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10/21/2016

Citizens Financial Group, Inc. Reports Third Quarter Net Income of $297 Million; Diluted EPS of $0.56

Results include a $19 million after-tax benefit, or $0.04 per diluted share, from notable items

Adjusted net income up 26% and Adjusted diluted EPS up 30% from third quarter 2015*

ROTCE of 8.6% and Adjusted ROTCE of 8.0% in third quarter 2016*

Positive operating leverage year over year of 5.5% and 4.5% on an Adjusted basis*

PROVIDENCE, R.I.--(BUSINESS WIRE)-- Citizens Financial Group, Inc. (NYSE: CFG or “Citizens”) today reported third quarter net income of $297 million, or $0.56 per diluted common share, up 35% and 40%, respectively, from $220 million and $0.40 per diluted common share in third quarter 2015. Compared with second quarter 2016, net income increased 22% from $243 million and earnings per diluted common share increased 22% from $0.46. Third quarter 2016 results include a $19 million after-tax benefit from notable items, reflecting a gain on the sale of a Troubled Debt Restructuring portfolio (“TDR Transaction”) partially offset by other items largely associated with our efficiency and balance sheet optimization initiatives.

Excluding notable items, third quarter 2016 Adjusted net income totaled $278 million, or $0.52 per diluted common share. Adjusted EPS was up 13% from second quarter 2016 and 30% from third quarter 2015. Third quarter 2016 Return on Average Common Equity (“ROTCE”) of 8.6% and Adjusted ROTCE of 8.0% improved from 7.3% in second quarter 2016 and 6.6% in third quarter 2015.*

“We are pleased to report another very strong quarter of improved financial performance with good revenue growth, robust positive operating leverage and further progress across all of our key strategic initiatives,” said Chairman and CEO Bruce Van Saun. “Our team continues their great work towards running the bank better and delivering for all of our stakeholders, including customers, colleagues, communities and shareholders.”

Van Saun continued, “I’m also pleased to announce that as part of our 2016 capital plan we launched our first open-market share-repurchase program since becoming a fully independent company. During the quarter we repurchased 11 million shares of common stock, returning $313 million to shareholders including common dividends. We remain focused on continuing to enhance shareholder returns.”

CFG’s Board of Directors declared a quarterly common stock dividend of $0.12 per common share payable on November 16, 2016 to shareholders of record at the close of business on November 2, 2016. Third quarter 2016 net income available to common stockholders was reduced by $7 million, or $0.01 per share, related to preferred stock dividends, which are paid semi-annually and were not declared in second quarter 2016.

Third Quarter 2016 vs. Second Quarter 2016

Key Highlights

• Third quarter highlights include net income to common stockholders growth of 19%, driven by 8% revenue growth with 2% net interest income growth, 23% noninterest income growth, and 5% noninterest expense growth. These GAAP results reflect the impact of the TDR Transaction gain and other third quarter notable items. Results reflect positive operating leverage of 3%, a 2% improvement in the efficiency ratio and ROTCE of 8.6%.*
• Adjusted results reflect 12% growth in net income available to common stockholders with 3% revenue growth highlighted by continued loan and deposit growth, a stable net interest margin, 4% noninterest income growth and a modest increase in noninterest expense. Adjusted results also reflect positive operating leverage of 2% and the repurchase of $250 million of common shares, which led to a 72 basis point improvement in Adjusted ROTCE to 8.0%.*
• Tangible book value per common share increased to $26.20 and common shares outstanding decreased by 11 million, or 2%.

