Edgar Filing: CITIZENS FINANCIAL GROUP INC/RI

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

September 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

(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 491,991,403 shares of Registrant’s common stock ($0.01 par value) outstanding on November 1, 2017.





	Table of Contents


Glossary of Acronyms and Terms		3

Part I. Financial Information		5

Item 1. Financial Statements		66

Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 (unaudited)		67
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016		68
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016		69
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2017 and 2016		70
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2017 and 2016		71
Notes to the Consolidated Financial Statements (unaudited)		72

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		5

Item 3. Quantitative and Qualitative Disclosures about Market Risk		121

Item 4. Controls and Procedures		121


Part II. Other Information		122

Item 1. Legal Proceedings		122
Item 1A. Risk Factors		122
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		122
Item 6. Exhibits		122


Signature		124

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)
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, National Association
CBPA		Citizens Bank of Pennsylvania
CCAR		Comprehensive Capital Analysis and Review
CCB		Capital Conservation Buffer
CET1		Common Equity Tier 1
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
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
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

CITIZENS FINANCIAL GROUP, INC.



NM		Not meaningful
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, National Association 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
TOP		Tapping Our Potential
VaR		Value at Risk
VIE		Variable Interest Entities

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		6
Introduction		7
Financial Performance		8
Selected Consolidated Financial Data		10
Principal Components of Operations and Key Performance Metrics Used By Management		12
Results of Operations		21
Third Quarter 2017 vs. Third Quarter 2016		21
Nine Months Ended 2017 vs. Nine Months Ended 2016		22
Net Income		24
Net Interest Income		24
Noninterest Income		28
Provision for Credit Losses		29
Noninterest Expense		29
Income Tax Expense		30
Business Segments		31
Analysis of Financial Condition		38
Securities		38
Loans and Leases		39
Non-Core Assets		40
Allowance for Credit Losses and Nonperforming Assets		40
Derivatives		44
Deposits		45
Borrowed Funds		46
Capital and Regulatory Matters		48
Liquidity		53
Off-Balance Sheet Arrangements		57
Critical Accounting Estimates		57
Risk Governance		57
Market Risk		60

CITIZENS FINANCIAL GROUP, INC.

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.

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 September 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 interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the interim 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.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL PERFORMANCE

Third Quarter 2017 compared with Third Quarter 2016 - Key Highlights


•	Third quarter 2017 net income of $348 million increased 17% from $297 million in third quarter 2016, with earnings per diluted common share of $0.68, up 21% from $0.56 per diluted common share. Third quarter 2017 ROTCE of 10.1% improved from 8.6%.*

◦

On an Adjusted basis,* third quarter 2017 net income increased 25% and earnings per diluted common share increased 31% compared to third quarter 2016. Adjusted results exclude the impact of a third quarter 2016 net $19 million after-tax benefit from the sale of a troubled debt restructuring portfolio (“TDR Transaction”), partially offset by other notable items largely associated with our efficiency and balance sheet optimization initiatives.


•	Third quarter 2017 results reflect an 18% increase in net income available to common stockholders, led by revenue growth of 5%, with a 12% increase in net interest income given 5% average loan growth and a 21 basis point increase in net interest margin.


◦	On an Adjusted basis,* net income available to common stockholders increased 26%.


•	Continued strong focus on top-line growth and expense management helped drive positive operating leverage of 6%, a 3.5% improvement in the efficiency ratio and a 1.6% improvement in ROTCE.*


◦	On an Adjusted basis,* operating leverage was 7% with an efficiency ratio improvement of 3.9% and a ROTCE improvement of 2.1%.


•	Fully diluted average common shares outstanding decreased by 19 million shares.

Nine Months Ended 2017 compared with Nine Months Ended 2016 - Key Highlights

•

For the first nine months of 2017, net income of $986 million, increased 29% from $763 million in the first nine months of 2016, with earnings per diluted common share of $1.92, up 35% from $1.42 per diluted common share in the first nine months of 2016. Our first nine months of 2017 results include a $23 million benefit, or $0.05 per diluted common share, related to the settlement of certain state tax matters. For the first nine months of 2017, ROTCE of 9.8% improved from 7.5% in the first nine months of 2016.*


◦	On an Underlying basis,* excluding a $23 million benefit related to the settlement of certain state tax matters, net income of $963 million was up 26%, earnings per diluted common share of $1.87 was up 32%, and ROTCE of 9.6% improved by 206 basis points.


