Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended
June 30, 2017

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From
(Not Applicable)
Commission File Number 001-36636
a5422139a7e5fcpreview620a15.jpg
(Exact name of the registrant as specified in its charter)
Delaware
 
05-0412693
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
One Citizens Plaza, Providence, RI 02903
(Address of principal executive offices, including zip code)
(401) 456-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
[ü] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ü] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
[ü]
Accelerated filer
[ ]
Non-accelerated filer (Do not check if a smaller reporting company)
[ ]
Smaller reporting company
[ ]
 
 
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ü] No
There were 500,671,099 shares of Registrant’s common stock ($0.01 par value) outstanding on August 1, 2017.



 
 
 
 
 
 
a5422139a7e5fcpreview620a15.jpg
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
CITIZENS FINANCIAL GROUP, INC.

 

GLOSSARY OF ACRONYMS AND TERMS
The following listing provides a comprehensive reference of common acronyms and terms we regularly use in our financial reporting:
AFS
 
Available for Sale
ALLL
 
Allowance for Loan and Lease Losses
AOCI
 
Accumulated Other Comprehensive Income (Loss)
ASU
 
Accounting Standards Update
ATM
 
Automated Teller Machine
Board of Directors
 
The Board of Directors of Citizens Financial Group, Inc.
bps
 
Basis Points
C&I
 
Commercial and Industrial
Capital Plan Rule
 
Federal Reserve’s Regulation Y Capital Plan Rule
CBNA
 
Citizens Bank, N.A.
CBPA
 
Citizens Bank of Pennsylvania
CCAR
 
Comprehensive Capital Analysis and Review
CCB
 
Capital Conservation Buffer
CCO
 
Chief Credit Officer
CET1
 
Common Equity Tier 1
CEO
 
Chief Executive Officer
Citizens or CFG or the Company
 
Citizens Financial Group, Inc. and its Subsidiaries
CLTV
 
Combined Loan to Value
CMO
 
Collateralized Mortgage Obligation
CRE
 
Commercial Real Estate
CRO
 
Chief Risk Officer
DFAST
 
Dodd-Frank Act Stress Test
Dodd-Frank Act
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS
 
Earnings Per Share
Exchange Act
 
The Securities Exchange Act of 1934
Fannie Mae (FNMA)
 
Federal National Mortgage Association
FASB
 
Financial Accounting Standards Board
FDIA
 
Federal Deposit Insurance Act
FDIC
 
Federal Deposit Insurance Corporation
FHLB
 
Federal Home Loan Bank
FICO
 
Fair Isaac Corporation (credit rating)
FRB
 
Federal Reserve Board of Governors and, as applicable, Federal Reserve Bank(s)
FTP
 
Funds Transfer Pricing
GAAP
 
Accounting Principles Generally Accepted in the United States of America
Ginnie Mae (GNMA)
 
Government National Mortgage Association
HELOC
 
Home Equity Line of Credit
HTM
 
Held To Maturity
LCR
 
Liquidity Coverage Ratio
LGD
 
Loss Given Default
LIBOR
 
London Interbank Offered Rate
LIHTC
 
Low Income Housing Tax Credit
LTV
 
Loan to Value
MBS
 
Mortgage-Backed Securities
Mid-Atlantic
 
District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia
Midwest
 
Illinois, Indiana, Michigan, and Ohio

3
CITIZENS FINANCIAL GROUP, INC.

 

MD&A
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSR
 
Mortgage Servicing Right
New England
 
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont
NSFR
 
Net Stable Funding Ratio
OCC
 
Office of the Comptroller of the Currency
OCI
 
Other Comprehensive Income (Loss)
Parent Company
 
Citizens Financial Group, Inc. (the Parent Company of Citizens Bank of Pennsylvania, Citizens Bank, N.A. and other subsidiaries)
PD
 
Probability of Default
ROTCE
 
Return on Average Tangible Common Equity
RPA
 
Risk Participation Agreement
SBO
 
Serviced by Others loan portfolio
SEC
 
United States Securities and Exchange Commission
SVaR
 
Stressed Value at Risk
TDR
 
Troubled Debt Restructuring
VaR
 
Value at Risk
VIE
 
Variable Interest Entities




4
CITIZENS FINANCIAL GROUP, INC.

 

PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
 
Page
Forward-Looking Statements
 
 
 
Selected Consolidated Financial Data
 
 
Results of Operations
 
 
 
 
 
 
 
 
 
 
Analysis of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
 
 


5
CITIZENS FINANCIAL GROUP, INC.
FORWARD-LOOKING STATEMENTS



FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.”

Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
•
Negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense;
•
The rate of growth in the economy and employment levels, as well as general business and economic conditions;
•
Our ability to implement our strategic plan, including the cost savings and efficiency components, and achieve our indicative performance targets;
•
Our ability to remedy regulatory deficiencies and meet supervisory requirements and expectations;
•
Liabilities and business restrictions resulting from litigation and regulatory investigations;
•
Our capital and liquidity requirements (including under regulatory capital standards, such as the U.S. Basel III capital rules) and our ability to generate capital internally or raise capital on favorable terms;
•
The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
•
Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;
•
The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;
•
Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;
•
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks; and
•
Management’s ability to identify and manage these and other risks.
In addition to the above factors, we also caution that the amount and timing of any future common stock dividends or share repurchases will depend on our financial condition, earnings, cash needs, regulatory constraints, capital requirements (including requirements of our subsidiaries), and any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will pay any dividends to holders of our common stock, or as to the amount of any such dividends.

