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04/22/2015

Citizens Financial Group, Inc. Reports First Quarter Net Income of $209 Million; Diluted EPS of $0.38, Up 27 Percent from First Quarter 2014

First quarter 2015 Adjusted net income, excluding net restructuring charges and special items, of $215 million, or $0.39 diluted EPS*, up 30 percent from first quarter 2014

First quarter 2015 Adjusted ROTCE* of 6.7% compared with 5.2% in first quarter 2014

PROVIDENCE, R.I.--(BUSINESS WIRE)-- Citizens Financial Group, Inc. (NYSE:CFG or “Citizens") today reported first quarter net income of $209 million, or $0.38 per diluted common share, which were up 26% and 27%, respectively, from $166 million, or $0.30 per diluted common share in first quarter 2014. First quarter 2015 results were up 6% from fourth quarter 2014 net income of $197 million, or $0.36 per diluted common share. First quarter 2015 results were reduced by $0.01 per diluted common share related to net restructuring charges and special items, versus $0.03 in fourth quarter 2014 as detailed in the Discussion of Results portion of this release. First quarter 2015 Adjusted diluted EPS* of $0.39 compares with $0.30 in the first quarter 2014 and $0.39 in the fourth quarter 2014.

Bruce Van Saun, Chairman and Chief Executive Officer commented, “We are off to a solid start to 2015. We are executing well on our strategy, and our financial performance continues to meet expectations. During the quarter we were very pleased to announce two key leadership additions to the team - Eric Aboaf as Chief Financial Officer, and Don McCree as Vice Chairman and Head of Commercial Banking. We also had a successful CCAR result and supported the successful secondary offering of our common stock which, combined with our April share repurchase, reduced the Royal Bank of Scotland Group’s ownership level to 41%.” Van Saun added, “We continue to set ambitious goals for ourselves, and remain focused on execution and improving how the bank is operating.”

Return on Average Tangible Common Equity* (“ROTCE”) was 6.5% in first quarter 2015 compared to 6.1% in fourth quarter 2014 and 5.2% in first quarter 2014. Adjusted ROTCE* for first quarter 2015 was 6.7% compared to 6.8% for fourth quarter 2014 and 5.2% in first quarter 2014.

Citizens also announced that its board of directors declared a quarterly cash dividend of $0.10 per common share. The dividend is payable on May 19, 2015 to shareholders of record at the close of business on May 5, 2015.

Key Highlights

First Quarter 2015 vs. Fourth Quarter 2014

• First quarter highlights include 2% average loan growth, continued strong credit quality, good expense discipline and the impact of seasonality on revenues.

Results

• Net interest income of $836 million was down modestly, reflecting the impact of fewer days in the quarter.
• Net interest margin remained relatively stable at 2.77%, down three basis points from fourth quarter 2014.
• Noninterest income of $347 million increased $8 million, driven by gains on the sale of mortgage loans and investment securities, which more than offset seasonally lower noninterest income.
• Adjusted noninterest expense* of $800 million rose $9 million, largely due to seasonally higher payroll taxes and incentive compensation.
• Adjusted efficiency ratio* of 68% compared to 67% in fourth quarter 2014.
• Provision for credit losses of $58 million decreased $14 million, primarily due to an increase in commercial real estate recoveries.

Balance Sheet

• Average interest earning assets increased $2.6 billion, or 2%, driven by strength in commercial, auto, student, and mortgage loans.
• Average deposits increased $848 million, or 1%, driven by growth in most deposit categories.
• Nonperforming loans and leases (“NPLs”) to total loans and leases remained relatively stable at 1.20%. Allowance coverage of NPLs was relatively stable at 106% in first quarter 2015 compared to 109% in fourth quarter 2014.
• Capital strength remained robust with a common equity Tier 1 (“CET1”) risk-based capital ratio of 12.2%.
• Supported largest ever U.S. commercial bank first follow-on offering, selling 155 million shares of common stock, valued at $3.7 billion.

First Quarter 2015 vs. First Quarter 2014

• Total Revenue of $1.2 billion up $17 million despite an estimated $25 million reduction related to the Chicago Divestiture and a $17 million reduction in securities gains.
• Adjusted noninterest expense* of $800 million decreased $10 million driven by the estimated impact of the Chicago Divestiture.
• Adjusted net income* of $215 million increased $49 million, or 30%.
• Adjusted ROTCE* of 6.7% improved 149 basis points.
• Total assets increased 8%, driven by loan and lease growth of 9%.

