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01/22/2016

Citizens Financial Group, Inc., Reports Fourth Quarter Net Income of $221 Million, or $0.42 Diluted EPS

2015 Net Income of $840 Million, or $1.55 Diluted EPS

2015 Adjusted net income available to common stockholders*, excluding net restructuring charges and special items, of $864 million, or $1.61 diluted EPS, up 13% from Adjusted 2014

Delivered 3% Adjusted positive operating leverage* in 2015

PROVIDENCE, R.I.--(BUSINESS WIRE)-- Citizens Financial Group, Inc. (NYSE: CFG or “Citizens") today reported fourth quarter net income of $221 million, or $0.42 per diluted common share, compared with $220 million, or $0.40 per diluted common share, for third quarter 2015 and $197 million, or $0.36 per diluted common share, for fourth quarter 2014. There were no net restructuring charges and special items in fourth quarter 2015 and third quarter 2015, compared with $0.03 per diluted common share reduction in fourth quarter 2014, as detailed in the Discussion of Results portion of this release. Fourth quarter Adjusted diluted EPS* of $0.42 increased 5% from $0.40 diluted EPS in third quarter 2015 and 8% from Adjusted diluted EPS* of $0.39 in fourth quarter 2014.

2015 net income available to common stockholders of $833 million, or $1.55 per diluted common share, decreased from $865 million in 2014, which included a $180 million after-tax Chicago Divestiture gain and a net $105 million after-tax restructuring charges and special items. 2015 Adjusted net income available to common stockholders* of $864 million increased 9% from the prior year, while Adjusted diluted EPS* of $1.61 were up 13% from 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 February 18, 2016 to shareholders of record at the close of business on February 4, 2016.

Chairman and Chief Executive Officer Bruce Van Saun commented, “We made great progress and had a strong year overall in 2015. We delivered solid execution on our plan to improve Citizens’ performance for all stakeholders. This resulted in improving financial performance and permitted RBS to fully divest their ownership position. As we enter 2016, we remain very focused on execution — we want to continue to grow our balance sheet, serve our customers well and operate efficiently to deliver positive operating leverage.” He added, “I thank our 18,000 colleagues for their great efforts in 2015, and I look forward to another successful year in 2016.”

Return on Average Tangible Common Equity* (“ROTCE”) was 6.7% in fourth quarter 2015 and improved from 6.6% in third quarter 2015 and 6.1% in fourth quarter 2014.

Key Highlights

Fourth Quarter 2015 vs. Third Quarter 2015

• Fourth quarter highlights include 1.5% average loan growth, revenue growth of 2% and continued good
  expense discipline.

Results

• Total revenue of $1.2 billion, up 2%.
• Net interest income of $870 million increased $14 million, reflecting an increase in average interest-earning assets and improved yields as the net interest margin improved one basis point to 2.77%.
• Noninterest income of $362 million was up $9 million, or 3%, driven by growth in service charges and fees.
• Noninterest expense of $810 million was up $12 million, or 2%.
• Efficiency ratio of 66% improved 26 basis points.
• Pre-provision profit of $422 million increased $11 million, driven by higher revenue.
• Provision for credit losses of $91 million increased $15 million, of which $14 million reflects a fourth quarter 2015 reserve build in excess of net charge-offs.

Balance Sheet

• Average loans and leases increased $1.4 billion, or 1.5%, on strength in both retail and commercial loans.
• Average deposits increased $378 million and deposit costs decreased as strength in checking account balances was largely offset by a reduction in term deposits.
• Nonperforming loans and leases (“NPLs”) to total loans and leases remained relatively stable at 1.07%. Allowance coverage of NPLs was 115% in fourth quarter 2015 relative to 116% in the third quarter 2015.
• Capital strength remains robust with a common equity tier 1 (“CET1”) capital ratio of 11.7%.
• Repurchased $750 million of subordinated debt held by The Royal Bank of Scotland, plc (“RBS”) and issued $750 million of public subordinated notes and $750 million of bank senior notes during the quarter, further diversifying our funding base and enhancing contingent liquidity.

Full-Year 2015 vs. Full-Year 2014

• Adjusted total revenue* of $4.8 billion increased 3%, reflecting solid performance in a sluggish environment.
• Adjusted noninterest expense* of $3.2 billion decreased $14 million driven by the impact of the Chicago Divestiture and strong expense discipline.
• Adjusted net income* of $871 million increased by $81 million, or 10%.
• Adjusted ROTCE* of 6.7 % was up 56 basis points.
• Adjusted efficiency ratio* of 67%, improved 218 basis points.
• Average total assets increased 6%, driven by loan growth of 8%.
• Completed separation from RBS; now 100% independent.