Results

• Total revenue of $1.4 billion was up $102 million, or 8%, driven by the impact of the TDR Transaction. Adjusted total revenue of $1.3 billion was up $35 million, or 3%, on 2% net interest income growth and 4% noninterest income growth.*
  • Net interest income of $945 million was up $22 million, driven by 1% average loan growth and the benefit of an additional day during the quarter.
  • Net interest margin of 2.84% remained stable, as the benefit of improved loan yields was offset by lower investment portfolio yields and an increase in deposit costs.
  • Noninterest income of $435 million increased $80 million, or 23%, reflecting the impact of notable items in other noninterest income. Adjusted noninterest income* of $368 million increased $13 million, or 4%, reflecting particular strength in mortgage banking fees, service charges and fees, other income and foreign exchange and letter of credit fees, partially offset by lower securities gains. Capital markets fees were relatively flat compared to record second quarter levels.
• Noninterest expense of $867 million increased $40 million, or 5%, driven by the impact of notable items, largely in salaries and employee benefits, outside services and other expense. Adjusted noninterest expense* of $831 million increased $4 million, reflecting a reduction in salaries and employee benefits from higher second quarter 2016 levels, which was more than offset by an increase in outside services largely related to professional services and marketing expense, higher FDIC insurance expense and small increases across other expense categories.
• Efficiency ratio of 63%; Adjusted efficiency ratio* of 63% improved 140 basis points.
• Provision for credit losses of $86 million decreased $4 million, as the impact of a $17 million increase in commercial net charge-offs, driven largely by previously reserved for losses in the energy portfolio, was more than offset by continued improvement in underlying credit quality.

Balance Sheet

• Average interest-earning assets increased $2.2 billion, or 2%, driven by continued loan growth. Period-end loans increased 2%.
• Average deposits increased $2.7 billion, or 3%, driven by growth in money market and checking with interest deposits with particular strength in the Commercial business. Period-end deposits increased 2%.
• Nonperforming loans and leases (“NPLs”) to total loans and leases ratio of 1.05% increased slightly from 1.01%, largely reflecting energy- and commodity-related increases in commercial NPLs. The balance of the portfolio broadly reflects stable to improving trends. Allowance coverage of NPLs was 112% compared with 119%.
• Net charge-offs of 32 basis points increased seven basis points from relatively low second quarter levels, driven by higher charge-offs in the commercial energy portfolio.
• Capital strength remained robust with a common equity tier 1 (“CET1”) risk-based capital ratio of 11.3%.
• Repurchased 11.1 million shares of common stock, returning $250 million to shareholders.

Third Quarter 2016 vs. Third Quarter 2015

Key Highlights

• Third quarter highlights include net income to common stockholders growth of 36%, given strong revenue growth led by a 23% increase in noninterest income and a 9% increase in noninterest expense driven by notable items. Results reflect positive operating leverage of 5.5%, a 3% improvement in the efficiency ratio and ROTCE of 8.6% compared to 6.6% in third quarter 2015.*
• Adjusted results reflect net income to common stockholders growth of 27%, highlighted by revenue growth of 9%, with strength in both net interest income and fee income and continued noninterest expense discipline. Adjusted results reflect positive operating leverage of 4.5% and almost 3% improvement in the efficiency ratio. Adjusted ROTCE of 8.0% compares with 6.6% in third quarter 2015.*

Results

• Total revenue of $1.4 billion increased $171 million, or 14%, reflecting net interest income growth and the impact of notable items. Adjusted total revenue* increased 9%, driven by strong loan growth and net interest margin improvement as well as growth in mortgage banking, capital markets and service charges and fees.
  • Net interest income increased $89 million, or 10%, reflecting the benefit of loan growth and an eight basis point improvement in the net interest margin.
  • Net interest margin of 2.84% reflects the benefits of improved loan yields given continued pricing and portfolio optimization initiatives, as well as higher short-term rates. These benefits were partially offset by a reduction in investment portfolio yields, which includes a reduction in Federal Reserve Bank stock dividends, as well as increased borrowing costs.
  • Noninterest income of $435 million increased $82 million driven by the $72 million TDR Transaction gain. Adjusted noninterest income* of $368 million increased $15 million from third quarter 2015 levels. Strength in mortgage banking fees, capital markets fees and service charges and fees was partially offset by the card reward accounting change impact, lower trust and investment services fees and other income.
• Noninterest expense of $867 million increased $69 million, driven by the effect of third quarter notable items largely in salaries and employee benefits, outside services and other expense. Adjusted noninterest expense* of $831 million increased $33 million, driven by a $17 million increase in salaries and employee benefits, largely reflecting merit increases and higher incentive payments.
• Provision for credit losses of $86 million increased $10 million, largely reflecting an $8 million increase in net charge-offs.
• ROTCE of 8.6%; Adjusted ROTCE of 8.0% improved 142 basis points.*