Update on Plan Execution

• Continued progress on initiatives to drive growth and enhance efficiency:
  • Consumer Banking – Continued loan growth, sales force expansion in mortgage and wealth, household growth and new product rollout in student lending and card.
  • CommercialBanking – Growth in targeted business areas supported by continued additions in relationship managers and product capabilities.
  • Expense initiatives - Delivering against milestones with 32% of targeted efficiency initiative savings achieved by end of 1Q15; remain on track to reach our savings target of $200 million by end 2016.
• In early April completed $250 million preferred stock issuance and 10.5 million common stock share repurchase, further reducing The Royal Bank of Scotland Group plc’s (“RBS”) ownership interest to 40.8%.

^{*These are non-GAAP financial measures. Please see Non-GAAP Reconciliation Tables at the end of this release for an explanation of our use of non-GAAP financial measures and their reconciliation to GAAP. All references to “Adjusted” results exclude restructuring charges and special items.}

Discussion of Results:

First quarter 2015 results were reduced by a net $6 million after-tax, or $0.01 per diluted share, of restructuring charges and special items, largely related to efforts to improve processes and enhance efficiencies, as well as rebranding and separation from RBS. Fourth quarter 2014 results were reduced by a net $20 million after-tax, or $0.03 per diluted share, of restructuring charges and special items.

First quarter 2015 Adjusted net income* of $215 million was broadly stable compared to fourth quarter 2014, reflecting lower provision for credit losses and improved revenue, partially offset by seasonally higher noninterest expense and an increase in the tax rate tied to a low-income housing portfolio accounting change. Adjusted pre-provision profit* decreased $5 million from fourth quarter 2014 as a $9 million increase in Adjusted noninterest expense* was partially offset by a $4 million increase in total revenue.

Compared to the first quarter 2014, Adjusted net income* increased $49 million, or 30%, from $166 million in first quarter 2014, driven by a $63 million decrease in provision expense related to continued improvement in credit quality. Adjusted pre-provision profit* increased $27 million from first quarter 2014 as growth in net interest income and mortgage banking fees was partially offset by lower securities gains, leasing income, and service charges and fees.

Comparisons to first quarter 2014 results were impacted by the second quarter 2014 Chicago Divestiture, which reduced quarterly results by the following estimated amounts: $13 million in net interest income, $12 million in noninterest income and $21 million in noninterest expense.

Net interest income of $836 million in first quarter 2015 decreased modestly from fourth quarter 2014, largely as the benefit of a $1.9 billion increase in average loans and leases and a reduction in pay-fixed swap costs was more than offset by the impact of two fewer days in the quarter and increased senior debt and deposit costs.

Net interest margin of 2.77% in first quarter 2015 decreased three basis points from 2.80% in fourth quarter 2014, which included a two basis point non-recurring benefit. First quarter 2015 results reflected the benefit of a reduction in pay-fixed swap costs, which was more than offset by the impact of the persistent low-rate environment on investment portfolio and loan yields, and increased senior debt borrowing costs and higher deposit costs.

Compared to first quarter 2014, net interest income increased $28 million, as the benefit of earning asset growth and a reduction in pay-fixed swap costs was partially offset by continued pressure from the relatively persistent low-rate environment on loan yields and mix, the estimated $13 million effect of the Chicago Divestiture, higher borrowing costs related to debt issuances, and higher deposit costs.

Compared to first quarter 2014, net interest margin decreased 12 basis points given the impact of the continued low-rate environment on loan yields and mix, higher borrowing costs related to the issuance of subordinated debt and senior notes, higher deposit costs, and the impact of the Chicago Divestiture.

Noninterest income of $347 million in first quarter 2015 increased $8 million relative to fourth quarter 2014 driven by higher mortgage banking income, securities gains and other income. Service charges and fees decreased $9 million driven by the impact of seasonality as well as customer-behavior trends. Card fees decreased $6 million reflecting seasonality and fewer days in the quarter. Trust and investment services fees decreased $2 million on lower sales activity. Mortgage banking fees increased $17 million reflecting a $10 million gain on the sale of a $273 million portfolio of conforming loans, as well as higher origination volume. Foreign exchange and trade finance fees, and capital markets fees were down from strong fourth quarter levels. Securities gains increased $7 million, as we modestly extended duration in the securities portfolio to help mitigate the impact of lower rates. Other income increased $6 million, largely reflecting a $5 million increase from a low-income housing investment portfolio accounting change, which is offset in income tax expense.

Compared to first quarter 2014, noninterest income decreased $11 million, driven by an estimated $12 million decrease related to the Chicago Divestiture. Noninterest income before the effect of the Chicago Divestiture remained broadly flat, largely as strength in mortgage banking, capital markets and service charges and fees was partially offset by lower securities gains. Excluding both the impact of the Chicago Divestiture and the decrease in securities gains, underlying noninterest income was up 5%. Service charges and fees decreased $4 million as the benefit of underlying growth was more than offset by an estimated $6 million tied to the Chicago Divestiture. Card fees decreased $4 million driven by an estimated $3 million decrease related to the Chicago Divestiture. Trust and investment services fees decreased $3 million reflecting the impact of the Chicago Divesture and a reduction in investment sales. Mortgage banking income increased $13 million, largely reflecting the benefit of the portfolio sale gain. Capital markets fees increased $4 million, reflecting continued progress in building up the scale of the business. Securities gains decreased $17 million. Other income was relatively stable as a decrease from relatively high first quarter 2014 levels was broadly offset by the benefit of the effect of an accounting change related to the low-income housing investment portfolio.

Noninterest expense of $810 million in first quarter 2015 decreased $14 million from fourth quarter 2014, driven by a $23 million decrease in restructuring charges and special items.

Adjusted noninterest expense* of $800 million increased $9 million from fourth quarter 2014, largely as a seasonal increase in salaries and employee benefits, reflecting higher payroll taxes and higher incentives expense, was partially offset by a sizeable decrease in outside services, while our efficiency initiatives helped to fund continued investments in the businesses to drive future revenue growth.

Compared with the first quarter of 2014, noninterest expense remained stable as the impact of higher salaries and employee benefits expense and amortization of software expense was offset by lower other operating expense, outside services, occupancy and equipment expense, as well as an estimated $21 million decrease related to the Chicago Divestiture. First quarter 2015 results also reflected a $10 million increase in restructuring charges and special items from first quarter 2014.

Adjusted noninterest expense* decreased $10 million compared to first quarter 2014, driven by an estimated $21 million decrease related to the Chicago Divestiture. Reductions in other operating expense and outside services were partially offset by an increase in salaries and employee benefits, and amortization of software.

As expected, the effective tax rate increased to 33.7% in first quarter 2015, compared to 30.6% in fourth quarter 2014, and 29.5% in first quarter 2014. The increase in the rate was largely driven by the effect of an accounting change related to a low-income housing investment portfolio which increased both other income and income tax expense by $5 million in first quarter 2015.

_{1 Includes held for sale.}

_{2 Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level of common equity Tier 1 and then allocate that approximation to the segments based on economic capital.}

Consumer Banking net income of $61 million for first quarter 2015 increased $9 million, or 17%, compared to fourth quarter 2014, as the impact of a seasonal decrease in net interest income was more than offset by lower expenses. Net interest income decreased $3 million, or 1%, from fourth quarter 2014, driven by an estimated $8 million decrease tied to two fewer days in the quarter as well as an increase in deposit costs, which more than offset the benefit of growth in auto, mortgage and student loans, and improved loan yields. Noninterest income remained relatively stable compared to fourth quarter 2014, driven by a $17 million increase in mortgage banking fees, which included a $10 million gain on the sale of a $273 million portfolio of conforming loans, as well as improvement in overall origination volumes. Results also reflected lower service charges and other fees and card fees due to seasonality, as well as customer-behavior trends on service charges. Noninterest expense of $596 million decreased $15 million from fourth quarter 2014, as a reduction in outside services, equipment, advertising and employee benefits was partially offset by seasonally higher payroll taxes and incentives as well as higher insurance and tax expense from unusually low fourth quarter levels. Provision for credit losses of $63 million remained relatively stable.

Compared with first quarter 2014, net income increased $29 million as a reduction in noninterest expense and provision for credit losses more than offset the impact of lower revenue. First quarter 2014 results included an estimated $31 million in revenue and $20 million in expense associated with the Chicago Divestiture. Consumer Banking total revenue before the effect of the Chicago Divesture increased $28 million driven by a $17 million increase in net interest income and an $11 million increase in noninterest income. Net interest income results reflect strong loan growth particularly in auto and student, partially offset by the effect of the relatively persistent low-rate environment. Noninterest income results before the impact of the Chicago Divestiture were driven by strength in mortgage banking, including the impact of the conforming mortgage sale gain, and higher service charges and fees driven by the first quarter 2014 launch of the One Deposit product. Noninterest expense before the estimated impact of the Chicago Divestiture decreased $22 million, largely reflecting our focus on improving efficiency which more than offset continued investment in the business to drive further growth. Provision for credit losses of $63 million decreased $7 million, or 10%, from first quarter 2014, largely reflecting continued improvement in credit quality.