Update on Plan Execution

• Continued execution on initiatives intended to drive growth and enhance efficiency:
  • Grew checking account households by nearly 30,000 with improving cross-sell rates.
  • Progress in recruiting mortgage loan officers: 442 at year end, up 29 net for 2015, and mortgage origination volume up 56% compared to 2014.
  • Attractive organic growth in auto with improving yields.
  • Added 46 wealth managers, with strong momentum in fourth quarter 2015; also added 26 business bankers.
  • 2015 period-end loan and lease growth of $5.6 billion, or 6%, with $3.0 billion in commercial and commercial real estate, $2.1 billion in student, including our attractive refinance product, and $1.5 billion in residential mortgages.
  • Delivered well against our revenue and expense initiatives, achieving targeted $200 million in Top I cost saves and $25 million in revenue and expense benefits from Top II initiatives by year end 2015. Currently tracking to
    2016 targets.

Discussion of Results:

Fourth quarter 2015 pre-provision profit of $422 million and net income of $221 million included no net restructuring charges and special items. Third quarter 2015 pre-provision profit of $411 million and net income of $220 million similarly included no restructuring charges and special items. Fourth quarter 2014 results were reduced by a net $33 million pre-tax, or $20 million after tax, of restructuring charges and special items, largely related to efforts to improve processes and enhance efficiencies, as well as rebranding and separation from RBS.

Full-year 2015 net income was reduced by a net $50 million pre-tax, or $31 million after tax, of restructuring charges and special items, compared with full-year 2014 net income, which was benefited by a net $119 million pre-tax, or $75 million after tax, of net restructuring charges and special items. All references to Adjusted results* exclude the impact of restructuring charges and special items.

In addition to the restructuring charges and special items associated with the Chicago Divestiture that have been excluded from Adjusted Results*, the second quarter 2014 Chicago Divestiture also had the following estimated effects on full-year 2015 results, as compared to full-year 2014, decreasing full-year 2015 results by the following estimated amounts:$26 million in net interest income, $24 million in noninterest income and $42 million in noninterest expense.

Adjusted pre-provision profit* of $422 million increased $11 million from third quarter 2015, reflecting a $23 million increase in total revenue, partially offset by a $12 million increase in noninterest expense. Fourth quarter net income of $221 million was relatively stable with third quarter 2015 as revenue growth was largely offset by the impact of higher noninterest expense and higher provision for credit losses, which included a $14 million reserve build.

Adjusted pre-provision profit* increased $34 million from Adjusted fourth quarter 2014 levels, driven by a $53 million increase in total revenue, partially offset by noninterest expense growth. Compared to Adjusted fourth quarter 2014 results, net income increased $4 million, or 2%, reflecting a $53 million increase in total revenue, partially offset by a $19 million increase in noninterest expense, a $19 million increase in provision including a $14 million reserve build and an increase in the effective tax rate. Adjusted diluted earnings per share were up 8% given net income growth and a 4% reduction in share count.

Full-year 2015 Adjusted net income* of $871 million increased $81 million, or 10%, from full-year 2014 Adjusted net income of $790 million, driven by 3% total revenue growth and flat noninterest expense, as savings from our efficiency initiatives were used to fund investments in the businesses to drive future revenue growth. Results also reflected a $17 million decrease in provision expense, given stable credit quality in a benign environment and a modest increase in the effective tax rate. Full-year 2015 Adjusted diluted earnings per share were up 13% from the prior period, reflecting growth in net income and a reduction in common shares outstanding.

Net interest income of $870 million in fourth quarter 2015 increased $14 million, or 2%, compared with third quarter 2015, driven largely by a $1.4 billion increase in average loans and leases, improved loan yields and lower deposit costs, partially offset by growth in liquidity and higher subordinated and senior debt borrowing costs. Net interest margin increased one basis point to 2.77% in fourth quarter 2015, from 2.76% in third quarter 2015, benefitting from initiatives to improve loan yields, deposit costs and mix.

Fourth quarter 2015 net interest income increased $30 million, or 4%, from fourth quarter 2014 as the benefit of 7% average loan growth, improving retail loan yields and a reduction in pay-fixed swap costs was partially offset by the impact of higher deposit costs, largely in the first half of 2015, as well as higher subordinated and senior debt borrowing costs. Results also reflect lower investment portfolio income. Net interest margin decreased three basis points, primarily reflecting higher deposit and borrowing costs.

Noninterest income of $362 million in fourth quarter 2015 increased $9 million from third quarter 2015 as higher service charges and fees and an $8 million increase in securities gains were partially offset by a decline in capital markets fees, as market headwinds impacted originations. Results also reflect a $5 million decrease in other income from third quarter 2015 levels, which included $8 million of branch real estate gains.

Noninterest income increased $23 million from fourth quarter 2014, as strength in service charges and fees and higher securities gains, other income and mortgage banking fees were partially offset by lower capital markets fees, reflecting weak market conditions.

Noninterest expense of $810 million in fourth quarter 2015 increased $12 million from third quarter 2015 due to higher outside services, equipment and software amortization expense resulting from our technology initiatives. Efficiency initiatives positively impacted salaries and employee benefits, occupancy and other operating expense.

Compared with fourth quarter 2014, noninterest expense decreased $14 million given restructuring costs in the year-ago quarter. Compared with Adjusted* fourth quarter 2014 results, noninterest expense increased $19 million, or 2%, as the impact of efficiency initiatives helped to fund continued strategic investments in the businesses to drive future revenue growth.

The company’s effective tax rate was 33.4% in fourth quarter 2015, compared to 34.1% in third quarter 2015 and 30.6% in fourth quarter 2014.

Consumer Banking net income of $67 million in fourth quarter 2015 remained relatively flat compared to third quarter 2015, which included $8 million of branch real estate gains. Net interest income increased $9 million, or 2%, from third quarter 2015, driven by mortgage, student, unsecured consumer loan growth, improved loan yields and lower deposit costs. Noninterest income decreased $9 million, or 4%, from third quarter 2015, as seasonal growth in service charges and fees was more than offset by a decrease in other income from third quarter levels, which included $8 million of branch real estate gains. Noninterest expense of $624 million remained stable as increased outside services expense tied to investment initiatives and higher equipment and other expense was partially offset by lower salaries and employee benefits expense and insurance expense. Provision for credit losses of $65 million remained relatively stable.

Net income of $67 million in fourth quarter 2015 increased $15 million, or 29%, compared with fourth quarter 2014, as a 5% increase in total revenue delivered meaningful operating leverage relative to a 2% increase in noninterest expense. Consumer Banking total revenue increased $37 million from fourth quarter 2014, reflecting strength in net interest income and noninterest income. Noninterest expense increased $13 million as higher outside services expense tied to investment initiatives, higher taxes and insurance and other operating expense were partially offset by lower credit collection costs and occupancy expense. Provision for credit losses of $65 million remained relatively stable with fourth quarter 2014, largely reflecting stable credit quality trends.

Commercial Banking net income of $152 million in fourth quarter 2015 increased $7 million, or 5%, from third quarter 2015, as a $9 million increase in total revenue and $5 million decrease in provision for credit losses was partially offset by a $5 million increase in noninterest expense. Net interest income increased $2 million, or 1%, due to 2% average loan and lease growth and lower deposit costs. Average loans and leases increased $649 million led by Commercial Real Estate, Mid-Corporate and Franchise Finance lines of business, while deposits remained relatively stable. Noninterest income increased $7 million, or 7%, from third quarter 2015, as an increase in service charges and fees, leasing income and interest rate product fees was partially offset by lower capital markets fees as market headwinds impacted originations. Noninterest expense increased $5 million, or 3%, from third quarter 2015 due to an increase in regulatory, equipment and outside services expenses, partially offset by a decrease in salaries and employee benefits and insurance costs. Provision for credit losses resulted in a net recovery of $2 million in fourth quarter of 2015, delivering an improvement of $5 million from third quarter 2015, reflecting lower net charge-offs.

Commercial Banking net income of $152 million in the fourth quarter of 2015 increased $12 million, or 9%, from fourth quarter 2014, reflecting the benefit of a $14 million increase in total revenue, a $3 million decrease in provision for credit losses and flat noninterest expense. Net interest income increased $18 million, or 6%, from fourth quarter 2014, as the benefit of $3.7 billion average loan and lease growth and a $2.1 billion average deposit growth was partially offset by loan yield compression. Loan growth was driven by strength in Commercial Real Estate, Franchise Finance, Mid-Corporate and Industry Verticals. Noninterest income decreased $4 million, or 4%, as improvement in service charges and fees was more than offset by lower capital markets fees as market headwinds impacted originations. Noninterest expense was flat compared to fourth quarter 2014 levels, which included higher regulatory costs and an operating lease residual write-down. Fourth quarter 2015 results reflect increased insurance costs, equipment and outside services expense, and lower occupancy costs. Provision for credit losses improved $3 million from fourth quarter 2014, reflecting lower net charge-offs.