More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

6
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $151.4 billion in assets as of June 30, 2017. Our mission is to help our customers, colleagues and communities reach their potential. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. We help our customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center and the convenience of approximately 3,200 ATMs and approximately 1,200 branches in 11 states in the New England, Mid-Atlantic and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.
The following MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements in Item 1 of this Form 10-Q, as well as other information contained in this document and our 2016 Annual Report on Form 10-K.



7
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL PERFORMANCE
Second Quarter 2017 compared with Second Quarter 2016 - Key Highlights
Second quarter 2017 net income of $318 million, increased 31% from $243 million in second quarter 2016, with earnings per diluted common share of $0.63, up 37% from $0.46 per diluted common share in second quarter 2016. Second quarter 2017 ROTCE of 9.6% improved from 7.3% in second quarter 2016.
•
Second quarter 2017 results reflect a 31% increase in net income available to common stockholders, led by revenue growth of 9%, as net interest income increased 11% given 6% average loan growth and a 13 basis point increase in net interest margin as well as noninterest income growth of 4%.
•
Second quarter 2017 results reflect a $26 million pre-tax impact related to impairments on aircraft lease assets which, in addition to provision expense of $70 million, resulted in total credit-related costs of $96 million.* The lease impairments, which largely relate to a non-core runoff portfolio, reduced noninterest income by $11 million and increased noninterest expense by $15 million.
•
Continued strong focus on top-line growth and expense management helped drive positive operating leverage of 5%, a 2.8% improvement in the efficiency ratio and a 2.3% improvement in ROTCE.
•
Before the impact of the lease impairments, Underlying revenue increased 10% with Underlying noninterest income growth of 7%.* Underlying operating leverage was 7% and the efficiency ratio improved 4.4%.*
•
The provision for credit losses of $70 million in second quarter 2017 decreased $20 million from $90 million in second quarter 2016, largely reflecting continued improvement in portfolio credit quality, partially offset by an increase tied to a retail runoff portfolio and an increase in commercial net charge-offs. Including the $26 million of lease impairments, total credit-related costs were $96 million* in the second quarter 2017, up modestly from the prior year quarter.
•
The second quarter 2017 tax rate reflected a 1.5% benefit primarily related to investments in historic tax credits.
•
Fully diluted average common shares outstanding decreased by 23 million shares.
First Half 2017 compared with First Half 2016 - Key Highlights
First half 2017 net income of $638 million, increased 37% from $466 million in first half 2016, with earnings per diluted common share of $1.24, up 43% from $0.87 per diluted common share in first half 2016. Our first half 2017 results include a $23 million benefit, or $0.05 per diluted common share, related to the settlement of certain state tax matters. First half 2017 ROTCE of 9.6% improved from 7.0% in first half 2016.
On an Underlying basis*, excluding a $23 million benefit related to the settlement of certain state tax matters, first half 2017 net income of $615 million was up 32% from first half 2016. First half 2017 Underlying earnings per diluted common share of $1.19 was up 37% versus first half 2016.* First half 2017 Underlying ROTCE of 9.3% improved by 232 basis points relative to first half 2016.*
•
First half results reflect a 37% increase in net income available to common stockholders, led by revenue growth of 11%, as net interest income increased 11%, given a 7% average loan growth and a 12 basis point increase in net interest margin, as well as noninterest income growth of 9%.
•
Continued strong focus on top-line growth and expense management helped drive positive operating leverage of 6%, 3.4% improvement in the efficiency ratio from 65.2% to 61.8%, and a 2.7% improvement in ROTCE.  On an Underlying basis*, the efficiency ratio improved 4.2% from 65.2% to 61.0%.
•
First half 2017 results included a $26 million pre-tax impact related to impairments on aircraft lease assets, which increased the efficiency ratio by 79 basis points on an Underlying basis.*
•
The first half 2017 tax rate reflected a 3.9% benefit driven by the settlement of certain state tax matters and investments in historic tax credits.
•
Fully diluted average common shares outstanding decreased by 21 million shares.
*
“Underlying” results, as applicable, exclude a first quarter 2017 $23 million benefit related to the settlement of certain state tax matters and reclassify second quarter 2017 results for the pre-tax impact of $26 million of lease asset impairments to reflect their credit-related impact. For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Principal Components of Operations and Key Performance Metrics Used by Management — Key Performance Metrics and Non-GAAP Financial Measures.”

8
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

SELECTED CONSOLIDATED FINANCIAL DATA
The summary Consolidated Operating Data for the three and six months ended June 30, 2017 and 2016 and the summary Consolidated Balance Sheet data as of June 30, 2017 and December 31, 2016 are derived from our unaudited interim Consolidated Financial Statements included in Part I, Item 1 — Financial Statements of this report. Our historical results are not necessarily indicative of the results expected for any future period.
Our unaudited interim Consolidated Financial Statements have been prepared on the same basis as the audited Consolidated Financial Statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information set forth herein. Our operating results for the three and six months ended June 30, 2017 are not necessarily indicative of those to be expected for the year ending December 31, 2017 or for any future period. The following selected consolidated financial data should be read in conjunction with our unaudited interim Consolidated Financial Statements and the Notes thereto.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions, except per-share amounts)
  2017