^{1 Includes held for sale.}

^{2 Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to a sustainable target level for common equity Tier 1 and then allocate that approximation to the segments based on economic capital.}

Commercial Banking net income of $147 million in first quarter 2015 increased $7 million, or 5%, from fourth quarter 2014. A reduction in provision for credit losses and lower noninterest expense more than offset a decline in total revenue, which largely reflects a seasonally strong prior quarter, as well as the continued effect of the low-interest rate environment. Net interest income of $276 million declined $7 million, or 2%, driven by lower yields, despite a $1.3 billion increase in average loans led by Industry Verticals, Middle Market, Mid-Corporate, Commercial Real Estate, and Franchise Finance lines of business. Noninterest income decreased $11 million, or 10%, from seasonally strong fourth quarter 2014 levels, reflecting a reduction in interest rate products, capital markets, leasing and foreign exchange and trade finance fees. Noninterest expense decreased $7 million, or 4%, from fourth quarter 2014, primarily due to lower regulatory costs, depreciation expense on leased equipment, and outside services partially offset by higher insurance and tax expense and seasonally higher salaries and employee benefits expense. Provision for credit losses reflects a $21 million benefit in the quarter related to recoveries.

Compared to first quarter 2014, net income increased $6 million, or 4%, as the benefit of a $13 million increase in total revenue and a $16 million decrease in provision for credit losses was partially offset by a $20 million increase in noninterest expense. Net interest income increased $20 million, or 8%, from first quarter 2014, reflecting the benefit of a $3.7 billion increase in average loans and leases, driven by strength in Commercial Real Estate, Industry Verticals, Mid-Corporate, and Franchise Finance, partially offset by yield compression. Noninterest income decreased $7 million, or 7%, from first quarter 2014 as strength in capital markets fees were more than offset by a decline in leasing income from unusually high first quarter 2014 levels, as well as lower interest rate products fees. Noninterest expense increased $20 million, or 13%, from first quarter 2014, reflecting increased salary and benefits costs associated with continued sales force expansion, as well as higher insurance and tax expense. Provision for credit losses decreased $16 million from first quarter 2014, reflecting higher recoveries on prior period charge-offs.

^{1 Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, revenues, provision for credit losses and expenses not attributed to our Consumer Banking or Commercial Banking segments.}

^{2 Includes held for sale.}

Other recorded net income of $1 million in first quarter 2015, compared with $5 million in fourth quarter 2014, reflecting the benefit of higher total revenue, partially offset by higher noninterest expense and provision for credit losses. Net interest income of $27 million increased $6 million from the prior quarter and included the benefit of lower hedging costs. Noninterest income of $28 million increased $18 million from fourth quarter 2014, reflecting an increase in securities gains and a change in low-income housing investment portfolio accounting, which is offset in income tax expense. Noninterest expense increased $8 million, driven by higher incentives expense and insurance and tax expense, partially offset by lower restructuring charges and special items. Provision for credit losses of $16 million in first quarter 2015 included a $4 million reserve build, compared with $7 million of provision for credit losses in fourth quarter 2014, which included an $8 million reserve release.

Compared with the first quarter of 2014, net income improved from a net loss of $7 million, driven by lower provision expense. Net interest income increased $12 million and included the benefit of lower hedging costs. Noninterest income decreased $4 million, as a reduction in securities gains was partially offset by the $5 million impact of a change in low-income housing portfolio accounting, which increased income tax expense by the same amount. Noninterest expense increased $22 million, driven by higher restructuring charges and special items, increased insurance and tax expense and higher incentives expense. Provision for credit losses decreased $40 million from the first quarter 2014, which included a reserve build of $34 million.

^{1 Represents period-end unless otherwise noted.}

^{2 Includes loans held for sale and deposits held for sale.}

^{3 Current reporting period regulatory capital ratios are preliminary. Periods prior to 1Q15 reported on a Basel I basis. Basel III ratios assume that certain definitions impacting qualifying Basel III capital, will phase in through 2018. Ratios also reflect the required US Standardized methodology for calculating RWAs, effective January 1, 2015.}

Total assets of $136.5 billion increased $3.7 billion, or 3%, from December 31, 2014, driven by a $2.6 billion increase in investments and interest-bearing deposits, largely in Federal Reserve Bank deposits, and a $1.1 billion, or 1%, increase in loans and leases. Total assets increased $9.6 billion, or 8%, from March 31, 2014, largely reflecting a $2.7 billion increase in investments and interest-bearing deposits, and a $7.4 billion, or 9%, increase in loans and leases.