Other recorded net income of $2 million in fourth quarter 2015 compared to net income of $7 million in third quarter 2015. The decrease was largely due to increased noninterest expense and provision for credit losses, which included a $14 million reserve build, partially offset by higher total revenue. Net interest income of $4 million increased $3 million from the prior quarter, driven by residual funds transfer pricing. Noninterest income of $29 million reflects an $8 million increase in securities gains compared to third quarter 2015. Noninterest expense of $6 million reflects an increase in incentive compensation. Provision for credit losses in other of $28 million in fourth quarter 2015 included a $14 million reserve build, compared with $9 million of provision for credit losses in third quarter 2015, which included a $1 million reserve build. Provision for credit losses within other mainly represents the residual change in the consolidated allowance for credit losses after attributing the respective net charge-offs to the Consumer Banking and Commercial Banking segments, while also factoring in net charge-offs related to the non-core portfolio.

Other net income of $2 million in fourth quarter decreased from net income of $5 million in fourth quarter of 2014 because of higher wholesale funding costs, continued non-core loan run off and an increase in provision expense, which reflects a $14 million reserve build compared to an $8 million reserve release in fourth quarter 2014. These items were partially offset by higher securities gains and a reduction in restructuring charges and special items.

Total assets of $138.2 billion increased $2.8 billion, or 2%, from September 30, 2015, driven by a $1.6 billion, or 2%, increase in loans and leases. Total assets increased $5.4 billion, or 4%, from December 31, 2014 as a 6% increase in loans and leases was partially offset by a decrease in the securities portfolio.

Average interest-earning assets of $124.2 billion in fourth quarter 2015 increased $1.2 billion, or 1%, from the prior quarter, driven by a $1.4 billion, or 1.5%, growth in average loans and leases. Retail loans increased $763 million, while commercial loans and leases increased by $645 million, driven by strength in Commercial Real Estate, Mid-Corporate and Franchise Finance. Retail loan growth largely reflects growth in residential mortgage, student loans and other retail, which includes the impact of our new consumer unsecured product, partially offset by lower home equity balances and a reduction in the non-core portfolio.

Average interest-earning assets increased $5.5 billion, or 5%, from fourth quarter 2014, driven by average loan growth of $6.2 billion, or 7%. Commercial loans and leases growth of $3.6 billion and retail loan growth of $2.6 billion were modestly offset by a $788 million reduction in investments and interest-bearing deposits. Commercial loan growth in fourth quarter 2014 was paced by Commercial Real Estate, Franchise Finance, Corporate Finance and Mid-Corporate. Retail loan growth from fourth quarter 2014 was driven by student, auto and mortgage, partially offset by lower home equity outstandings and a reduction in the non-core portfolio.

Investments and interest-bearing deposits of $26.4 billion as of December 31, 2015 increased $1.0 billion from September 30, 2015. Investments and interest-bearing deposits decreased $762 million, or 3%, from December 31, 2014, driven by a reduction in securities available for sale reflecting more efficient balance sheet management. At the end of fourth quarter 2015, the average effective duration of the securities portfolio increased to 3.5 years, compared with 3.3 years at September 30, 2015, largely reflecting an increase in long-term rates, which slowed prepayment speeds. The average effective duration of the securities portfolio remained stable from December 31, 2014.

Period-end loans and leases of $99.0 billion at December 31, 2015 increased $1.6 billion, or 2%, from $97.4 billion at September 30, 2015. The linked-quarter increase was driven by a $945 million increase in commercial loans and leases and a $666 million increase in retail loans. Commercial loan and lease growth reflects a $538 million increase in commercial loans, a $293 million increase in commercial real estate and an increase in lease outstandings. Retail loan growth was driven by a $526 million increase in residential mortgages and a $513 million increase in student loans, partially offset by a reduction in home equity outstandings, auto and continued run off in the non-core portfolio. During the quarter, we purchased a net $308 million of student loans and $94 million of residential mortgages, partially offset by net auto purchase run off of $28 million and commercial lease sales of $76 million.