◦	On an Adjusted basis,* excluding the third quarter 2016 net $19 million after-tax benefit related to the TDR Transaction, partially offset by other notable items, net income of $986 million was up 33%, earnings per diluted common share of $1.92 was up 38%, and ROTCE of 9.8% improved by 248 basis points.


•	Results for the first nine months of 2017 reflected a 30% increase in net income available to common stockholders, led by revenue growth of 9%, as net interest income increased 12%, given a 6% average loan growth and a 15 basis point increase in net interest margin, as well as noninterest income growth of 1%.

•

Results for the first nine months of 2017 included a $26 million pre-tax impact related to impairments on aircraft lease assets, which largely related to a non-core runoff portfolio, and reduced noninterest income by $11 million and increased noninterest expense by $15 million. The lease impairments, in addition to provision expense of $238 million, resulted in total credit-related costs of $264 million.*


•	Continued strong focus on top-line growth and expense management helped drive positive operating leverage of 6%, a 3.4% improvement in the efficiency ratio from 64.4% to 61.0%, and a 2.3% improvement in ROTCE.*


◦	Before the impact of the lease impairments, Underlying* operating leverage was 7% and the efficiency ratio improved 3.9% from 64.4% to 60.5%.


◦	On an Adjusted basis,* the efficiency ratio improved from 64.5% to 61.0%.


•	For the first nine months of 2017, the tax rate reflected a 1.8% benefit driven by the settlement of certain state tax matters and investments in historic tax credits.


◦	On an Underlying basis,* the effective income tax rate decreased from 31.9% to 31.7%.


•	Fully diluted average common shares outstanding decreased by 20 million shares.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Summary of Notable and Underlying Items⁽¹⁾



	Three Months Ended September 30, 2016
(in millions)	Noninterest income			Noninterest expense		Credit-related costs		Income tax expense			Net Income
Reported results (GAAP)		$435			$867		$86		$130			$297
Less: notable items
Gain on mortgage/home equity TDR transaction	72			—		—		27			45
Home equity operational items	—			8		—		(3		)	(5		)
Asset Finance repositioning	(5		)	11		—		(6		)	(10		)
TOP III efficiency initiatives	—			17		—		(6		)	(11		)
Total notable items		$67			$36		$—		$12			$19
Adjusted results (Non-GAAP)		$368			$831		$86		$118			$278



	Nine Months Ended September 30, 2017
(in millions)	Noninterest income			Noninterest expense		Credit-related costs			Income tax expense			Net Income
Reported results (GAAP)		$1,130			$2,576		$238			$423			$986
Less: Underlying items
Lease impairment credit-related costs	(11		)	15		(26		)	—			—
Settlement of certain tax matters	—			—		—			(23		)	23
Total Underlying items		($11	)		$15		($26	)		($23	)		$23
Underlying results (Non-GAAP)		$1,141			$2,561		$264			$446			$963



	Nine Months Ended September 30, 2016
(in millions)	Noninterest income			Noninterest expense		Credit-related costs		Income tax expense			Net Income
Reported results (GAAP)		$1,120			$2,505		$267		$357			$763
Less: notable items
Gain on mortgage/home equity TDR transaction	72			—		—		27			45
Home equity operational items	—			8		—		(3		)	(5		)
Asset Finance repositioning	(5		)	11		—		(6		)	(10		)
TOP III efficiency initiatives	—			17		—		(6		)	(11		)
Total notable items		$67			$36		$—		$12			$19
Adjusted results (Non-GAAP)		$1,053			$2,469		$267		$345			$744

⁽¹⁾There were no notable or Underlying items for the three months ended September 2017.

