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

March 31, 2018

[ ] 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 484,726,571 shares of Registrant’s common stock ($0.01 par value) outstanding on May 1, 2018.





	Table of Contents


Glossary of Acronyms and Terms		3

Part I. Financial Information		5

Item 1. Financial Statements		50

Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017 (unaudited)		51
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2018 and 2017		52
Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2018 and 2017		53
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2018 and 2017		54
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2018 and 2017		55
Notes to the Consolidated Financial Statements (unaudited)		56

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk		100

Item 4. Controls and Procedures		100


Part II. Other Information		101

Item 1. Legal Proceedings		101
Item 1A. Risk Factors		101
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		101
Item 6. Exhibits		101


Signature		103

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, 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		Board of Governors of the Federal Reserve System and, as applicable, Federal Reserve Bank(s)
Freddie Mac (FHLMC)		Federal Home Loan Mortgage Corporation
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

CITIZENS FINANCIAL GROUP, INC.



MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSRs		Mortgage Servicing Rights
New England		Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont
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 portfolio
SEC		United States Securities and Exchange Commission
SVaR		Stressed Value at Risk
TBAs		To-Be Announced securities
TDR		Troubled Debt Restructuring
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		9
Selected Consolidated Financial Data		11
Results of Operations		13
Net Income		13
Net Interest Income		13
Noninterest Income		15
Provision for Credit Losses		16
Noninterest Expense		16
Income Tax Expense		16
Business Operating Segments		17
Analysis of Financial Condition		22
Securities		22
Loans and Leases		23
Allowance for Credit Losses and Nonperforming Assets		23
Derivatives		28
Deposits		29
Borrowed Funds		30
Capital and Regulatory Matters		31
Liquidity		35
Off-Balance Sheet Arrangements		39
Critical Accounting Estimates		39
Risk Governance		40
Market Risk		40
Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations		46

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 and political 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, and changes in the competitive environment;


•	Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals;


•	Our ability to meet heightened 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 repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.

More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2017.

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 $153.5 billion in assets as of March 31, 2018. 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 3,300 ATMs and approximately 1,150 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 unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Item 1 of this Form 10-Q, as well as other information contained in this document and our Annual Report on Form 10-K for the year ended December 31, 2017.

Key Performance Metrics Used by Management and Non-GAAP Financial Measures

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.

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, 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.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 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 (*).

For additional information regarding our non-GAAP financial measures and reconciliations, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations,” included in this report.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL PERFORMANCE

First Quarter 2018 compared with First Quarter 2017 - Key Highlights

First quarter 2018 net income of $388 million increased 21% from $320 million in first quarter 2017, with earnings per diluted common share of $0.78, up 28% from $0.61 per diluted common share in first quarter 2017. First quarter 2018 ROTCE of 11.7% improved from 9.7% in first quarter 2017.

There were no notable items recorded in first quarter 2018.* The following table presents results for first quarter 2017, including a $23 million benefit, or $0.04 per diluted common share, related to the settlement of certain state tax matters:



	Three Months Ended March 31,
	2018				2017
(in millions)	Income tax expense		Net Income		Income tax expense			Net Income
Reported results (GAAP)		$113		$388		$114			$320
Less Notable items: Settlement of certain state tax matters	—		—		(23		)	23
Underlying results (Non-GAAP)		$113		$388		$137			$297

“Underlying” results, as applicable, exclude a first quarter 2017 $23 million benefit related to the settlement of certain state tax matters. Where there is a reference to “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 “—Introduction — Key Performance Metrics Used By Management and Non-GAAP Financial Measures” and “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations.”


•	Net income available to common stockholders of $381 million increased $68 million, or 22%, compared to $313 million in first quarter 2017.


◦	On an Underlying basis,* excluding a first quarter 2017 $23 million impact from the settlement of certain tax matters, net income available to common shareholders increased by 31%, led by 6% revenue growth with 9% growth in net interest income, given a 3% average loan growth and a 20 basis point increase in net interest margin.


•	Generated operating leverage of 2% and ROTCE of 11.7%, despite the impact of continued investing to drive future growth.


◦	On an Underlying basis,* ROTCE improved 2.7% from 9.0%.


•	Return on average common equity was 7.8% compared to 6.5% for first quarter 2017.


◦	On an Underlying basis,* return on average common equity improved 178 bps from 6.1% for first quarter 2017.


•	Diluted earnings per common share increased $0.17, or 28%.