Balance Sheet

• Average interest-earning assets increased $8.7 billion, or 7%, driven by strong loan growth.
• Average deposits increased $5.7 billion, or 6%, on strength in checking with interest, money market and DDA products.
• NPLs to total loans and leases ratio of 1.05% remained stable, as underlying improvement in retail nonperforming loans as well as the impact of the TDR Transaction more than offset an increase in commercial nonperforming loans, largely commodities-related borrowers. Allowance coverage of NPLs of 112% compares with 116%.
• Net charge-offs of 32 basis points of loans remained relatively stable with third quarter 2015 levels as an increase in commercial was largely offset by continued improvement in retail.

Update on Plan Execution

• Continued progress on initiatives to drive growth and enhance efficiency.
• Consumer Banking – Performance paced by solid deposit and loan growth, improvement in conforming mortgage volume and strong salesforce expansion, with a record 47 net mortgage loan officer hires during the quarter as well as 11 financial consultants, resulting in nearly 500 mortgage originators and 350 financial consultants at quarter end. Our needs-based approach for serving retail customers, Citizens Checkup, has resulted in approximately 275,000 scheduled appointments year to date with high levels of customer satisfaction.
• Commercial Banking — Delivered strong results in Capital Markets, foreign exchange and interest rate products. Generated 11% average loan growth from the year-ago quarter, reflecting continued progress in Mid-corporate and Industry Verticals, Commercial Real Estate and Franchise Finance. Treasury Solutions fee income up 10% from third quarter 2015.
• Continue to deliver on efficiency and balance sheet optimization strategies.
  • Tapping Our Potential (“TOP”) initiatives remain on track; TOP II is delivering $95 million to $100 million of pre-tax benefits in 2016, while TOP III continues to project pre-tax revenue and expense benefits of $73 million to $90 million and $10 million to $15 million of tax benefits by the end of 2017.
  • Initiatives to shift loan portfolio mix to higher-return categories continue to progress well; extracting capital from TDR and aircraft lease portfolios; managing deposit pricing to minimize cost while achieving growth objectives.

*Please see important information on Key Performance Metrics and Non-GAAP Financial Measures at the end of this release for an explanation of our use of these metrics and non-GAAP financial measures and their reconciliation to GAAP financial measures. “Adjusted” results exclude restructuring charges, special items and notable items, as applicable. Where there is a reference to an “Adjusted” result in a paragraph, all measures that follow that “Adjusted” result are also “Adjusted” when applicable.

Discussion of Results:

Third quarter 2016 results benefited from $31 million pre-tax, or $19 million after-tax, of notable items detailed in the table below.

During third quarter 2016, we completed the previously announced TDR Transaction sale of $310 million of consumer real estate-secured loans classified as troubled debt restructurings that resulted in a pre-tax gain of approximately $72 million, which was partially offset by $8 million of home equity systems and operational items identified as part of a broader review in conjunction with the transaction. Additionally, the company utilized approximately $33 million of the gain to fund costs associated with efficiency and balance sheet optimization initiatives.

Third quarter 2016 net income of $297 million was up $54 million, or 22%, from second quarter 2016 as the benefit of 8% revenue growth and a decrease in provision for credit losses exceeded noninterest expense growth of 5%. Third quarter 2016 diluted EPS of $0.56 grew 22% from second quarter 2016, reflecting net income growth and the benefit of a 9.2 million reduction in average fully diluted shares outstanding, partially offset by the impact of a $7 million, or $0.01 per diluted common share, preferred dividend in third quarter 2016.