Period-end loans and leases increased $5.6 billion from December 31, 2014, reflecting a $3.0 billion increase in commercial loans and leases and a $2.6 billion increase in retail loans. Commercial loan growth reflects growth in nearly all business lines. Retail loan growth was driven by a $2.1 billion increase in student loans, a $1.5 billion increase in residential mortgages and a $1.1 billion increase in auto, partially offset by a $2.0 billion decrease in home equity outstandings, including continued run off in the non-core portfolio. During 2015 we purchased a net $872 million of student loans, $544 million of auto loans and $155 million of residential mortgages and sold a net $324 million of commercial loans and leases.

Average loans and leases of $98.2 billion increased $1.4 billion from third quarter 2015, driven by higher commercial real estate, residential mortgage and student loan balances. Results also reflect a $181 million decrease in the non-core loan portfolio. Average loans and leases increased $6.2 billion from fourth quarter 2014, driven by growth in commercial, commercial real estate, student, auto and residential mortgage, partially offset by a decrease in home equity outstandings, including continued run off in the non-core loan portfolio.

Period-end total deposits of $102.5 billion at December 31, 2015 increased $673 million from September 30, 2015 as strength in money market, demand deposits and savings was partially offset by a reduction in term deposits and checking with interest balances. Fourth quarter 2015 period-end total deposits increased $6.8 billion compared with December 31, 2014, led by growth in money market, demand deposits, checking with interest, and savings. Fourth quarter 2015 average deposits of $101.4 billion increased $378 million from third quarter 2015, reflecting strength in demand and checking with interest, partially offset by a reduction in term deposits. Fourth quarter average deposits increased $6.6 billion from fourth quarter 2014 with particular strength in money market, checking with interest and demand deposits.

Total borrowed funds of $13.3 billion at December 31, 2015 increased $2.0 billion from September 30, 2015, reflecting a $1.7 billion increase in Federal Home Loan Bank advances, a $750 million issuance of senior bank notes and a $491 million decrease in securities sold under repurchase agreements. Results reflect a $5.0 billion shift from short-term to long-term Federal Home Loan Bank secured advances. Total borrowed funds decreased $1.9 billion from the end of fourth quarter 2014 as continued growth in deposits reduced the need for borrowings. Average borrowed funds of $12.6 billion increased $602 million from third quarter 2015 and decreased $1.4 billion from fourth quarter 2014.

On December 3, 2015, we issued $750 million of public subordinated debt, and retired $750 million of subordinated debt held by RBS.

At December 31, 2015, our Basel III Capital ratios on a transitional basis remained well in excess of applicable regulatory requirements, with a CET1 capital ratio of 11.7% and a total capital ratio of 15.3%. Our capital ratios continue to reflect progress against our objective of realigning our capital profile to be more consistent with that of peer regional banks, while maintaining a strong capital base to support our growth aspirations, strategy and risk appetite.

On November 3, 2015, RBS completed the sale of all of its remaining shares of CFG common stock.

Credit quality during the quarter remained strong with relatively low levels of charge-offs and nonperforming loans and leases. Nonperforming loans and leases of $1.1 billion at December 31, 2015 increased $26 million from September 30, 2015, reflecting an $18 million increase in commercial and an $8 million increase in retail. The increase in commercial was driven by a $35 million increase in commercial real estate, tied to a single relationship, which more than offset decreases in other commercial categories. The increase in retail was driven by a $7 million increase in residential mortgage and a $4 million increase in auto, largely due to portfolio growth and seasoning. Nonperforming loans and leases to total loans and leases of 1.07% at December 31, 2015 remained relatively stable compared to 1.06% at September 30, 2015 and decreased 11 basis points from 1.18% at December 31, 2014. Nonperforming loans and leases of $1.1 billion decreased $41 million, or 4%, from December 31, 2014, reflecting improving trends in both Consumer and Commercial categories. The improvement in retail nonperforming loans was driven by a $69 million improvement in real estate-secured categories, partially offset by an increase in student and auto, largely reflecting portfolio growth and seasoning. Other real estate owned of $46 million increased $7 million from September 30, 2015 and $4 million from December 31, 2014.

Nonperforming non-core loans totaled $156 million in fourth quarter 2015, compared with $162 million in third quarter 2015, and $184 million in fourth quarter 2014. Nonperforming non-core loans to total non-core loans of 6.8% at December 31, 2015, compared with 6.5% at September 30, 2015, and 6.1% at December 31, 2014. Troubled debt restructured loans (“TDRs”) of $1.3 billion included $1.2 billion of retail loans and $156 million of commercial loans. Performing TDRs represented 69% of total TDRs as of December 31, 2015, compared with 68% as of September 30, 2015, and 69% as of December 31, 2014.