◦	On an Underlying basis,* diluted earnings per share increased $0.21, or 37%.


•	Tangible book value per common share improved 5% to $27.24. Fully diluted average common shares outstanding decreased by 22.1 million shares.


•	Total revenue of $1.5 billion increased $78 million, or 6%, driven by strong net interest income growth:


◦	Net interest income of $1.1 billion increased $86 million, or 9%, compared to $1.0 billion in first quarter 2017, driven by a 20 basis point improvement in net interest margin and 3% average loan growth.


◦	Net interest margin of 3.16% increased 20 basis points, compared to 2.96% in first quarter 2017, reflecting higher interest-earning asset yields tied to higher interest rates and improving loan mix towards higher-return categories, partially offset by higher deposit and funding costs.


◦	Noninterest income of $371 million decreased $8 million, or 2%, from first quarter 2017, driven by a $9 million decrease in capital market fees from near-record first quarter 2017 levels, as well as lower other income.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

•

Noninterest expense of $883 million increased $29 million, or 3%, compared to $854 million in first quarter 2017. Results reflect higher salaries and employee benefits cost, largely reflecting annual merit increases, increased stock-based compensation costs and revenue-driven incentives and the impact of strategic growth initiatives, as well as higher outside services expense largely tied to Consumer Banking strategic growth initiatives.


•	Provision for credit losses of $78 million decreased $18 million, or 19%, from $96 million in first quarter 2017, despite the impact the of an $8 million reserve build, reflecting lower commercial net charge-offs, partially offset by expected seasoning in retail portfolios.


•	The income tax rate decreased to 22.5% from 26.4% in first quarter 2017. The decrease in the effective income tax rate was primarily driven by the impact of tax reform, partially offset by the prior year settlement of certain state tax matters.


◦	On an Underlying basis,* the effective income tax rate decreased to 22.5% from 31.6% in first quarter 2017.

•

Net charge-offs of $70 million decreased $17 million, or 20%, from $87 million in first quarter 2017. The ALLL of $1.2 billion increased $10 million compared to December 31, 2017. ALLL to total loans and leases of 1.12% as of March 31, 2018 remained stable compared to December 31, 2017. ALLL to nonperforming loans and leases ratio was 144% as of March 31, 2018, compared with 142% as of December 31, 2017.


•	Average loans and leases of $111.1 billion increased $3.1 billion, or 3%, from $108.1 billion in first quarter 2017, reflecting a $2.5 billion increase in retail loans and a $589 million increase in commercial loans and leases.


•	Average deposits of $113.4 billion increased $3.5 billion, or 3%, from $110.0 billion in first quarter 2017, reflecting strength in term, checking with interest, savings and demand deposits.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SELECTED CONSOLIDATED FINANCIAL DATA

The summary Consolidated Operating Data for the three months ended March 31, 2018 and 2017 and the summary Consolidated Balance Sheet data as of March 31, 2018 and December 31, 2017 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 the fair presentation of the information set forth herein. Our operating results for the three months ended March 31, 2018 are not necessarily indicative of those to be expected for the year ending December 31, 2018 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 March 31,
(dollars in millions, except per-share amounts)	2018			2017
OPERATING DATA:
Net interest income		$1,091			$1,005
Noninterest income	371			379
Total revenue	1,462			1,384
Provision for credit losses	78			96
Noninterest expense	883			854
Income before income tax expense	501			434
Income tax expense	113			114
Net income		$388			$320
Net income available to common stockholders		$381			$313
Net income per common share - basic		$0.78			$0.61
Net income per common share - diluted		$0.78			$0.61
OTHER OPERATING DATA:
Return on average common equity	7.83		%	6.52		%
Return on average tangible common equity	11.71			9.68
Return on average total assets	1.04			0.87
Return on average total tangible assets	1.08			0.91
Efficiency ratio	60.43			61.68
Operating leverage	2.14			6.86
Net interest margin	3.16			2.96
Effective income tax rate	22.52			26.36