Compared with third quarter 2015 levels, net income improved $77 million as revenue growth of $171 million was partially offset by a $69 million increase in noninterest expense and a $10 million increase in provision for credit losses. Third quarter 2016 diluted EPS growth increased 40% year over year and included the benefit of a 12.3 million reduction in average fully diluted shares outstanding.

Excluding the impact of notable items, Adjusted third quarter 2016 net income increased $35 million from second quarter 2016 as a $35 million increase in Adjusted total revenue and a $4 million decrease in provision for credit losses were partially offset by a $4 million increase in noninterest expense. Adjusted third quarter 2016 diluted earnings per share of $0.52 were up 13% from second quarter 2016, reflecting a 12% increase in net income available to common stockholders and a 2% reduction in fully diluted shares outstanding.*

Compared with third quarter 2015, Adjusted net income increased $58 million, or 26%. Adjusted results reflect a $104 million increase in total revenue driven by net interest income, partially offset by a $33 million increase in noninterest expense. Adjusted third quarter 2016 diluted earnings per share of $0.52 were up 30% from third quarter 2015, reflecting a 27% increase in net income available to common stockholders and a 2% reduction in fully diluted shares outstanding.*

Net interest income of $945 million increased $22 million from second quarter 2016, reflecting a 1% increase in average loans, stable net interest margin and one additional day in the quarter. Net interest margin of 2.84% reflects the benefit of improved commercial and consumer loan yields, including the benefit of an increase in LIBOR, offset by an increase in deposit costs and a reduction in investment portfolio yields.

Compared to third quarter 2015, net interest income increased $89 million, or 10%, largely reflecting 7% average loan growth and an eight basis point improvement in net interest margin. Results were driven by improved loan yields given continued pricing and portfolio optimization initiatives and higher short-term interest rates, partially offset by a reduction in investment portfolio yield driven by lower long-term rates and a decrease in Federal Reserve Bank stock dividends, as well as increased borrowing costs related to senior bank-debt issuance.

Noninterest income of $435 million increased $80 million from second quarter 2016, driven by the $72 million TDR Transaction gain recorded in other income. Adjusted noninterest income* of $368 million increased $13 million, or 4%, from second quarter 2016, largely reflecting higher mortgage banking fees, other income and service charges and fees. Mortgage banking fees increased $8 million, reflecting the benefit of higher application and origination volumes with improved secondary mix, and increased loan sales and spreads, partially offset by a modest decrease in mortgage servicing rights (“MSR”) valuations. Adjusted other income* increased $6 million from second quarter levels, which included an other-than-temporary impairment charge of $6 million on the securities portfolio tied to a new model implementation. Service charges and fees increased $2 million, reflecting improved volume and an additional day in the quarter. Capital markets fees of $34 million were in line with record second quarter levels and reflected continued strong loan syndication fees. Results also reflect modest growth in foreign exchange and letter of credit fees as well as relatively stable card fees and trust and investment services fees. There were no securities gains in third quarter 2016, compared with $4 million in second quarter 2016.

Noninterest income increased $82 million from third quarter 2015 levels, driven by the $72 million TDR Transaction gain recorded in other income. Adjusted noninterest income* of $368 million increased $15 million, or 4%, from third quarter 2015 levels that included a $16 million benefit from a branch sale gain and the card reward accounting change impact. Mortgage banking fees increased $15 million, driven by higher origination volumes and an increase in loan sales and spreads. Capital markets fees increased $13 million, reflecting strong loan syndication volumes and the broadening of our capabilities. Service charges and fees increased $7 million, driven by improved pricing in retail and commercial products as well as higher volume. Card fees decreased $8 million, reflecting the impact of the card reward accounting change. Adjusted other income* decreased $7 million from third quarter 2015 levels that included an $8 million branch real estate sale gain. Trust and investment services fees decreased $4 million, reflecting a change in the mix of product sales.