“Adjusted” results exclude restructuring charges, special items and/or notable items; “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. Where there is a reference to “Adjusted” and/or “Underlying” results in a paragraph, all measures that follow these references are on the same basis when applicable. 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.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SELECTED CONSOLIDATED FINANCIAL DATA

The summary Consolidated Operating Data for the three and nine months ended September 30, 2017 and 2016 and the summary Consolidated Balance Sheet data as of September 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 nine months ended September 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 September 30,						Nine Months Ended September 30,
(dollars in millions, except per-share amounts)	2017			2016			2017			2016
OPERATING DATA:
Net interest income		$1,062			$945			$3,093			$2,772
Noninterest income	381			435			1,130			1,120
Total revenue	1,443			1,380			4,223			3,892
Provision for credit losses	72			86			238			267
Noninterest expense	858			867			2,576			2,505
Income before income tax expense	513			427			1,409			1,120
Income tax expense	165			130			423			357
Net income		$348			$297			$986			$763
Net income available to common stockholders		$341			$290			$972			$749
Net income per common share - basic		$0.68			$0.56			$1.92			$1.43
Net income per common share - diluted		$0.68			$0.56			$1.92			$1.42
OTHER OPERATING DATA:
Return on average common equity ⁽¹⁾	6.87		%	5.82		%	6.63		%	5.08		%
Return on average tangible common equity ⁽¹⁾	10.13			8.58			9.80			7.51
Return on average total assets ⁽¹⁾	0.92			0.82			0.88			0.72
Return on average total tangible assets ⁽¹⁾	0.96			0.86			0.92			0.75
Efficiency ratio ⁽¹⁾	59.41			62.88			60.99			64.36
Operating leverage ^{(1) (2)}	5.61			5.49			5.67			6.06
Net interest margin ⁽¹⁾	3.05			2.84			3.00			2.85
Effective income tax rate	32.18			30.46			30.04			31.87

⁽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 $3.6 billion for the three and nine months ended September 30, 2015, respectively, and noninterest expense was $798 million and $2.4 billion for the three and nine months ended September 30, 2015, respectively.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



(dollars in millions)	September 30, 2017			December 31, 2016
BALANCE SHEET DATA:
Total assets		$151,356			$149,520
Loans held for sale, at fair value	500			583
Other loans held for sale	724			42
Loans and leases	110,151			107,669
Allowance for loan and lease losses	(1,224		)	(1,236		)
Total securities	25,742			25,610
Goodwill	6,887			6,876
Total liabilities	131,247			129,773
Total deposits	113,235			109,804
Federal funds purchased and securities sold under agreements to repurchase	453			1,148
Other short-term borrowed funds	1,505			3,211
Long-term borrowed funds	13,400			12,790
Total stockholders’ equity	20,109			19,747
OTHER BALANCE SHEET DATA:
Asset Quality Ratios:
Allowance for loan and lease losses as a percentage of total loans and leases	1.11		%	1.15		%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases	131.35			118.32
Nonperforming loans and leases as a percentage of total loans and leases	0.85			0.97
Capital Ratios:⁽³⁾
CET1 capital ratio ⁽⁴⁾	11.1		%	11.2		%
Tier 1 capital ratio ⁽⁵⁾	11.3			11.4
Total capital ratio ⁽⁶⁾	13.8			14.0
Tier 1 leverage ratio ⁽⁷⁾	9.9			9.9

⁽³⁾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 September 30, 2017 and December 31, 2016 are prepared using the U.S. Basel III Standardized transitional approach.

⁽⁴⁾“Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

⁽⁵⁾“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.

⁽⁶⁾“Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

⁽⁷⁾ “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.

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.

“Adjusted” or “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 “Adjusted” or “Underlying” results in any period reflect our operational performance in that period and, accordingly, it is useful to consider our GAAP results and our “Adjusted” or “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

