secured borrowings by approximately $465 million.

Capital

Capital*




3Q18 change from



($ in millions, except per share data)

3Q18



2Q18



3Q17



2Q18




3Q17































Common stockholders' equity

$

5,995



$

6,201



$

7,126



$

(205)



-3

%



$

(1,131)



-16

%


Tangible common equity

$

5,530



$

5,730



$

6,382



$

(200)



-3

%



$

(851)



-13

%


Total risk-based capital(1)

$

6,824



$

6,980



$

7,087



$

(155)



-2

%



$

(262)



-4

%


Risk-weighted assets(1)

$

45,296



$

43,676



$

45,124



$

1,619



4

%



$

172



0

%






























Book value per common share (BVPS)

$

54.22



$

53.47



$

54.25



$

0.75



1

%



$

(0.03)



0

%


Tangible book value per common share (TBVPS)

$

50.02



$

49.41



$

48.58



$

0.61



1

%



$

1.44



3

%


CET1 ratio(1)


12.3

%



13.2

%



14.0

%


-90bps







NM






Total capital ratio(1)


15.1

%



16.0

%



15.7

%


-90bps







-60bps






Tier 1 leverage ratio(1)


12.0

%



12.1

%



13.4

%


-10bps







NM


































(1)Balances and ratios on fully phased-in basis.



* Certain balances may not sum due to rounding.



Capital actions during the quarter included the repurchase of approximately 5.5 million common shares at an average share price of $52.91 and a quarterly cash dividend of $0.25 per common share. Subsequent to the end of the third quarter and through Oct. 22, we repurchased an additional approximately 3.8 million common shares at an average share price of $49.63. As a result, of the current $750 million share repurchase authorization, $271 million remains, most of which is expected to be completed by year-end.

Common stockholders' equity decreased from the prior quarter, primarily driven by the capital returns, partially offset by net income in the current quarter. Tangible book value per common share increased in the quarter to $50.02, as retained earnings and the reduced share count were partially offset by share repurchases and unrealized losses on investments in other comprehensive income.

Total common shares outstanding was 110.6 million at Sept. 30, 2018, down from 116.0 million at June 30, 2018 and 131.4 million at Sept. 30, 2017.

The preliminary Common Equity Tier 1 Capital ratio decreased from the prior quarter and remained strong at 12.3%. Common Equity Tier 1 Capital decreased primarily from capital returns in the quarter, partially offset by earnings. Risk-weighted assets (RWA) increased primarily reflecting growth in our core portfolio, including a seasonal increase in the Commercial Services business. The preliminary Total Capital ratio also decreased from the prior quarter to 15.1%.

On Oct. 15, 2018, the Board of Directors declared a quarterly cash dividend of $0.25 per common share on outstanding common stock. The dividend is payable on Nov. 27, 2018 to common shareholders of record as of Nov. 13, 2018.

On Oct. 15, 2018, the Board of Directors declared a semi-annual dividend of $29.00 per share on outstanding preferred stock. The dividend is payable on Dec. 17, 2018, to preferred shareholders of record as of Nov. 30, 2018.

Asset Quality

Asset Quality*




3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18



3Q17































Net charge-offs (NCOs)

$

26



$

15



$

42



$

11



70

%



$

(16)



-38

%


NCOs as a % of average loans


0.35

%



0.21

%



0.58

%


14bps







-23bps






Non-accrual loans

$

318



$

292



$

265



$

27



9

%



$

54



20

%


OREO

$

34



$

35



$

64



$

(1)



-2

%



$

(30)



-47

%


Provision for credit losses

$

38



$

33



$

30



$

5



16

%



$

8



27

%


Total portfolio allowance as a % of loans


1.57

%



1.59

%



1.47

%


-3bps







9bps


































* Certain balances may not sum due to rounding.



Provision
The provision for credit losses was $38 million in the current quarter including $39 million related to the Commercial Banking segment, while the Consumer Banking segment had a $1 million reserve release. In the prior quarter, all of the $33 million provision for credit losses was related to the Commercial Banking segment. The increase in the provision for credit losses from the prior quarter was primarily driven by asset growth and an increase in charge-offs in the Commercial Banking segment.