 
  2016

 
  2017
 
2016
OPERATING DATA:
 
 
 
 
 
 
 
Net interest income

$1,026

 

$923

 

$2,031

 

$1,827

Noninterest income
370

 
355

 
749

 
685

Total revenue
1,396

 
1,278

 
2,780

 
2,512

Provision for credit losses
70

 
90

 
166

 
181

Noninterest expense
864

 
827

 
1,718

 
1,638

Income before income tax expense
462

 
361

 
896

 
693

Income tax expense
144

 
118

 
258

 
227

Net income

$318

 

$243

 

$638

 

$466

Net income available to common stockholders

$318

 

$243

 

$631

 

$459

Net income per common share - basic

$0.63

 

$0.46

 

$1.24

 

$0.87

Net income per common share - diluted

$0.63

 

$0.46

 

$1.24

 

$0.87

OTHER OPERATING DATA:
 
 
 
 
 
 
 
Return on average common equity (1)
6.48
%
 
4.94
%
 
6.50
%
 
4.70
%
Return on average tangible common equity (1)
9.57

 
7.30

 
9.62

 
6.96

Return on average total assets (1)
0.85

 
0.69

 
0.86

 
0.67

Return on average total tangible assets (1)
0.89

 
0.72

 
0.90

 
0.70

Efficiency ratio (1)
61.94

 
64.71

 
61.81

 
65.18

Operating leverage (1) (2)
4.76

 
8.16

 
5.79

 
6.20

Net interest margin (1)
2.97

 
2.84

 
2.97

 
2.85


9
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

(dollars in millions)
June 30,
2017
 
December 31,
2016
BALANCE SHEET DATA:
 
 
 
Total assets

$151,407

 

$149,520

Loans and leases (3)
109,046

 
107,669

Allowance for loan and lease losses
(1,219
)
 
(1,236
)
Total securities
25,115

 
25,610

Goodwill
6,887

 
6,876

Total liabilities
131,343

 
129,773

Total deposits
113,613

 
109,804

Federal funds purchased and securities sold under agreements to repurchase
429

 
1,148

Other short-term borrowed funds
2,004

 
3,211

Long-term borrowed funds
13,154

 
12,790

Total stockholders’ equity
20,064

 
19,747

OTHER BALANCE SHEET DATA:
 
 
 
Asset Quality Ratios:
 
 
 
Allowance for loan and lease losses as a percentage of total loans and leases
1.12
%
 
1.15
%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases
118.98

 
118.32

Nonperforming loans and leases as a percentage of total loans and leases
0.94

 
0.97

Capital Ratios:(4)
 
 
 
CET1 capital ratio (5)
11.2

 
11.2

Tier 1 capital ratio (6)
11.4

 
11.4

Total capital ratio (7)
14.0

 
14.0

Tier 1 leverage ratio (8)
9.9

 
9.9

(1) See “—Principal Components of Operations and Key Performance Metrics Used By Management” for definitions of our key performance metrics.
(2) “Operating leverage” represents the period-over-period percent change in total revenue, less the period-over-period percent change in noninterest expense. For the purpose of the 2016 calculation, total revenue was $1.2 billion and $2.4 billion for the three and six months ended June 30, 2015, respectively, and noninterest expense was $841 million and $1.7 billion for the three and six months ended June 30, 2015, respectively.
(3) Excludes loans held for sale of $707 million and $625 million as of June 30, 2017 and December 31, 2016, respectively.
(4) U.S. Basel III transitional rules for institutions applying the Standardized approach to calculating risk-weighted assets became effective January 1, 2015. The
capital ratios and associated components as of June 30, 2017 and December 31, 2016 are prepared using the U.S. Basel III Standardized transitional approach.
(5) “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(6) “Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital,
divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(7) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(8) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.




10
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

PRINCIPAL COMPONENTS OF OPERATIONS AND KEY PERFORMANCE METRICS USED BY MANAGEMENT
As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our balance sheet and statement of operations, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable banking institutions in our region and nationally.
The primary line items we use in our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense, net income and net income available to common stockholders. The primary line items we use in our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives.
In first quarter 2017, certain prior period noninterest income amounts reported in the Consolidated Statement of Operations were reclassified to enhance transparency and provide additional granularity, particularly with regard to fee income related to customer activity. Additionally, student loans were renamed “education” loans to more closely align with the full range of services offered to borrowers, from loan origination to refinancing. These changes had no effect on net income, total comprehensive income, total assets or total stockholders’ equity as previously reported.
Key performance metrics and non-GAAP financial measures
We consider various measures when evaluating our performance and making day-to-day operating decisions, as well as evaluating capital utilization and adequacy, including:
•
Return on average common equity, which we define as annualized net income available to common stockholders divided by average common equity;
•
Return on average tangible common equity, which we define as annualized net income available to common stockholders divided by average common equity excluding average goodwill (net of related deferred tax liability) and average other intangibles;
•
Return on average total assets, which we define as annualized net income divided by average total assets;
•
Return on average total tangible assets, which we define as annualized net income divided by average total assets excluding average goodwill (net of related deferred tax liability) and average other intangibles;
•
Efficiency ratio, which we define as the ratio of our total noninterest expense to the sum of net interest income and total noninterest income. We measure our efficiency ratio to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to our income. A decrease in our efficiency ratio represents improvement;
•
Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense;
•
Net interest margin, which we calculate by dividing annualized net interest income for the period by average total interest-earning assets, is a key measure that we use to evaluate our net interest income; and
•
Common equity tier 1 capital ratio (U.S. Basel III Standardized fully phased-in basis), represents CET1 capital divided by total risk-weighted assets as defined under U.S Basel III Standardized approach.
“Underlying” results, which are non-GAAP measures, exclude certain items, as applicable, that may occur in a reporting period which management does not consider indicative of on-going financial performance.
We believe these non-GAAP measures provide useful information to investors because these are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our “Underlying” results in any period reflect our operational performance in that period and, accordingly, it is useful to consider our GAAP results and our “Underlying” results together. We believe this presentation also increases comparability of period-to-period results.
Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by other companies. We caution investors not to place undue reliance on such non-GAAP measures, but instead to consider them with the most directly comparable GAAP measure. Non-GAAP financial measures have