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 “Adjusted” or “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 September 30,						As of and for the Nine Months Ended September 30,
(in millions, except ratio data)	Ref.	2017			2016			2017			2016
Total revenue (GAAP)	A		$1,443			$1,380			$4,223			$3,892
Noninterest expense (GAAP)	B	858			867			2,576			2,505
Net income (GAAP)	C	348			297			986			763
Net income available to common stockholders (GAAP)	D	341			290			972			749
Return on average common equity:
Average common equity (GAAP)	E		$19,728			$19,810			$19,617			$19,715
Return on average common equity	D/E	6.87		%	5.82		%	6.63		%	5.08		%
Return on average tangible common equity:
Average common equity (GAAP)	E		$19,728			$19,810			$19,617			$19,715
Less: Average goodwill (GAAP)		6,887			6,876			6,882			6,876
Less: Average other intangibles (GAAP)		2			1			2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		537			509			535			495
Average tangible common equity	F		$13,376			$13,442			$13,268			$13,332
Return on average tangible common equity	D/F	10.13		%	8.58		%	9.80		%	7.51		%
Return on average total assets:
Average total assets (GAAP)	G		$150,012			$144,399			$149,563			$141,795
Return on average total assets	C/G	0.92		%	0.82		%	0.88		%	0.72		%
Return on average total tangible assets:
Average total assets (GAAP)	G		$150,012			$144,399			$149,563			$141,795
Less: Average goodwill (GAAP)		6,887			6,876			6,882			6,876
Less: Average other intangibles (GAAP)		2			1			2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		537			509			535			495
Average tangible assets	H		$143,660			$138,031			$143,214			$135,412
Return on average total tangible assets	C/H	0.96		%	0.86		%	0.92		%	0.75		%
Efficiency ratio:
Efficiency ratio	B/A	59.41		%	62.88		%	60.99		%	64.36		%
Operating leverage:
Increase in total revenue		4.57		%	14.14		%	8.50		%	8.35		%
(Decrease) increase in noninterest expense		(1.04		)	8.65			2.83			2.29
Operating leverage		5.61		%	5.49		%	5.67		%	6.06		%

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		As of and for the Three Months Ended September 30,
		2017											2016
(in millions, except ratio data)	Ref.	Consumer Banking			Commercial Banking			Other		Consolidated			Consumer Banking			Commercial Banking			Other		Consolidated
Net income available to common stockholders:
Net income (GAAP)	I		$122			$201			$25		$348			$92			$162			$43		$297
Less: Preferred stock dividends		—			—			7		7			—			—			7		7
Net income available to common stockholders	J		$122			$201			$18		$341			$92			$162			$36		$290
Efficiency ratio:
Total revenue (GAAP)	K		$901			$490			$52		$1,443			$850			$450			$80		$1,380
Noninterest expense (GAAP)	L	648			195			15		858			650			181			36		867
Efficiency ratio	L/K	71.88		%	39.39		%	NM		59.41		%	76.46		%	40.21		%	NM		62.88		%
Return on average total tangible assets:
Average total assets (GAAP)			$60,012			$49,833			$40,167		$150,012			$56,689			$47,902			$39,808		$144,399
Less: Average goodwill (GAAP)		—			—			6,887		6,887			—			—			6,876		6,876
Less: Average other intangibles (GAAP)		—			—			2		2			—			—			1		1
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			537		537			—			—			509		509
Average total tangible assets	M		$60,012			$49,833			$33,815		$143,660			$56,689			$47,902			$33,440		$138,031
Return on average total tangible assets	I/M	0.81		%	1.60		%	NM		0.96		%	0.64		%	1.35		%	NM		0.86		%
Return on average tangible common equity:
Average common equity (GAAP)⁽¹⁾			$5,565			$5,685			$8,478		$19,728			$5,190			$5,172			$9,448		$19,810
Less: Average goodwill (GAAP)		—			—			6,887		6,887			—			—			6,876		6,876
Less: Average other intangibles (GAAP)		—			—			2		2			—			—			1		1
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			537		537			—			—			509		509
Average tangible common equity ⁽¹⁾	N		$5,565			$5,685			$2,126		$13,376			$5,190			$5,172			$3,080		$13,442
Return on average tangible common equity ⁽¹⁾	J/N	8.72		%	14.06		%	NM		10.13		%	7.04		%	12.50		%	NM		8.58		%