The provision for credit losses in the year-ago quarter was $30 million, which included a noteworthy item of a $15 million charge related to the transfer of the reverse mortgage portfolio to assets held for sale in Consumer Banking in connection with the Financial Freedom transaction. The increase in the provision for credit losses from the year-ago quarter was primarily driven by asset growth.

Net Charge-offs
Net charge-offs were $26 million (0.35% of average loans), compared to $15 million (0.21% of average loans) in the prior quarter and $42 million (0.58% of average loans) in the year-ago quarter. Net charge-offs in the year-ago quarter included a noteworthy item of $15 million for charge-offs related to the transfer of the reverse mortgage portfolio to assets held for sale. Excluding noteworthy items, net charge-offs in the year-ago quarter were $26 million (0.36% of average loans).

Nearly all net charge-offs are in the Commercial Banking segment. Net charge-offs in the Commercial Banking segment were $25 million (0.42% of average loans), up from $15 million (0.25% of average loans) in the prior quarter and $22 million (0.39% of average loans) in the year-ago quarter.

Loan Loss Allowance
The allowance for loan losses was $477 million (1.57% of loans) at Sept. 30, 2018, compared to $467 million (1.59% of loans) at June 30, 2018 and $420 million (1.47% of loans) at Sept. 30, 2017.

In the Commercial Banking segment, the allowance for loan losses was $450 million (1.87% of loans) at Sept. 30, 2018, compared to $438 million (1.90% of loans) at June 30, 2018 and $392 million (1.73% of loans) at Sept. 30, 2017.

Purchase credit impaired (PCI) loans acquired as part of the OneWest acquisition are carried at a significant discount to the unpaid principal balance. At Sept. 30, 2018, PCI loans with an aggregate unpaid principal balance of $2.6 billion were carried at $1.8 billion, representing a 32% discount. The vast majority of the discount is related to our LCM portfolio in Consumer Banking.

Non-accrual Loans
Non-accrual loans were $318 million (1.04% of loans) compared to $292 million (0.99% of loans) in the prior quarter and $265 million (0.93% of loans) in the year-ago quarter.

In Commercial Banking, non-accrual loans were $275 million (1.14% of loans), compared to $252 million (1.10% of loans) at June 30, 2018 and $241 million (1.06% of loans) at Sept. 30, 2017. The increases from the prior and year-ago quarters were primarily driven by an increase in the Commercial Finance division.

In Consumer Banking, non-accrual loans were $35 million (0.55% of loans) at Sept. 30, 2018, compared to $29 million (0.46% of loans) at June 30, 2018, and $19 million (0.33% of loans) at Sept. 30, 2017. At Sept. 30, 2018, $29 million of the non-accrual loans were related to non-PCI loans in LCM. In the prior and year-ago quarters, essentially all non-accrual loans were in the LCM portfolio.

Commercial Banking

Earnings Summary*




3Q18 change from



($ in millions)

3Q18



2Q18



3Q17



2Q18



3Q17































Interest income

$

339



$

330



$

309



$

8



3

%



$

30



10

%


Rental income on operating leases


264




261




252




3



1

%




12



5

%


Interest expense


190




177




131




13



8

%




59



45

%


Depreciation on operating lease equipment


78




77




71




1



1

%




7



10

%


Maintenance and other operating lease expenses


57




64




58




(7)



-11

%




(1)



-2

%


Net finance revenue


278




274




301




4



2

%




(23)



-8

%


Other non-interest income


76




73




71




3



5

%




6



8

%


Provision for credit losses


39




33




11




6



17

%




28


NM



Operating expenses


172




171




169




1



1

%




4



2

%


Income before income taxes

$

143



$

143



$

193



$

1



1

%



$

(49)



-26

%






























Select Average Balances




























Average loans(1)

$

22,018



$

21,724



$

20,978



$

294



1

%



$

1,040



5

%


Average operating leases(1)

$

8,032



$

7,980



$

7,798



$

52



1

%



$

234



3

%


Average earning assets(2)

$

30,319



$

29,965



$

29,011



$

354



1

%



$

...