11
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

limitations as analytical tools, and should not be considered in isolation, or as a substitute for our results as reported under GAAP.
Non-GAAP measures are denoted throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations” by the use of the term “Underlying” and/or are followed by an asterisk (*).

The following table presents computations of key performance metrics used throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations”:
 
 
As of and for the Three Months Ended June 30,
 
As of and for the Six Months Ended June 30,
(dollars in millions)
Ref.
2017

 
2016

 
2017

 
2016

Total revenue (GAAP)
A

$1,396

 

$1,278

 

$2,780

 

$2,512

Noninterest expense (GAAP)
B
864

 
827

 
1,718

 
1,638

Net income (GAAP)
C
318

 
243

 
638

 
466

Net income available to common stockholders (GAAP)
D
318

 
243

 
631

 
459

Return on average common equity:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$19,659

 

$19,768

 

$19,560

 

$19,667

Return on average common equity
D/E
6.48
%
 
4.94
 %
 
6.50
%
 
4.70
 %
Return on average tangible common equity:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$19,659

 

$19,768

 

$19,560

 

$19,667

Less: Average goodwill (GAAP)
 
6,882

 
6,876

 
6,879

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
2

 
1

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
534

 
496

 
533

 
488

Average tangible common equity
F

$13,309

 

$13,386

 

$13,213

 

$13,277

Return on average tangible common equity
D/F
9.57
%
 
7.30
 %
 
9.62
%
 
6.96
 %
Return on average total assets:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$149,878

 

$142,179

 

$149,335

 

$140,479

Return on average total assets
C/G
0.85
%
 
0.69
 %
 
0.86
%
 
0.67
 %
Return on average total tangible assets:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$149,878

 

$142,179

 

$149,335

 

$140,479

Less: Average goodwill (GAAP)
 
6,882

 
6,876

 
6,879

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
2

 
1

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
534

 
496

 
533

 
488

Average tangible assets
H

$143,528

 

$135,797

 

$142,988

 

$134,089

Return on average total tangible assets
C/H
0.89
%
 
0.72
 %
 
0.90
%
 
0.70
 %
Efficiency ratio:
 
 
 
 
 
 
 
 
Efficiency ratio
B/A
61.94
%
 
64.71
 %
 
61.81
%
 
65.18
 %
Operating Leverage:
 
 
 
 
 
 
 
 
Increase in total revenue
 
9.23
%
 
6.50
 %
 
10.67
%
 
5.41
 %
Increase (decrease) noninterest expense
 
4.47

 
(1.66
)
 
4.88

 
(0.79
)
Operating Leverage
 
4.76
%
 
8.16
 %
 
5.79
%
 
6.20
 %

12
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents computations of non-GAAP financial measures used throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations”:
 
 
As of and for the Three Months Ended June 30,
 
As of and for the Six Months Ended June 30,
(in millions, except share, per-share and ratio data)
Ref.
2017

 
2016

 
2017

 
2016

Noninterest income, Underlying:
 
 
 
 
 
 
 
 
Noninterest income (GAAP)
 

$370

 

$355

 

$749

 

$685

Less: Lease impairment credit-related costs
 
(11
)
 
—

 
(11
)
 
—

Noninterest income, Underlying (non-GAAP)
 

$381

 

$355

 

$760

 

$685

Total revenue, Underlying:
 
 
 
 
 
 
 
 
Total revenue (GAAP)
A

$1,396

 

$1,278

 

$2,780

 

$2,512

Less: Lease impairment credit-related costs
 
(11
)
 
—

 
(11
)
 
—

Total revenue, Underlying (non-GAAP)
I

$1,407

 

$1,278

 

$2,791

 

$2,512

Noninterest expense, Underlying:
 
 
 
 
 
 
 
 
Noninterest expense (GAAP)
B

$864

 

$827

 

$1,718

 

$1,638

Less: Lease impairment credit-related costs
 
15

 
—

 
15

 
—

Noninterest expense, Underlying (non-GAAP)
J

$849

 

$827

 

$1,703

 

$1,638

Pre-provision profit, Underlying:
 
 
 
 
 
 
 
 
Pre-provision profit (GAAP)
 

$532

 

$451

 

$1,062

 

$874

Less: Lease impairment credit-related costs
 
(26
)
 
—

 
(26
)
 
—

Pre-provision profit, Underlying (non-GAAP)
 

$558

 

$451

 

$1,088

 

$874

Total credit-related costs, Underlying:
 
 
 
 
 
 
 
 
Provision for credit losses (GAAP)
 

$70

 

$90

 