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



(dollars in millions)	March 31, 2018			December 31, 2017
BALANCE SHEET DATA:
Total assets		$153,453			$152,336
Loans held for sale, at fair value	478			497
Other loans held for sale	322			221
Loans and leases	111,425			110,617
Allowance for loan and lease losses	(1,246		)	(1,236		)
Total securities	25,433			25,733
Goodwill	6,887			6,887
Total liabilities	133,394			132,066
Total deposits	115,730			115,089
Federal funds purchased and securities sold under agreements to repurchase	315			815
Other short-term borrowed funds	1,494			1,856
Long-term borrowed funds	13,486			11,765
Total stockholders’ equity	20,059			20,270
OTHER BALANCE SHEET DATA:
Asset Quality Ratios:
Allowance for loan and lease losses as a percentage of total loans and leases	1.12		%	1.12		%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases	144			142
Nonperforming loans and leases as a percentage of total loans and leases	0.78			0.79
Capital Ratios:
CET1 capital ratio ⁽¹⁾	11.2		%	11.2		%
Tier 1 capital ratio ⁽²⁾	11.4			11.4
Total capital ratio ⁽³⁾	13.9			13.9
Tier 1 leverage ratio ⁽⁴⁾	10.0			10.0

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

⁽²⁾“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.

⁽³⁾“Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

⁽⁴⁾ “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

RESULTS OF OPERATIONS

Net Income

Net income totaled $388 million, up $68 million, or 21%, from $320 million in first quarter 2017. The following table presents the significant components of our net income:



	Three Months Ended March 31,
(dollars in millions)	2018			2017			Change			Percent
Operating Data:
Net interest income		$1,091			$1,005			$86		9	%
Noninterest income	371			379			(8		)	(2	)
Total revenue	1,462			1,384			78			6
Provision for credit losses	78			96			(18		)	(19	)
Noninterest expense	883			854			29			3
Income before income tax expense	501			434			67			15
Income tax expense	113			114			(1		)	(1	)
Net income		$388			$320			$68		21
Net income available to common stockholders		$381			$313			$68		22	%
Return on average common equity	7.83		%	6.52		%	131		bps
Return on average tangible common equity	11.71		%	9.68		%	203		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 “—Market Risk — Non-Trading Risk,” included in this report and “—Risk Governance” as described in our Annual Report on Form 10-K for the year ended December 31, 2017.

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 March 31,
	2018							2017							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		$1,442			$6	1.61	%		$1,965			$3	0.63	%		($523	)	98 bps
Taxable investment securities	25,433			168		2.64		25,789			160		2.48		(356		)	16
Non-taxable investment securities	6			—		2.60		7			—		2.60		(1		)	—
Total investment securities	25,439			168		2.64		25,796			160		2.48		(357		)	16
Commercial	37,960			357		3.77		37,517			312		3.33		443			44
Commercial real estate	11,549			119		4.11		10,821			87		3.21		728			90
Leases	3,114			20		2.61		3,696			23		2.47		(582		)	14
Total commercial	52,623			496		3.77		52,034			422		3.24		589			53
Residential mortgages	17,162			153		3.56		15,285			136		3.55		1,877			1
Home equity loans	1,342			19		5.76		1,793			25		5.66		(451		)	10
Home equity lines of credit	13,353			138		4.20		13,955			118		3.43		(602		)	77
Home equity loans serviced by others	520			9		7.31		719			13		7.02		(199		)	29
Home equity lines of credit serviced by others	142			1		3.98		207			2		3.75		(65		)	23
Automobile	13,015			112		3.47		13,772			107		3.16		(757		)	31
Education	8,283			114		5.58		6,837			88		5.23		1,446			35
Credit cards	1,828			48		10.70		1,665			46		11.16		163			(46	)
Other retail	2,847			56		7.97		1,798			35		7.94		1,049			3
Total retail	58,492			650		4.49		56,031			570		4.11		2,461			38
Total loans and leases	111,115			1,146		4.15		108,065			992		3.69		3,050			46
Loans held for sale, at fair value	420			4		3.84		510			4		3.31		(90		)	53
Other loans held for sale	255			4		6.21		74			1		6.62		181			(41	)
Interest-earning assets	138,671			1,328		3.85		136,410			1,160		3.42		2,261			43
Allowance for loan and lease losses	(1,236		)					(1,235		)					(1		)
Goodwill	6,887							6,876							11
Other noninterest-earning assets	7,201							6,735							466
Total assets		$151,523							$148,786							$2,737
Liabilities and Stockholders’ Equity
Checking with interest		$21,665			$26	0.48	%		$20,699			$13	0.26	%		$966		22 bps
Money market accounts	37,084			65		0.71		37,874			41		0.44		(790		)	27
Regular savings	9,627			1		0.05		9,110			1		0.04		517			1
Term deposits	16,503			53		1.30		14,173			31		0.89		2,330			41
Total interest-bearing deposits	84,879			145		0.69		81,856			86		0.43		3,023			26
Federal funds purchased and securities sold under agreements to repurchase ⁽¹⁾	645			1		0.68		882			1		0.24		(237		)	44
Other short-term borrowed funds	1,481			9		2.40		2,963			8		1.05		(1,482		)	135
Long-term borrowed funds	13,549			82		2.44		12,412			60		1.94		1,137			50
Total borrowed funds	15,675			92		2.36		16,257			69		1.68		(582		)	68
Total interest-bearing liabilities	100,554			237		0.95		98,113			155		0.64		2,441			31
Demand deposits	28,544							28,098							446
Other liabilities	2,446							2,868							(422		)
Total liabilities	131,544							129,079							2,465
Stockholders’ equity	19,979							19,707							272
Total liabilities and stockholders’ equity		$151,523							$148,786							$2,737
Interest rate spread						2.90	%						2.78	%				12
Net interest income					$1,091							$1,005
Net interest margin						3.16	%						2.96	%				20 bps
Memo: Total deposits (interest-bearing and demand)		$113,423			$145	0.52	%		$109,954			$86	0.32	%		$3,469		20 bps

⁽¹⁾Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. See “—Analysis of Financial Condition — Derivatives” for further information.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net interest income of $1.1 billion increased $86 million, or 9%, compared to $1.0 billion in first quarter 2017, reflecting 3% average loan growth and a 20 basis point improvement in net interest margin.

Average interest-earning assets of $138.7 billion increased $2.3 billion, or 2%, from first quarter 2017, driven by a $589 million increase in average commercial loans and leases and a $2.5 billion increase in average retail loans, partially offset by an $880 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by strength in commercial and commercial real estate. Retail loan growth was driven by strength in residential mortgages, education, and other retail.

Average deposits of $113.4 billion increased $3.5 billion from first quarter 2017, reflecting growth in term deposits, checking with interest, savings and demand deposits, partially offset by a decrease in money market deposits. Total interest-bearing deposit costs of $145 million increased $59 million, or 69%, from $86 million in first quarter 2017, primarily due to the impact of rising rates and a shift in mix toward commercial deposits.

Average total borrowed funds of $15.7 billion decreased $582 million from first quarter 2017, reflecting a decrease in other short-term borrowed funds and a decrease in federal funds purchased and repurchase agreements, partially offset by an increase in average long-term borrowed funds, primarily senior debt. Total borrowed funds costs of $92 million increased $23 million from first quarter 2017. The total borrowed funds yield of 2.36% increased 68 basis points from 1.68% in first quarter 2017 due to an increase in long-term rates and a mix shift to long-term senior debt.

Net interest margin of 3.16% increased 20 basis points compared to 2.96% in first quarter 2017, driven by higher interest-earning asset yields given higher interest rates and continued mix shift toward higher-yielding assets. These results were partially offset by the impact of higher deposit and funding costs. Average interest-earning asset yields of 3.85% increased 43 basis points from 3.42% in first quarter 2017, while average interest-bearing liability costs of 0.95% increased 31 basis points from 0.64% in first quarter 2017.

Noninterest Income

The following table presents the significant components of our noninterest income:



	Three Months Ended March 31,
(in millions)	2018		2017		Change			Percent
Service charges and fees		$124		$125		($1	)	(1	%)
Card fees	61		60		1			2
Capital markets fees	39		48		(9		)	(19	)
Trust and investment services fees	40		39		1			3
Letter of credit and loan fees	30		29		1			3
Foreign exchange and interest rate products	27		27		—			—
Mortgage banking fees	25		23		2			9
Securities gains, net	8		4		4			100
Other income ⁽¹⁾	17		24		(7		)	(29	)
Noninterest income⁽²⁾		$371		$379		($8	)	(2	%)

⁽¹⁾ Includes net securities impairment losses on debt securities available for sale recognized in earnings, bank-owned life insurance income and other income.

⁽²⁾First quarter 2018 noninterest income amounts reflect the adoption of ASU 2014-09, Revenue From Contracts With Customers (Topic 606).

Noninterest income of $371 million decreased $8 million, or 2%, from first quarter 2017, largely driven by a $9 million reduction in capital market fees, primarily reflecting seasonality and an overall market reduction in middle market loan syndication activity, as well as a $7 million decrease in other income, partially offset by a $4 million increase in net securities gains and a $2 million increase in mortgage banking fees.

We adopted ASU 2014-09, Revenue From Contracts With Customers (Topic 606), on January 1, 2018 under the modified retrospective method. Adoption of the new standard did not result in a change in the timing or amount of revenue recognized from contracts with customers.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Provision for Credit Losses

The provision for credit losses of $78 million decreased $18 million from $96 million in first quarter 2017, reflecting the impact of continued improvement in overall credit quality and a decline in total net charge-offs, partially offset by the impact of loan growth. First quarter 2018 results reflected an $8 million reserve build, compared to a $9 million reserve build in first quarter 2017, largely due to loan volume growth, partially offset by the shift in asset mix toward lower risk retail loans. Net charge-offs of $70 million were $17 million lower than first quarter 2017, primarily reflecting lower commercial losses.

The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ALLL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.

Noninterest Expense

The following table presents the significant components of our noninterest expense:



	Three Months Ended March 31,
(in millions)	2018		2017		Change			Percent
Salaries and employee benefits⁽¹⁾		$470		$446		$24		5	%
Outside services	99		91		8			9
Occupancy	81		82		(1		)	(1	)
Equipment expense	67		67		—			—
Amortization of software	46		44		2			5
Other operating expense⁽¹⁾	120		124		(4		)	(3	)
Noninterest expense		$883		$854		$29		3	%

⁽¹⁾Salaries and employee benefits and other operating expense amounts reflect the impact of the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

Noninterest expense of $883 million increased $29 million, or 3%, from first quarter 2017, reflecting an increase in salaries and employee benefits driven by higher revenue-based incentives and merit increases. First quarter 2018 also reflected an increase in outside service costs given investment in strategic initiatives as well as higher amortization of software, partially offset by lower other operating expense, compared to first quarter 2017.

As of January 1, 2018, we retrospectively adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the service cost component of net periodic pension and postretirement benefit cost to be reported separately in the Consolidated Statements of Operations from the other components. The adoption resulted in the presentation of the service cost component of net periodic pension cost in salaries and employee benefits and all other components of net periodic pension cost in other operating expense. Prior periods have been adjusted to conform with the current period presentation.

Income Tax Expense

Income tax expense was $113 million and $114 million in first quarter 2018 and 2017, respectively. Our effective tax rates in first quarter 2018 and 2017 were 22.5% and 26.4%, respectively. The decrease in the effective income tax rate was primarily driven by the impact of tax reform, partially offset by the prior year settlement of certain state tax matters.

At March 31, 2018, our net deferred tax liability was $475 million, compared with $571 million at December 31, 2017. The decrease in the net deferred tax liability was primarily attributable to the tax effect of net unrealized losses on securities and derivatives. For further discussion, see Note 15 “Income Taxes” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Business Operating Segments

The following tables present certain financial data of our business operating segments, Other and consolidated:



	As of and for the Three Months Ended March 31, 2018
(dollars in millions)	Consumer Banking			Commercial Banking			Other⁽⁴⁾			Consolidated
Net interest income ⁽¹⁾		$733			$357			$1			$1,091
Noninterest income	222			125			24			371
Total revenue	955			482			25			1,462
Noninterest expense	656			208			19			883
Profit before provision for credit losses	299			274			6			579
Provision for credit losses	72			(4		)	10			78
Income (loss) before income tax expense (benefit)	227			278			(4		)	501
Income tax expense (benefit)	57			63			(7		)	113
Net income		$170			$215			$3			$388
Loans and leases (period-end) ⁽²⁾		$59,795			$49,868			$2,562			$112,225
Average Balances:
Total assets		$61,348			$50,393			$39,782			$151,523
Total loans and leases ⁽²⁾	59,942			49,285			2,563			111,790
Deposits	75,416			30,766			7,241			113,423
Interest-earning assets	59,994			49,479			29,198			138,671
Key Performance Metrics:
Net interest margin ⁽³⁾	4.96		%	2.93		%	NM			3.16		%
Efficiency ratio	68.72			43.07			NM			60.43
Loans-to-deposits ratio (average balances)⁽²⁾	79.48			160.19			NM			98.56
Return on average total tangible assets ⁽³⁾	1.12			1.73			NM			1.08

⁽¹⁾We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.

⁽²⁾Includes loans held for sale.

⁽³⁾Ratios for the period ended March 31, 2018 are presented on an annualized basis.

⁽⁴⁾Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense, not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of and for the Three Months Ended March 31, 2017
(dollars in millions)	Consumer Banking				Commercial Banking			Other⁽³⁾			Consolidated
Net interest income		$638				$346			$21			$1,005
Noninterest income	220				134			25			379
Total revenue	858				480			46			1,384
Noninterest expense	647				190			17			854
Profit before provision for credit losses	211				290			29			530
Provision for credit losses	64				19			13			96
Income before income tax expense (benefit)	147				271			16			434
Income tax expense (benefit)	52				91			(29		)	114
Net income		$95				$180			$45			$320
Loans and leases (period-end) ⁽¹⁾		$57,494				$48,013			$3,273			$108,780
Average Balances:
Total assets		$58,660				$49,243			$40,883			$148,786
Total loans and leases ⁽¹⁾	57,309			—	48,154			3,186			108,649
Deposits	74,133				28,973			6,848			109,954
Interest-earning assets	57,361				48,283			30,766			136,410
Key Performance Metrics
Net interest margin ⁽²⁾	4.51		%		2.91		%	NM			2.96		%
Efficiency ratio	75.41				39.80			NM			61.68
Loans-to-deposits ratio (average balances)⁽¹⁾	77.31				166.20			NM			98.81
Return on average total tangible assets ⁽²⁾	0.66				1.48			NM			0.91

⁽¹⁾ Includes loans held for sale.

⁽²⁾Ratios for the period ended March 31, 2017 are presented on an annualized basis.

⁽³⁾Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense, not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.”

We operate through two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and their related revenues, provision for credit losses and expenses. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets, community development, non-core assets (including legacy Royal Bank of Scotland Group plc aircraft loan and leasing), and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses, including income tax expense. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.” In addition, Other includes goodwill and any associated goodwill impairment charges. For impairment testing purposes, we allocate goodwill to Consumer Banking and Commercial Banking reporting units. For management reporting purposes, we present the goodwill balance (and any related impairment charges) in Other.

Our capital levels are evaluated and managed centrally, however, capital is allocated to the business operating segments to support evaluation of business performance. Business operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. Interest income and expense is determined based on the assets and liabilities managed by the business operating segment. Because funding and asset liability management is a central function, funds transfer pricing (“FTP”) methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business operating segment assets, liabilities and capital, respectively, using a matched-funding concept. The residual effect on net interest income of asset/liability management, including the residual net interest income related to the FTP process, is included in Other. We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In the first quarter of 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Provision for credit losses is allocated to each business operating segment based on actual net charge-offs that have been recognized by the business operating segment. The difference between the consolidated provision for credit losses and the business operating segments’ net charge-offs is reflected in Other.

Noninterest income and expense directly managed by each business operating segment, including fees, service charges, salaries and benefits, and other direct revenues and costs are accounted for within each business operating segment’s financial results in a manner similar to our unaudited interim Consolidated Financial Statements. Occupancy costs are allocated based on utilization of facilities by each business operating segment. Noninterest expenses incurred by centrally managed operations or business operating segments that directly support another business operating segment’s operations are charged to the applicable business operating segment based on its utilization of those services.

Income taxes are assessed to each business operating segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.

Developing and applying methodologies used to allocate items among the business operating segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines change, or our organizational structure changes.

Consumer Banking



	As of and for the Three Months Ended March 31,
(dollars in millions)	2018			2017			Change			Percent
Net interest income ⁽¹⁾		$733			$638			$95		15	%
Noninterest income	222			220			2			1
Total revenue	955			858			97			11
Noninterest expense	656			647			9			1
Profit before provision for credit losses	299			211			88			42
Provision for credit losses	72			64			8			13
Income before income tax expense	227			147			80			54
Income tax expense	57			52			5			10
Net income		$170			$95			$75		79
Loans (period-end) ⁽²⁾		$59,795			$57,494			$2,301		4
Average Balances:
Total assets		$61,348			$58,660			$2,688		5	%
Total loans and leases ⁽²⁾	59,942			57,309			2,633			5
Deposits	75,416			74,133			1,283			2
Interest-earning assets	59,994			57,361			2,633			5
Key Performance Metrics:
Net interest margin ⁽³⁾	4.96		%	4.51		%	45		bps
Efficiency ratio	68.72			75.41			(669		) bps
Loans-to-deposits ratio (average balances)⁽²⁾	79.48			77.31			217		bps
Return on average total tangible assets ⁽³⁾	1.12			0.66			46		bps

⁽²⁾ Includes loans held for sale.

⁽³⁾Ratios for the periods ended March 31, 2018 and 2017 are presented on an annualized basis.

Consumer Banking net income of $170 million increased $75 million, or 79%, from $95 million in first quarter 2017, as the benefit of a $97 million increase in total revenue more than offset a $9 million increase in noninterest expense. Net interest income of $733 million increased $95 million, or 15%, from first quarter 2017, driven by the impact of the FTP methodology enhancement as well as the benefit of a $2.6 billion increase in average loans led by residential mortgage, education and retail unsecured categories with higher loan yields that included the benefit of higher rates, partially offset by an increase in deposit costs.

Noninterest income increased $2 million, or 1%, from first quarter 2017, driven by an increase in mortgage banking fees and trust and investment services fees, partially offset by lower service charges and fees. Noninterest

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

expense of $656 million increased $9 million, or 1%, from first quarter 2017, driven by higher salaries and benefits and outside services. These results were partially offset by lower credit collection costs. Provision for credit losses of $72 million increased $8 million, or 13%, largely driven by higher net charge-offs in auto and retail unsecured categories.

Commercial Banking



	As of and for the Three Months Ended March 31,
(dollars in millions)	2018			2017			Change			Percent
Net interest income ⁽¹⁾		$357			$346			$11		3	%
Noninterest income	125			134			(9		)	(7	)
Total revenue	482			480			2			—
Noninterest expense	208			190			18			9
Profit before provision for credit losses	274			290			(16		)	(6	)
Provision for credit losses	(4		)	19			(23		)	(121	)
Income before income tax expense	278			271			7			3
Income tax expense	63			91			(28		)	(31	)
Net income		$215			$180			$35		19
Loans and leases (period-end) ⁽²⁾		$49,868			$48,013			$1,855		4
Average Balances:
Total assets		$50,393			$49,243			$1,150		2	%
Total loans and leases ⁽²⁾	49,285			48,154			1,131			2
Deposits	30,766			28,973			1,793			6
Interest-earning assets	49,479			48,283			1,196			2
Key Performance Metrics:
Net interest margin ⁽³⁾	2.93		%	2.91		%	2		bps
Efficiency ratio	43.07			39.80			327		bps
Loans-to-deposits ratio (average balances)⁽²⁾	160.19			166.20			(601		) bps
Return on average total tangible assets ⁽³⁾	1.73			1.48			25		bps

⁽²⁾ Includes loans held for sale.

⁽³⁾Ratios for the periods ended March 31, 2018 and 2017 are presented on an annualized basis.

Commercial Banking net income of $215 million increased $35 million, or 19%, from $180 million in first quarter 2017, as the benefit of a $2 million increase in total revenue and a $23 million decrease in provision for credit losses was partially offset by an $18 million increase in noninterest expense. Net interest income of $357 million increased $11 million, or 3%, from $346 million in first quarter 2017, reflecting a $1.1 billion increase in average loans and leases and a $1.8 billion increase in average deposits.

Noninterest income of $125 million decreased $9 million, or 7%, from $134 million in first quarter 2017, reflecting lower capital markets and leasing fees. Noninterest expense of $208 million increased $18 million, or 9%, from $190 million in first quarter 2017, largely driven by higher salaries and employee benefits and outside services. Provision for credit losses decreased $23 million from first quarter 2017, driven by lower net charge-offs.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other



	As of and for the Three Months Ended March 31,
(in millions)	2018			2017			Change			Percent
Net interest income ⁽¹⁾		$1			$21			($20	)	(95	%)
Noninterest income	24			25			(1		)	(4	)
Total revenue	25			46			(21		)	(46	)
Noninterest expense	19			17			2			12
Profit before provision for credit losses	6			29			(23		)	(79	)
Provision for credit losses	10			13			(3		)	(23	)
(Loss) income before income tax benefit	(4		)	16			(20		)	(125	)
Income tax benefit	(7		)	(29		)	22			76
Net income		$3			$45			($42	)	(93	)
Loans and leases (period-end) ⁽²⁾		$2,562			$3,273			($711	)	(22	)
Average Balances:
Total assets		$39,782			$40,883			($1,101	)	(3	%)
Total loans and leases ⁽²⁾	2,563			3,186			(623		)	(20	)
Deposits	7,241			6,848			393			6
Interest-earning assets	29,198			30,766			(1,568		)	(5	)

⁽¹⁾ We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. In first quarter 2018, we enhanced our assumptions for the liquidity and deposit components within our FTP methodology which provides a credit for sources of funds and a charge for the use of funds by each business operating segment. The enhancement largely provides increased credit for the stability of deposit composition, and an increased charge for unused commitments under lending arrangements. Prior periods have not been adjusted for this change.

⁽²⁾ Includes loans held for sale.

Other net income of $3 million decreased from $45 million in first quarter 2017, primarily driven by a $23 million benefit related to the settlement of state tax matters in first quarter 2017 and lower net interest income. Net interest income decreased $20 million, including an FTP methodology enhancement. Results also reflected lower net charge-offs and a reserve build of $8 million in first quarter 2018, compared to a reserve build of $9 million in first quarter 2017.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

ANALYSIS OF FINANCIAL CONDITION

Securities

Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns. The following table presents our securities AFS and HTM:



	March 31, 2018				December 31, 2017
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Change in Fair Value
Debt Securities Available for Sale, At Fair Value:⁽¹⁾
U.S. Treasury and other		$12		$12		$12		$12		$—		—	%
State and political subdivisions	6		6		6		6		—			—
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	20,257		19,654		20,065		19,828		(174		)	(1	)
Other/non-agency	288		286		311		311		(25		)	(8	)
Total mortgage-backed securities	20,545		19,940		20,376		20,139		(199		)	(1	)
Total debt securities available for sale, at fair value		$20,563		$19,958		$20,394		$20,157		($199	)	(1	%)
Debt Securities Held to Maturity:⁽¹⁾
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities		$3,747		$3,622		$3,853		$3,814		($192	)	(5	%)
Other/non-agency	808		817		832		854		(37		)	(4	)
Total mortgage-backed securities	4,555		4,439		4,685		4,668		(229		)	(5	)
Total debt securities held to maturity		$4,555		$4,439		$4,685		$4,668		($229	)	(5	)
Total debt securities available for sale and held to maturity		$25,118		$24,397		$25,079		$24,825		($428	)	(2	%)
Equity Securities:⁽¹⁾
Equity securities, at fair value		$172		$172		$169		$169		$3		2	%
Equity securities, at cost	748		748		722		722		26			4
Total equity securities		$920		$920		$891		$891		$29		3	%

⁽¹⁾As of January 1, 2018, we adopted ASU 2016-01, Financial Instruments, Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet.

As of March 31, 2018, the fair value of the AFS and HTM debt securities portfolio decreased $428 million to $24.4 billion, compared with $24.8 billion as of December 31, 2017. The decline in fair value of the AFS debt portfolio of $199 million was attributable to an increase in net unrealized losses on mortgage-backed securities of $368 million due to higher interest rates over the period. This was partially offset by a net reinvestment of proceeds from maturities and paydowns of $169 million. The decline in the fair value of the HTM debt portfolio of $229 million was attributable to net principal paydowns of $130 million, which were not reinvested in the HTM portfolio as well as a $99 million increase in net unrealized losses on mortgage-backed securities due to higher interest rates over the period.

As of March 31, 2018, the portfolio’s average effective duration was 4.4 years compared with 3.9 years as of December 31, 2017, as higher long-term rates drove a decrease in securities prepayment speeds. We manage the securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetite in the context of the broader Interest Rate Risk in the Banking Book framework and limits.

The securities portfolio includes high-quality, highly-liquid investments reflecting our ongoing commitment to maintaining appropriate contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and government-sponsored entity-issued mortgage-backed securities represent 95% of the fair value of the debt securities portfolio holdings. The portfolio composition is also dominated by holdings backed by mortgages to facilitate our ability to pledge them to the FHLBs, which has become increasingly important due to the enhanced liquidity

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

requirements of the liquidity coverage ratio and the liquidity stress test. For further discussion of the liquidity coverage ratios, see “Regulation and Supervision — Liquidity Standards” in Part I — Business, included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Loans and Leases

Our loans and leases are disclosed in portfolio segments and classes. Our loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential mortgages, home equity loans, home equity lines of credit, home equity loans serviced by others, home equity lines of credit serviced by others, automobile, education, credit cards and other retail. Our SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others, which we service a portion of internally. The following table shows the composition of loans and leases, including non-core loans, as of:

(in millions)

March 31, 2018