⁽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.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		As of and for the Nine Months Ended September 30,
		2017											2016
(in millions, except ratio data)	Ref.	Consumer Banking			Commercial Banking			Other		Consolidated			Consumer Banking			Commercial Banking			Other		Consolidated
Net income available to common stockholders:
Net income (GAAP)	I		$335			$568			$83		$986			$253			$459			$51		$763
Less: Preferred stock dividends		—			—			14		14			—			—			14		14
Net income available to common stockholders	J		$335			$568			$69		$972			$253			$459			$37		$749
Efficiency ratio:
Total revenue (GAAP)	K		$2,645			$1,444			$134		$4,223			$2,460			$1,285			$147		$3,892
Noninterest expense (GAAP)	L	1,939			577			60		2,576			1,898			554			53		2,505
Efficiency ratio	L/K	73.28		%	39.89		%	NM		60.99		%	77.15		%	43.15		%	NM		64.36		%
Return on average total tangible assets:
Average total assets (GAAP)			$59,310			$49,604			$40,649		$149,563			$55,825			$46,869			$39,101		$141,795
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)		—			—			535		535			—			—			495		495
Average total tangible assets	M		$59,310			$49,604			$34,300		$143,214			$55,825			$46,869			$32,718		$135,412
Return on average total tangible assets	I/M	0.76		%	1.53		%	NM		0.92		%	0.60		%	1.31		%	NM		0.75		%
Return on average tangible common equity:
Average common equity (GAAP)⁽¹⁾			$5,515			$5,611			$8,491		$19,617			$5,130			$5,001			$9,584		$19,715
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)		—			—			535		535			—			—			495		495
Average tangible common equity ⁽¹⁾	N		$5,515			$5,611			$2,142		$13,268			$5,130			$5,001			$3,201		$13,332
Return on average tangible common equity ⁽¹⁾	J/N	8.13		%	13.54		%	NM		9.80		%	6.58		%	12.27		%	NM		7.51		%

⁽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.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents computations of non-GAAP financial measures representing our “Adjusted” results used throughout “Management's Discussion and Analysis of Financial Condition and Results of Operations”:



		As of and for the Three Months Ended September 30,					As of and for the Nine Months Ended September 30,
(in millions, except share, per-share and ratio data)	Ref.	2017		2016			2017		2016
Noninterest income, Adjusted:
Noninterest income (GAAP)			$381		$435			$1,130		$1,120
Less: notable items
Gain on mortgage/home equity TDR transaction		—		72			—		72
Home equity operational items		—		—			—		—
Asset Finance repositioning		—		(5		)	—		(5		)
TOP III efficiency initiatives		—		—			—		—
Noninterest income, Adjusted (non-GAAP)			$381		$368			$1,130		$1,053
Total revenue, Adjusted:
Total revenue (GAAP)	A		$1,443		$1,380			$4,223		$3,892
Less: notable items
Gain on mortgage/home equity TDR transaction		—		72			—		72
Home equity operational items		—		—			—		—
Asset Finance repositioning		—		(5		)	—		(5		)
TOP III efficiency initiatives		—		—			—		—
Total revenue, Adjusted (non-GAAP)	O		$1,443		$1,313			$4,223		$3,825
Noninterest expense, Adjusted:
Noninterest expense (GAAP)	B		$858		$867			$2,576		$2,505
Less: notable items
Gain on mortgage/home equity TDR transaction		—		—			—		—
Home equity operational items		—		8			—		8
Asset Finance repositioning		—		11			—		11
TOP III efficiency initiatives		—		17			—		17
Noninterest expense, Adjusted (non-GAAP)	P		$858		$831			$2,576		$2,469
Pre-provision profit, Adjusted
Total revenue, Adjusted (non-GAAP)	O		$1,443		$1,313			$4,223		$3,825
Noninterest expense, Adjusted (non-GAAP)	P	858		831			2,576		2,469
Pre-provision profit, Adjusted (non-GAAP)			$585		$482			$1,647		$1,356
Income before income tax expense, Adjusted:
Income before income tax expense (GAAP)	Q		$513		$427			$1,409		$1,120
Less: notable items
Gain on mortgage/home equity TDR transaction		—		72			—		72
Home equity operational items		—		(8		)	—		(8		)
Asset Finance repositioning		—		(16		)	—		(16		)
TOP III efficiency initiatives		—		(17		)	—		(17		)
Income before income tax expense, Adjusted (non-GAAP)	R		$513		$396			$1,409		$1,089