Average interest-earning assets of $121.3 billion in first quarter 2015 increased $2.6 billion, or 2%, from the prior quarter, driven by a $1.2 billion increase in commercial loans and leases, and a $664 million increase in retail loans. Commercial loan growth was driven by strength in Industry Verticals, Middle Market and Mid-Corporate businesses and included the benefit of a fourth quarter 2014 acquisition of an oil and gas portfolio from RBS. Retail loan growth was driven by higher auto, student and residential mortgage balances, which were partially offset by lower home equity balances and a reduction in the non-core portfolio. Average interest-earning assets increased $8.8 billion, or 8%, from first quarter 2014, as a $4.0 billion increase in retail loans driven by growth in auto, mortgage, and student loan balances, a $3.8 billion increase in commercial loans and leases, and a $1.9 billion increase in investments and interest-bearing deposits, were partially offset by lower home equity loan and line outstandings and a reduction in the non-core loan portfolio.

Investments and interest-bearing deposits of $29.8 billion as of March 31, 2015 increased $2.6 billion from December 31, 2014, largely reflecting strong deposit growth. Compared with March 31, 2014, investments and interest-bearing deposits increased $2.7 billion, or 10%. At the end of first quarter 2015 the average effective duration of the securities portfolio decreased to 3.1 years, compared with 3.5 years at December 31, 2014, and 4.3 years at March 31, 2014, largely reflecting a decrease in long-term rates, which drove increased prepayment speeds. During the first quarter 2015 we repositioned a portion of our agency mortgage-backed securities portfolio which modestly extended duration while generating $8 million of securities gains.

Period-end loans and leases of $94.5 billion at March 31, 2015 increased $1.1 billion from $93.4 billion at December 31, 2014, and increased $7.4 billion from $87.1 billion at March 31, 2014. The linked quarter increase was driven by a $756 million increase in commercial loans and leases and a $328 million increase in retail loans. Commercial loan and lease growth reflects commercial loan growth of $818 million, on strength in Mid-Corporate, Industry Verticals and Franchise Finance, and modest growth in Commercial Real Estate loans offset by lower lease outstandings. Retail loan growth was driven by a $596 million increase in student and a $473 million increase in auto, partially offset by decreases in residential mortgage, home equity outstandings, including continued runoff in the non-core portfolio. During the quarter we purchased $393 million of auto loans and $261 million of student loans and sold $273 million of residential mortgages and $111 million of commercial leases.

Compared with March 31, 2014, period-end loans and leases increased $7.4 billion, reflecting a $3.9 billion increase in commercial loans and leases and a $3.5 billion increase in retail loans. Commercial loan growth was driven by growth in our Commercial Real Estate, Industry Verticals, Mid-Corporate and Franchise Finance businesses. Retail loan growth was driven by a $3.2 billion increase in auto and a $1.7 billion increase in residential mortgage, partially offset by a $1.7 billion decrease in home equity outstandings, including continued runoff in the non-core portfolio.

Average loans and leases of $94.0 billion increased $1.9 billion from fourth quarter 2014, driven by higher commercial, auto, student and residential mortgage balances. Results also reflected a $177 million decrease in the non-core loan portfolio. Compared with first quarter 2014, average loans and leases increased $7.8 billion, driven by commercial loan growth, and an increase in residential mortgage, auto and student loans, which were partially offset by a decrease in home equity outstandings and a $729 million reduction in the non-core loan portfolio.

Period-end total deposits at March 31, 2015 of $99.0 billion increased $3.3 billion, or 3%, from December 31, 2014, as a result of growth in every category, with particular strength in money market. Compared with March 31, 2014, period-end total deposits increased $11.5 billion, or 13%, driven by growth in money market, term deposits and checking with interest. Period-end deposits held for sale at March 31, 2015 decreased $5.2 billion from March 31, 2014, reflecting the impact of the Chicago Divestiture. First quarter 2015 average deposits of $95.6 billion increased $848 million from fourth quarter 2014, and $9.3 billion from first quarter 2014, given growth in every category and particular strength in term deposits.

Total borrowed funds of $15.3 billion at March 31, 2015 increased $158 million from December 31, 2014, largely due to an increase in securities sold under agreement to repurchase, offset by a decrease in Federal Funds purchased. Compared with March 31, 2014, total borrowed funds increased $2.9 billion as we utilized borrowing capacity to fund balance sheet growth and replace deposits sold in connection with the Chicago Divestiture. Average borrowed funds of $15.5 billion increased $1.5 billion from fourth quarter 2014, and increased $4.8 billion from first quarter 2014.