$166

 

$181

Add: Lease impairment credit-related costs
 
26

 
—

 
26

 
—

Total credit-related costs, Underlying (non-GAAP)
 

$96

 

$90

 

$192

 

$181

 
 
 
 
 
 
 
 
 
Income before income tax expense (GAAP)
K

$462

 

$361

 

$896

 

$693

Income tax expense and effective income tax rate, Underlying:
 
 
 
 
 
 
 
 
Income tax expense (GAAP)
L

$144

 

$118

 

$258

 

$227

Less: Settlement of certain state tax matters
 
—

 
—

 
(23
)
 
—

Income tax expense, Underlying (non-GAAP)
M

$144

 

$118

 

$281

 

$227

Effective income tax rate (GAAP)
L/K
31.13
%
 
32.61
%
 
28.82
%
 
32.73
%
Effective income tax rate, Underlying (non-GAAP)
M/K
31.13

 
32.61

 
31.34
%
 
32.73

Net income, Underlying:
 
 
 
 
 
 
 
 
Net income (GAAP)
C

$318

 

$243

 

$638

 

$466

Less: Settlement of certain state tax matters
 
—

 
—

 
23

 
—

Net income, Underlying (non-GAAP)
N

$318

 

$243

 

$615

 

$466

Net income available to common stockholders, Underlying:
 
 
 
 
 
 
 
 
Net income available to common stockholders (GAAP)
D

$318

 

$243

 

$631

 

$459

Less: Settlement of certain state tax matters
 
—

 
—

 
23

 
—

Net income available to common stockholders, Underlying (non-GAAP)
O

$318

 

$243

 

$608

 

$459




13
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

 
 
As of and for the Three Months Ended June 30,
 
As of and for the Six Months Ended June 30,
(in millions, except share, per-share and ratio data)
Ref.
2017

 
2016

 
2017

 
2016

Efficiency ratio and efficiency ratio, Underlying:
 
 
 
 
 
 
 
 
Efficiency ratio
B/A
61.94
%
 
64.71
%
 
61.81
%
 
65.18
%
Efficiency ratio, Underlying (non-GAAP)
J/I
60.36

 
64.71

 
61.02

 
65.18

Operating Leverage, Underlying
 
 
 
 
 
 
 
 
Increase in total revenue (GAAP)
 
9.23
%
 
6.50
 %
 
10.67
%
 
5.41
 %
Increase (decrease) noninterest expense (GAAP)
 
4.47

 
(1.66
)
 
4.88

 
(0.79
)
Operating Leverage
 
4.76
%
 
8.16
%
 
5.79
%
 
6.20
%
Increase in total revenue, Underlying (non-GAAP)
 
10.09
%
 
6.50
 %
 
11.11
%
 
5.41
 %
Increase (decrease) noninterest expense, Underlying (non-GAAP)
 
2.66

 
(1.66
)
 
3.97

 
(0.79
)
Operating Leverage, Underlying (non-GAAP)
 
7.43
%
 
8.16
%
 
7.14
%
 
6.20
%
Return on average common equity and return on average common equity, Underlying:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$19,659

 

$19,768

 

$19,560

 

$19,667

Return on average common equity
D/E
6.48
%
 
4.94
 %
 
6.50
%
 
4.70
 %
Return on average common equity, Underlying (non-GAAP)
O/E
6.48

 
4.94

 
6.27

 
4.70

Return on average tangible common equity and return on average tangible common equity, Underlying:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$19,659

 

$19,768

 

$19,560

 

$19,667

Less: Average goodwill (GAAP)
 
6,882

 
6,876

 
6,879

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
2

 
1

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
534

 
496

 
533

 
488

Average tangible common equity
F

$13,309

 

$13,386

 

$13,213

 

$13,277

Return on average tangible common equity
D/F
9.57
%
 
7.30
%
 
9.62
%
 
6.96
%
Return on average tangible common equity, Underlying (non-GAAP)
O/F
9.57

 
7.30

 
9.28

 
6.96

Return on average total assets and return on average total assets, Underlying:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$149,878

 

$142,179

 

$149,335

 

$140,479

Return on average total assets
C/G
0.85
%
 
0.69
%
 
0.86
%
 
0.67
%
Return on average total assets, Underlying (non-GAAP)
N/G
0.85

 
0.69

 
0.83

 
0.67

Return on average total tangible assets and return on average total tangible assets, Underlying:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$149,878

 

$142,179

 

$149,335

 

$140,479

Less: Average goodwill (GAAP)
 
6,882

 
6,876

 
6,879

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
2

 
1

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
534

 
496

 
533

 
488

Average tangible assets
H

$143,528

 

$135,797

 

$142,988

 

$134,089

Return on average total tangible assets
C/H
0.89
%
 
0.72
%
 
0.90
%
 
0.70
%
Return on average total tangible assets, Underlying (non-GAAP)
N/H
0.89

 
0.72

 
0.87

 
0.70

Net income per average common share - basic and diluted, Underlying:
 
 
 
 
 
 
 
 
Average common shares outstanding - basic (GAAP)
P
506,371,846

 
528,968,330

 
507,903,141

 
528,519,489

Average common shares outstanding - diluted (GAAP)
Q
507,414,122

 
530,365,203

 
509,362,055

 
530,396,871

Net income available to common stockholders (GAAP)
D

$318

 

$243

 

$631

 

$459

Net income per average common share - basic (GAAP)
D/P
0.63

 
0.46

 
1.24

 
0.87

Net income per average common share - diluted (GAAP)
D/Q
0.63

 
0.46

 
1.24

 
0.87

Net income available to common stockholders, Underlying (non-GAAP)
O
318

 
243

 
608

 
459

Net income per average common share - basic, Underlying (non-GAAP)
O/P
0.63

 
0.46

 
1.20

 
0.87

Net income per average common share - diluted, Underlying (non-GAAP)
O/Q
0.63

 
0.46

 
1.19

 
0.87



14
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

 
 
As of and for the Three Months Ended June 30,
 
 
2017
 
2016
(dollars in millions)
Ref. 
Consumer
Banking
Commercial
Banking
Other
Consolidated
 
Consumer
Banking
Commercial
Banking
Other
Consolidated
Net income available to common stockholders:
 
 
 
 
 
 
 
 
 
 
Net income (GAAP)
R

$118


$187


$13


$318

 

$90


$164


($11
)

$243

Less: Preferred stock dividends
 
—

—

—

—

 
—

—

—

—

Net income available to common stockholders (GAAP)
S

$118


$187


$13


$318

 

$90


$164


($11
)

$243

Efficiency ratio:
 

 
 
 

 

 

 

Total revenue (GAAP)
T

$886


$474


$36


$1,396

 

$821


$436


$21


$1,278

Noninterest expense (GAAP)
U
644

192

28

864

 
632

186

9

827

Efficiency ratio
U/T
72.64
%
40.48
%
NM

61.94
%
 
76.98
%
42.88
%
NM

64.71
%
Return on average total tangible assets:
 
 
 
 
 
 
 
 
 
 
Average total assets (GAAP)
 

$59,244


$49,731


$40,903


$149,878

 

$55,660


$47,388


$39,131


$142,179

Less: Average goodwill (GAAP)
 
—

—

6,882

6,882

 
—

—

6,876

6,876

Less: Average other intangibles (GAAP)
 
—

—

2

2

 
—

—

2

2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
—

—

534

534

 
—

—

496

496

Average total tangible assets
V

$59,244


$49,731


$34,553


$143,528

 

$55,660


$47,388


$32,749


$135,797

Return on average total tangible assets
R/V
0.80
%
1.51
%
NM

0.89
%
 
0.65
%
1.39
%
NM

0.72
%
Return on average tangible common equity:
 
 
 
 

 

 
 

 

 

 

Average common equity (GAAP)(1)
 

$5,519


$5,617


$8,523


$19,659

 

$5,110


$5,040


$9,618


$19,768

Less: Average goodwill (GAAP)
 
—

—

6,882

6,882

 
—

—

6,876

6,876

Less: Average other intangibles (GAAP)
 
—

—

2

2

 
—

—

2

2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
—

—

534

534

 
—

—

496

496

Average tangible common equity (1)
W

$5,519


$5,617


$2,173


$13,309

 

$5,110


$5,040


$3,236


$13,386

Return on average tangible common equity (1)
S/W
8.57
%
13.37
%
NM

9.57
%
 
7.09
%
13.04
%
NM

7.30
%
(1) 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.


15
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

 
 
As of and for the Six Months Ended June 30,
 
 
2017
 
2016
(dollars in millions)
Ref.
Consumer
Banking
Commercial
Banking
Other
Consolidated
 
Consumer
Banking
Commercial
Banking
Other
Consolidated
Net income available to common stockholders:
 
 
 
 
 
 
 
 
 
 
Net income (GAAP)
R

$213


$367


$58


$638

 

$161


$297


$8


$466

Less: Preferred stock dividends
 
—

—

7

7

 
—

—

7

7

Net income available to common stockholders (GAAP)
S

$213


$367


$51


$631

 

$161


$297


$1


$459

Efficiency ratio:
 

 
 
 

 

 

 

Total revenue (GAAP)
T

$1,744


$954


$82


$2,780

 

$1,610


$835


$67


$2,512

Noninterest expense (GAAP)
U
1,291

382

45

1,718

 
1,248

373

17

1,638

Efficiency ratio
U/T
74.00
%
40.14
%
NM

61.81
%
 
77.52
%
44.73
%
NM

65.18
%
Return on average total tangible assets:
 
 
 
 
 
 
 
 
 
 
Average total assets (GAAP)
 

$58,954


$49,488


$40,893


$149,335

 

$55,388


$46,346


$38,745


$140,479

Less: Average goodwill (GAAP)
 
—

—

6,879

6,879

 
—

—

6,876

6,876

Less: Average other intangibles (GAAP)
 
—

—

1

1

 
—

—

2

2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
—

—

533

533

 
—

—

488

488

Average total tangible assets
V

$58,954


$49,488


$34,546


$142,988

 

$55,388


$46,346


$32,355


$134,089

Return on average total tangible assets
R/V
0.73
%
1.50
%
NM

0.90
%
 
0.58
%
1.29
%
NM

0.70
%
Return on average tangible common equity:
 
 
 
 

 

 
 

 

 

 

Average common equity (GAAP)(1)
 

$5,490


$5,573


$8,497


$19,560

 

$5,099


$4,915


$9,653


$19,667

Less: Average goodwill (GAAP)
 
—

—

6,879

6,879

 
—

—

6,876

6,876

Less: Average other intangibles (GAAP)
 
—

—

1

1

 
—

—

2

2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
—

—

533

533

 
—

—

488

488

Average tangible common equity (1)
W

$5,490


$5,573


$2,150


$13,213

 

$5,099


$4,915


$3,263


$13,277

Return on average tangible common equity (1)
S/W
7.83
%
13.28
%
NM

9.62
%
 
6.34
%
12.14
%
NM

6.96
%
(1) 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.



