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,
(in millions, except share, per-share and ratio data)	Ref.	2017			2016			2017			2016
Income tax expense and effective income tax rate, Adjusted:
Income tax expense (GAAP)	S		$165			$130			$423			$357
Less: Notable items
Gain on mortgage/home equity TDR transaction		—			27			—			27
Home equity operational items		—			(3		)	—			(3		)
Asset Finance repositioning		—			(6		)	—			(6		)
TOP III efficiency initiatives		—			(6		)	—			(6		)
Income tax expense, Adjusted (non-GAAP)	T		$165			$118			$423			$345
Effective income tax rate (GAAP)	S/Q	32.18		%	30.46		%	30.04		%	31.87		%
Effective income tax rate, Adjusted (non-GAAP)	T/R	32.18			29.83			30.04			31.68
Net income, Adjusted:
Net income (GAAP)	C		$348			$297			$986			$763
Add: Notable items, net of tax expense
Gain on mortgage/home equity TDR transaction		—			(45		)	—			(45		)
Home equity operational items		—			5			—			5
Asset Finance repositioning		—			10			—			10
TOP III efficiency initiatives		—			11			—			11
Net income, Adjusted (non-GAAP)	U		$348			$278			$986			$744
Net income available to common stockholders, Adjusted:
Net income available to common stockholders (GAAP)	D		$341			$290			$972			$749
Add: Notable items, net of tax expense
Gain on mortgage/home equity TDR transaction		—			(45		)	—			(45		)
Home equity operational items		—			5			—			5
Asset Finance repositioning		—			10			—			10
TOP III efficiency initiatives		—			11			—			11
Net income available to common stockholders, Adjusted (non-GAAP)	V		$341			$271			$972			$730
Return on average common equity and return on average common equity, Adjusted:
Average common equity (GAAP)	E		$19,728			$19,810			$19,617			$19,715
Return on average common equity	D/E	6.87		%	5.82		%	6.63		%	5.08		%
Return on average common equity, Adjusted (non-GAAP)	V/E	6.87			5.44			6.63			4.95
Return on average tangible common equity and return on average common equity, Adjusted:
Average common equity (GAAP)	E		$19,728			$19,810			$19,617			$19,715
Less: Average goodwill (GAAP)		6,887			6,876			6,882			6,876
Less: Average other intangibles (GAAP)		2			1			2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		537			509			535			495
Average tangible common equity	F		$13,376			$13,442			$13,268			$13,332
Return on average tangible common equity	D/F	10.13		%	8.58		%	9.80		%	7.51		%
Return on average tangible common equity, Adjusted (non-GAAP)	V/F	10.13			8.02			9.80			7.32
Return on average total assets and return on average total assets, Adjusted:
Average total assets (GAAP)	G		$150,012			$144,399			$149,563			$141,795
Return on average total assets	C/G	0.92		%	0.82		%	0.88		%	0.72		%
Return on average total assets, Adjusted (non-GAAP)	U/G	0.92			0.77			0.88			0.70

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,
(in millions, except share, per-share and ratio data)	Ref.	2017			2016			2017			2016
Return on average total tangible assets and return on average total tangible assets, Adjusted:
Average total assets (GAAP)	G		$150,012			$144,399			$149,563			$141,795
Less: Average goodwill (GAAP)		6,887			6,876			6,882			6,876
Less: Average other intangibles (GAAP)		2			1			2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		537			509			535			495
Average tangible assets	H		$143,660			$138,031			$143,214			$135,412
Return on average total tangible assets	C/H	0.96		%	0.86		%	0.92		%	0.75		%
Return on average total tangible assets, Adjusted (non-GAAP)	U/H	0.96			0.80			0.92			0.73
Efficiency ratio and efficiency ratio, Adjusted:
Efficiency ratio	B/A	59.41		%	62.88		%	60.99		%	64.36		%
Efficiency ratio, Adjusted (non-GAAP)	P/O	59.41			63.31			60.99			64.54
Operating leverage and operating leverage, Adjusted:
Increase in total revenue		4.57		%	14.14		%	8.50		%	8.35		%
(Decrease) increase in noninterest expense		(1.04		)	8.65			2.83			2.29
Operating leverage		5.61		%	5.49		%	5.67		%	6.06		%
Increase in total revenue, Adjusted (non-GAAP)		9.90		%	8.60		%	10.41		%	6.49		%
Increase in noninterest expense, Adjusted (non-GAAP)		3.25			4.14			4.33			2.92
Operating leverage, Adjusted (non-GAAP)		6.65		%	4.46		%	6.08		%	3.57		%
Net income per average common share - basic and diluted, Adjusted:
Average common shares outstanding - basic (GAAP)	W	500,861,076			519,458,976			505,529,991			525,477,273
Average common shares outstanding - diluted (GAAP)	X	502,157,384			521,122,466			507,062,805			527,261,384
Net income available to common stockholders (GAAP)	D		$341			$290			$972