Noninterest expense of $867 million increased $40 million from second quarter 2016 and $69 million from third quarter 2015 driven by the impact of $36 million of notable items, largely in salaries and employee benefits, outside services and other expense. Adjusted noninterest expense* increased $4 million as an $11 million decrease in salaries and employee benefits, from higher second quarter levels, which included higher payroll taxes and benefits related to incentive payments, was more than offset by increases in other categories. These other categories include higher outside services expense, reflecting higher technology outsourcing expense and costs related to consumer loan product growth, increased regulatory and FDIC insurance expense and higher amortization of software and occupancy expense.

Compared with third quarter 2015, Adjusted noninterest expense* of $831 million increased $33 million, driven by a $17 million increase in Adjusted salaries and employee benefits, largely reflecting merit increases and higher incentive expense given strong revenue and income performance. Adjusted results also reflect higher software amortization, outside services expense, and equipment and occupancy expense, partially offset by the card reward accounting change impact.

The effective tax rate improved to 30.5% compared to 32.6% in second quarter 2016 and 34.1% in third quarter 2015, driven by benefits from TOP III initiatives.

Total assets of $147.0 billion increased $1.8 billion, or 1%, from June 30, 2016, driven by continued loan growth, including a $1.1 billion increase in retail loans and leases and an $832 million increase in commercial loans as well as a $620 million increase in investment portfolio assets. Compared with September 30, 2015, total assets increased $11.6 billion, or 9%, primarily reflecting an $8.0 billion increase in loans and leases with $5.1 billion in commercial and $2.9 billion in retail, as well as a $3.0 billion increase in investment portfolio assets.

Average interest-earning assets of $131.7 billion in third quarter 2016 increased $2.2 billion, or 2%, from the prior quarter, driven by a $1.1 billion increase in investment portfolio assets, a $789 million increase in retail loans and a $570 million increase in commercial loans and leases. Compared to third quarter 2015, average interest-earning assets increased $8.7 billion, or 7%, driven by commercial loan growth of $4.5 billion, retail loan growth of $2.7 billion and a $1.3 billion increase in investment portfolio assets, largely interest-bearing cash.

Investments and interest-bearing deposits of $28.4 billion as of September 30, 2016 increased $620 million, or 2%, compared with June 30, 2016 and reflected an increase in securities, partially offset by lower cash positions. Compared with September 30, 2015, investments and interest-bearing deposits increased $3.0 billion, or 12%. At the end of third quarter 2016, the average effective duration of the securities portfolio increased to 2.7 years, compared with 2.4 years at June 30, 2016 and 3.3 years at September 30, 2015, largely reflecting the continued low level of longer-term interest rates, which has increased estimated prepayment speeds.

Period-end loans and leases of $105.5 billion at September 30, 2016 increased $1.9 billion, or 2%, from $103.6 billion at June 30, 2016 and increased $8.0 billion, or 8%, from $97.4 billion at September 30, 2015. The linked-quarter change was driven by a $1.1 billion increase in retail loans and an $832 million increase in commercial loans. Compared with September 30, 2015, the period-end loans and leases increase reflects a $5.1 billion increase in commercial loans and leases and a $2.9 billion increase in retail loans.

Average loans and leases of $104.0 billion increased $1.4 billion from second quarter 2016, driven by a $789 million increase in retail and a $570 million increase in commercial loans. Retail loan growth was primarily driven by mortgage, student and unsecured retail loans, partially offset by lower home equity outstandings, including continued runoff in the non-core portfolio. Commercial loan and lease growth was driven by strength in Commercial Real Estate, Mid-corporate and Industry Verticals and Franchise Finance.

Compared with third quarter 2015, average loans and leases increased $7.2 billion, or 7%, reflecting a $4.5 billion increase in commercial and a $2.7 billion increase in retail loans. Commercial loan growth was driven by strength in Commercial Real Estate, Mid-corporate and Industry Verticals and Franchise Finance, partially offset by lower Asset Finance loan balances. Retail loan growth was driven by strength in student, residential mortgages, unsecured retail loans and auto, partially offset by lower home equity balances.