16
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS
 
Second Quarter 2017 vs. Second Quarter 2016
•
Net income and net income available to common stockholders of $318 million increased $75 million, or 31%, from $243 million in second quarter 2016;
•
Net income per average common share, diluted, of $0.63, compared to $0.46 in second quarter 2016;
•
Second quarter 2017 results reflect a $26 million pre-tax impact related to impairments on aircraft lease assets which, in addition to provision expense of $70 million, resulted in total credit-related costs of $96 million.* The lease impairments, which largely relate to a non-core runoff portfolio, reduced noninterest income by $11 million and increased noninterest expense by $15 million;
•
Total revenue of $1.4 billion increased $118 million, or 9%, reflecting strong net interest income and noninterest income growth:
◦
Net interest income increased 11%, to $1.0 billion from $923 million in second quarter 2016, given 6% average loan growth and a 13 basis point improvement in net interest margin;
◦
Net interest margin of 2.97% reflected improved loan yields, driven by higher rates and balance sheet optimization initiatives, partially offset by higher funding costs and investment portfolio growth; and
◦
Noninterest income increased 4% from second quarter 2016, as strength in capital markets fees, card fees, mortgage banking fees and letter of credit and loan fees was partially offset by the $11 million impact of finance lease impairments. Before the impact of finance lease impairments, Underlying noninterest income was up 7%.*
•
Noninterest expense of $864 million increased $37 million, or 4%, compared to $827 million in second quarter 2016, reflecting higher other operating expense, driven by the $15 million impact of operating lease impairments and higher FDIC expense, as well as an increase in advertising and public relations costs. Results also reflect stable salaries and employee benefits and equipment expense, as well as an increase in outside services, occupancy and amortization of software expense. Before the impact of operating lease impairments, Underlying noninterest expense increased 3%;*
•
The provision for credit losses of $70 million in second quarter 2017 decreased $20 million from $90 million in second quarter 2016, largely reflecting continued improvement in portfolio credit quality, partially offset by an increase tied to a retail runoff portfolio and an increase in commercial net charge-offs. Including the $26 million of lease impairments, total credit-related costs were $96 million* in second quarter 2017, up modestly from the prior year quarter;
•
Net charge-offs of $75 million increased $10 million, or 15%, from $65 million in second quarter 2016. Allowance for loan and lease losses (“ALLL”) of $1.2 billion remained stable compared to December 31, 2016. ALLL to total loans and leases ratio of 1.12% as of June 30, 2017, compared with 1.15% as of December 31, 2016. ALLL to nonperforming loans and leases ratio of 119% as of June 30, 2017, compared with 118% as of December 31, 2016;
•
The effective tax rate for second quarter 2017 was 31.1%, compared with 32.6% in second quarter 2016, primarily due to investments in historic tax credits;
•
Return on average common equity of 6.5% compared to 4.9% in second quarter 2016;
•
Return on average tangible common equity of 9.6% improved 227 basis points, from 7.3% in second quarter 2016;
•
Average interest-earning assets increased $8.1 billion, or 6%, reflecting 6% loan growth and a 7% increase in the investment portfolio; and
•
Average deposits of $110.8 billion increased $6.8 billion, or 7%, from $104.0 billion in second quarter 2016, reflecting strength in checking with interest, term, money market and savings.

17

First Half 2017 vs. First Half 2016
•
Net income of $638 million increased $172 million compared to $466 million in first half 2016. Net income available to common stockholders of $631 million increased $172 million, compared to $459 million in first half 2016 as the benefit of an 11% increase in revenue and a reduction in the effective income tax rate from the settlement of certain state tax matters was partially offset by a 5% increase in noninterest expense;
•
Net income per average common share was $1.24, diluted, compared to $0.87 in first half 2016. Excluding the impact related to settlement of certain state tax matters, Underlying net income per average common share for first half 2017, diluted, was $1.19;*
•
First half 2017 results reflect a $26 million pre-tax impact related to impairments on aircraft lease assets. The lease impairments, which largely relate to a non-core runoff portfolio, reduced noninterest income by $11 million and increased noninterest expense by $15 million;
•
Total revenue of $2.8 billion increased $268 million, or 11%, reflecting solid net interest income and noninterest income growth:
◦
Net interest income of $2.0 billion increased $204 million, or 11%, compared to $1.8 billion in first half 2016, reflecting 7% average loan growth and a 12 basis point improvement in net interest margin;
◦
Net interest margin of 2.97% increased 12 basis points, compared to 2.85% in first half 2016 reflecting improved loan growth, driven by higher rates and balance sheet optimization initiatives, partially offset by investment portfolio growth and higher funding costs; and
◦
Noninterest income of $749 million increased $64 million, or 9%, from first half 2016 levels largely driven by strength in capital markets fees, card fees, mortgage banking fees and foreign exchange and letter of credit and loan fees partially offset by the $11 million impact of finance lease impairments.
•
Noninterest expense of $1.7 billion, which includes the $15 million impact of operating lease impairments, increased $80 million, or 5%, compared to $1.6 billion in first half 2016. Results also reflect higher salaries and employee benefits expense largely tied to higher revenue-based incentives and merit increase, and increases in other categories given continued investments in the franchise, as well as higher FDIC expense and fraud and regulatory costs;
•
Provision for credit losses of $166 million decreased $15 million, or 8%, from $181 million in first half 2016. Total credit-related costs of $192 million* including lease impairments, were up modestly from first half 2016;
•
Net charge-offs of $162 million increased $14 million, or 9%, from $148 million in first half 2016. Allowance for loan and lease losses (“ALLL”) of $1.2 billion decreased $17 million compared to fourth quarter 2016. ALLL to total loans and leases was 1.12% as of June 30, 2017, compared with 1.15% as of December 31, 2016. ALLL to nonperforming loans and leases ratio was 119% as of June 30, 2017, compared with 118% as of December 31, 2016;
•
Return on average common equity was 6.5% compared to 4.7% for first half 2016;
•
Return on average tangible common equity was 9.6%, compared to 7.0% for first half 2016. Excluding the impact related to settlement of certain state tax matters, Underlying ROTCE was 9.3%*;
•
Average loans and leases of $108.6 billion increased $7.1 billion, or 7%, from $101.5 billion in first half 2016, driven by a $4.2 billion increase in commercial loans and a $3.0 billion increase in retail loans;
•
Average interest-bearing deposits of $82.6 billion increased $6.9 billion, or 9% from $75.7 billion in first half 2016, driven by strength in checking with interest, term, money market and savings; and
•
The effective tax rate for first half 2017 of 28.8% compared with 32.7% in first half 2016. The first half 2017 tax rate reflected a $23 million benefit related to the settlement of certain state tax matters and investments in historic tax credits.



18
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Income
Net income of $318 million, increased $75 million, or 31%, from $243 million in second quarter 2016. Net income totaled $638 million, up $172 million, or 37%, from $466 million in first half 2016.
The following table presents the significant components of our net income:
 
Three Months Ended June 30,
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
(dollars in millions)
2017

 
2016

 
Change

 
Percent

 
2017

 
2016

 
Change
 
Percent

Operating Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income

$1,026

 

$923

 

$103

 
11
%
 

$2,031

 

$1,827

 

$204

 
11
%
Noninterest income
370

 
355

 
15

 
4

 
749

 
685

 
64

 
9

Total revenue
1,396

 
1,278

 
118

 
9

 
2,780

 
2,512

 
268

 
11

Provision for credit losses
70

 
90

 
(20
)
 
(22
)
 
166

 
181

 
(15
)
 
(8
)
Noninterest expense
864

 
827

 
37

 
4

 
1,718

 
1,638

 
80

 
5

Income before income tax expense
462

 
361

 
101

 
28

 
896

 
693

 
203

 
29

Income tax expense
144

 
118

 
26

 
22

 
258

 
227

 
31

 
14

Net income

$318

 

$243

 

$75

 
31

 

$638

 

$466

 

$172

 
37

Net income available to common stockholders

$318

 

$243

 

$75

 
31
%
 

$631

 

$459

 

$172

 
37
%
Return on average common equity
6.48
%
 
4.94
%
 
154
 bps
 
 
 
6.50
%
 
4.70
%
 
180
 bps
 
 
Return on average tangible common equity 
9.57
%
 
7.30
%
 
227
 bps
 
 
 
9.62
%
 
6.96
%
 
266
 bps
 
 
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the effective yield on such assets and the effective cost of such liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Risk Governance” and “—Market Risk — Non-Trading Risk,” included in this report.
The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the FRB’s actions. However, the yields generated by our loans and securities are typically driven by both short-term and long-term interest rates, which are set by the market or, at times, by the FRB’s actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. In first half 2017, short-term and long-term interest rates have risen from very low levels by historical standards, with many benchmark rates, such as the federal funds rate and one- and three-month LIBOR, near 1.25%. Any declines in the yield curve or a decline in longer-term yields relative to short-term yields (a flatter yield curve) would have an adverse impact on our net interest margin and net interest income.
The FRB continued to follow its stated monetary policy during first half 2017 and increased the Fed Funds rate by 0.25% in both March and June 2017. The FRB targeted a 1.00% to 1.25% Fed Funds rate at June 2017, and interest rates are expected to gradually increase to more normal levels.

19
CITIZENS FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the major components of net interest income and net interest margin:
 
Three Months Ended June 30,
 
 
2017
 
2016
 
Change
(dollars in millions)
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Yields/
Rates
Assets
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and due from banks and deposits in banks

$2,081


$5

0.88
%
 

$1,948


$2

0.39
%
 

$133

49 bps
Taxable investment securities
25,732

154

2.39

 
24,050

141

2.35

 
1,682

4
Non-taxable investment securities
7

—

2.60

 
9

—

2.60

 
(2
)
—
Total investment securities
25,739

154

2.39

 
24,059

141

2.35

 
1,680

4
Commercial
37,846

326

3.40

 
35,622

278

3.09

 
2,224

31
Commercial real estate
11,086

97

3.47

 
9,649

67

2.74

 
1,437

73
Leases
3,557

22

2.50

 
3,863

24

2.45

 
(306
)
5
Total commercial
52,489

445

3.35

 
49,134

369

2.97

 
3,355

38
Residential mortgages
15,646

140

3.57

 
13,491