Period-end total deposits at September 30, 2016 of $108.3 billion increased $2.1 billion, or 2%, from June 30, 2016 as growth in money markets, checking with interest and term deposits was partially offset by a decrease in savings. Compared with September 30, 2015, period-end total deposits increased $6.5 billion, or 6%, driven largely by growth in money market and checking with interest deposits.

Third quarter 2016 average deposits of $106.6 billion increased $2.7 billion, or 3%, from second quarter 2016, driven by growth in all categories. Compared with third quarter 2015, average deposits increased $5.7 billion, or 6%, driven by growth in all categories.

Total borrowed funds of $15.3 billion at September 30, 2016 increased $17 million from June 30, 2016, reflecting an increase of $92 million in long-term funding and a decrease of $75 million in short-term funding. Compared with September 30, 2015, total borrowed funds increased $4.0 billion, primarily reflecting an increase in long-term borrowings. Average borrowed funds of $14.4 billion decreased $659 million from second quarter 2016 as growth in deposits reduced our reliance on short-term borrowings. Average borrowed funds increased $2.4 billion from third quarter 2015, reflecting a $2.8 billion increase in senior debt partially offset by subordinated debt redemptions and a further decline in short-term borrowings. We continue to improve the strength of our funding profile, including reducing our reliance on short-term wholesale borrowings.

On September 30, 2016, our Basel III capital ratios on a transitional basis remained well in excess of applicable regulatory requirements with a CET1 capital ratio of 11.3% and a total capital ratio of 14.2%. 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.

As part of the CFG’s 2016 Capital Plan (the “Plan”), during the third quarter the company repurchased 11.1 million shares at an average price of $22.60 per share. Tangible book value per common share of $26.20 increased 2% versus second quarter 2016 and 7% versus third quarter 2015. The Plan includes the repurchase of up to $690 million of Citizens’ outstanding common stock beginning in third quarter 2016 through second quarter 2017. The Plan also provides for proposed quarterly dividends of $0.12 per share through the end of 2016 and the potential to raise the quarterly dividend to $0.14 per share in 2017. Proposed capital actions are subject to consideration and approval by CFG’s Board of Directors.

Overall credit quality remained strong and broadly stable. Nonperforming loans and net charge-offs both increased during the quarter, largely tied to commercial energy and commodity-related borrowers. Nonperforming loans and leases of $1.1 billion at September 30, 2016 increased $63 million from June 30, 2016 and $73 million from September 30, 2015. The nonperforming loans and leases to total loans and leases ratio of 1.05% at September 30, 2016 compares with 1.01% at June 30, 2016 and 1.06% at September 30, 2015.

Net charge-offs of $83 million increased $18 million from relatively low second quarter 2016 levels, driven by a $17 million increase in commercial that included $14 million tied to the energy portfolio. Retail net charge-offs of $64 million remained broadly stable with relatively low second quarter 2016 levels, largely as a seasonal increase in the auto portfolio and an increase in deposit-account losses were largely offset by improvement in real estate-secured categories. Compared with third quarter 2015, net charge offs increased $8 million as a $14 million increase in commercial, largely related to the energy portfolio, was partially offset by a $6 million decrease in retail given declines in consumer real-estate secured. Third quarter 2016 net charge-offs of 32 basis points of average loans and leases compares with 25 basis points in second quarter 2016 and 31 basis points in third quarter 2015.

Allowance for loan and lease losses of $1.2 billion was relatively stable compared to second quarter 2016 and increased $39 million, or 3%, from third quarter 2015, largely reflecting continued loan growth.

Allowance for loan and lease losses to total loans and leases was 1.18% as of September 30, 2016, relatively stable compared with 1.20% as of June 30, 2016 and 1.23% as of September 30, 2015. Allowance for loan and lease losses to the nonperforming loans and leases ratio decreased to 112% as of September 30, 2016 from 119% as of June 30, 2016 and 116% as of September 30, 2015, given the higher level of nonperforming loans and leases.

Additional Segment Detail: