CITIZENS FINANCIAL GROUP INC/RI (Form: 10-K, Received: 02/21/2019 16:15:54)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended

December 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 )

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common stock, $0.01 par value per share		New York Stock Exchange
Depositary Shares each representing a 1/40 ^th interest in a share of 6.350% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ü ] Yes [ ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [ ü ] No

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 (or for such shorter period that the registrant was required to file such reports) 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 every Interactive Data File required to be submitted 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 such files). [ ü ] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ü ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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	[ ]	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

The aggregate market value of voting stock held by nonaffiliates of the Registrant was $18,789,421,828 (based on the June 30, 2018 closing price of Citizens Financial Group, Inc. common shares of $38.90 as reported on the New York Stock Exchange). There were 460,390,006 shares of Registrant’s common stock ($0.01 par value) outstanding on February 1, 2019.

Documents incorporated by reference

Portions of Citizens Financial Group, Inc.’s proxy statement to be filed with the United States Securities and Exchange Commission in connection with Citizens Financial Group, Inc.’s 2019 annual meeting of stockholders (the “Proxy Statement”) are incorporated by reference into Part III hereof. Such Proxy Statement will be filed within 120 days of Citizens Financial Group, Inc.’s fiscal year ended December 31, 2018 .





	Table of Contents

		Page
Glossary of Acronyms and Terms		2
Forward-looking Statements		4

Part I.

Item 1. Business		5
Item 1A. Risk Factors		22
Item 1B. Unresolved Staff Comments		36
Item 2. Properties		36
Item 3. Legal Proceedings		36
Item 4. Mine Safety Disclosures		36

Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		37
Item 6. Selected Consolidated Financial Data		39
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations		41
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		111
Item 8. Financial Statements and Supplementary Data		112

Consolidated Balance Sheets as of December 31, 2018 and 2017		116
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016		117
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016		118
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016		119
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016		120
Notes to the Consolidated Financial Statements		122
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		191
Item 9A. Controls and Procedures		191
Item 9B. Other Information		191

Part III.

Item 10. Directors, Executive Officers and Corporate Governance		192
Item 11. Executive Compensation		192
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		192
Item 13. Certain Relationships and Related Transactions, and Director Independence		192
Item 14. Principal Accountant Fees and Services		192

Part IV.

Item 15. Exhibits and Financial Statement Schedules		193
Item 16. Form 10-K Summary		197

Signatures		197

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:



2017 Tax Legislation		An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act)
ACL		Allowance for Credit Losses
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 or 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
CCMI		Citizens Capital Markets, Inc.
CET1		Common Equity Tier 1
CFPB		Consumer Financial Protection Bureau
CFTC		Commodity Futures Trading Commission
Citizens or CFG or the Company		Citizens Financial Group, Inc. and its Subsidiaries
CLTV		Combined Loan-to-Value
CLO		Collateralized Loan Obligation
CMO		Collateralized Mortgage Obligation
CRA		Community Reinvestment Act
CRE		Commercial Real Estate
DFAST		Dodd-Frank Act Stress Test
DIF		Deposit Insurance Fund
Dodd-Frank Act		The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS		Earnings Per Share
ESPP		Employee Stock Purchase Program
ERISA		Employee Retirement Income Security Act of 1974
Exchange Act		The Securities Exchange Act of 1934
FAMC		Franklin American Mortgage Company
FAMC acquisition		The August 1, 2018 acquisition of Franklin American Mortgage Company
Fannie Mae (FNMA)		Federal National Mortgage Association
FASB		Financial Accounting Standards Board
FDIA		Federal Deposit Insurance Act
FDIC		Federal Deposit Insurance Corporation
FFIEC		Federal Financial Institutions Examination Council
FHLB		Federal Home Loan Bank
FICO		Fair Isaac Corporation (credit rating)
FINRA		Financial Industry Regulation Authority

CITIZENS FINANCIAL GROUP, INC.



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
GDP		Gross Domestic Product
GLBA		Gramm-Leach-Bliley Act of 1999
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
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mid-Atlantic		District of Columbia, Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, and West Virginia
Midwest		Illinois, Indiana, Michigan, and Ohio
MSA		Metropolitan Statistical Area
MSR		Mortgage Servicing Right
New England		Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont
NM		Not meaningful
NPR		Notice of Proposed Rulemaking
NSFR		Net Stable Funding Ratio
NYSE		New York Stock Exchange
OCC		Office of the Comptroller of the Currency
OCI		Other Comprehensive Income
OFAC		Office of Foreign Assets Control
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
peers or peer regional banks		BB&T, Comerica, Fifth Third, KeyCorp, M&T, PNC, Regions, SunTrust and U.S. Bancorp
REITs		Real Estate Investment Trusts
ROTCE		Return on Average Tangible Common Equity
RPA		Risk Participation Agreement
SBO		Serviced by Others loan portfolio
SEC		United States Securities and Exchange Commission
SVaR		Stressed Value-at-Risk
TDR		Troubled Debt Restructuring
VaR		Value-at-Risk
VIE		Variable Interest Entities

CITIZENS FINANCIAL GROUP, INC.

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of 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 under “Risk Factors” in Part I, Item 1A, included in this Report.

CITIZENS FINANCIAL GROUP, INC.

PART I

ITEM 1. BUSINESS

Citizens Financial Group, Inc. is the 13th largest retail bank holding company in the United States. ⁽¹⁾ Headquartered in Providence, Rhode Island, Citizens offers a broad range of retail and commercial banking products and services to more than five million individuals, small businesses, middle-market companies, large corporations and institutions, largely through approximately 1,100 branches in 11 states in the New England, Mid-Atlantic and Midwest regions and approximately 140 retail and commercial non-branch offices located in our branch banking footprint and in other states and the District of Columbia, which are contiguous with our footprint. At December 31, 2018, the Company had total assets of $160.5 billion , total deposits of $119.6 billion and total stockholders’ equity of $20.8 billion .

Citizens is a bank holding company which was incorporated under Delaware state law in 1984 and whose primary federal regulator is the Board of Governors of the Federal Reserve System (“FRB”). As of December 31, 2018, our primary subsidiaries were Citizens Bank, N.A. (“CBNA”), a national banking association whose primary federal regulator is the Office of the Comptroller of the Currency (“OCC”), and Citizens Bank of Pennsylvania (“CBPA”), a Pennsylvania-chartered savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the Federal Deposit Insurance Corporation (the “FDIC”) as its primary federal regulator. On January 2, 2019, we consolidated our banking subsidiaries via a merger of CBPA into CBNA in order to streamline governance and enterprise risk management, improve CBNA’s risk profile and gain operational efficiencies. CBNA is now our primary subsidiary and our sole banking subsidiary.

Business Segments

We manage our business through two reportable business operating segments: Consumer Banking and Commercial Banking. The Company’s activities outside the two business operating segments are classified as “Other” and include 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. The Other classification also includes the financial impact of non-core, liquidating loan portfolios and other non-core assets and liabilities. For a description of non-core assets, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Analysis of Financial Condition — Loans and Leases — Non-Core Assets” in Part II, Item 7, of this Report. For additional information regarding our business segments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — 2018 compared with 2017 — Business Operating Segments” in Part II, Item 7 and Note 25 “Business Operating Segments” in the Notes to Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

The following table presents selected financial information for our business operating segments, Other and consolidated:



	For the Year Ended December 31,
	2018									2017
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated		Consumer Banking		Commercial Banking		Other		Consolidated
Net interest income		$3,064		$1,497		($29	)		$4,532		$2,651		$1,411		$111		$4,173
Noninterest income	973		545		78			1,596		905		538		91		1,534
Total revenue	4,037		2,042		49			6,128		3,556		1,949		202		5,707
Noninterest expense	2,723		813		83			3,619		2,593		772		109		3,474
Net income		$767		$927		$27			$1,721		$452		$774		$426		$1,652
Total average loans and leases and loans held for sale		$60,691		$51,344		$2,446			$114,481		$58,371		$48,655		$2,946		$109,972
Total average deposits		$77,542		$30,704		$7,611			$115,857		$74,873		$30,005		$6,996		$111,874

Consumer Banking Segment

Consumer Banking serves retail customers and small businesses with annual revenues of up to $25 million, with products and services that include deposit products, mortgage and home equity lending, credit cards, business loans, wealth management and investment services largely across our 11-state traditional banking footprint. We also offer auto loans, education loans, and unsecured and product financing loans in addition to select digital deposit

⁽¹⁾ According to SNL Financial as of September 30, 2018.

CITIZENS FINANCIAL GROUP, INC.

BUSINESS

products nationwide.

Consumer Banking operates a multi-channel distribution network with a workforce of approximately 6,200 branch colleagues, approximately 1,100 branches, including about 310 in-store locations, and approximately 2,900 ATMs. Our network includes approximately 1,320 specialists covering lending, savings and investment needs as well as a broad range of small business products and services. We serve customers on a national basis through telephone service centers as well as through our online and mobile platforms where we offer customers the convenience of depositing funds, paying bills and transferring money between accounts and from person to person, as well as a host of other everyday transactions.

We believe our strong retail deposit market share in our core regions, which have relatively diverse economies and affluent demographics, is a competitive advantage. As of June 30, 2018, we ranked second by retail deposit market share in the New England region and ranked in the top five in nine of our ten principal MSAs. ⁽¹⁾

The following table presents information regarding our competitive position in our principal MSAs:



(dollars in billions)		Total	Total	Deposit
MSA	Total Branches	Deposits	Deposit Rank	Market Share
Boston, MA	202	$22.1	2	14.0%
Philadelphia, PA	171	15.0	4	11.0
Pittsburgh, PA	118	8.7	2	16.2
Providence, RI	93	8.6	1	26.0
Detroit, MI	81	5.5	6	7.0
Cleveland, OH	51	3.9	4	10.1
Manchester, NH	20	2.5	1	30.2
Buffalo, NY	41	1.9	4	8.9
Albany, NY	22	1.9	3	12.3
Rochester, NY	25	1.7	5	9.6

Source: FDIC, June 2018. Principal MSAs determined by total retail branch count. Deposits capped at $500 million per branch. Excludes “non-retail banks” as defined by SNL Financial. The scope of “non-retail banks” is subject to the discretion of SNL Financial, but typically includes: industrial bank and non-depository trust charters, institutions with more than 20% brokered deposits (of total deposits), institutions with more than 20% credit card loans (of total loans), institutions deemed not to broadly participate in the banking services market and other nonretail competitor banks.

Commercial Banking Segment

Commercial Banking primarily serves companies and institutions with annual revenues of over $25 million to more than $3.0 billion and strives to be our clients’ trusted advisor and preferred provider for their banking needs. We offer a broad complement of financial products and solutions, including lending and leasing, deposit and treasury management services, foreign exchange and interest rate risk management solutions, as well as corporate finance, merger and acquisition, and debt and equity capital markets capabilities.

Commercial Banking is structured along business lines and product groups. The business lines, Corporate Banking and Commercial Real Estate, and the product groups, Treasury Solutions and Corporate Finance & Capital Markets, work in teams to understand client needs and provide comprehensive solutions to meet those needs. We acquire new clients through a coordinated approach to the market, leveraging deep industry knowledge in specialized banking groups and a geographic coverage model.

Our Corporate Banking business line services middle market domestic commercial and industrial clients with annual gross revenues of $25 million to $500 million, and mid-corporate clients with annual revenues of $500 million to more than $3.0 billion. In several areas, such as Healthcare, Technology, and Franchise Finance, we offer a more dedicated and tailored approach to better meet the unique needs of these client segments. Smaller commercial clients, with an affinity for local bank branch support, cluster around our 11 state footprint. Larger clients seeking more specialty financial services expertise are covered nationally. Corporate Banking is a general lending business which offers a broad range of products, including secured and unsecured lines of credit, term loans, commercial mortgages, domestic and global treasury management solutions, trade services, interest rate products, foreign exchange services and letters of credit.

⁽¹⁾ According to SNL Financial.

CITIZENS FINANCIAL GROUP, INC.

BUSINESS

Our Commercial Real Estate business line provides customized debt capital solutions for middle market operators, institutional developers, investors, and REITs. Commercial Real Estate provides financing for projects in the office, multi-family, industrial, retail, healthcare and hospitality sectors.

The Corporate Finance & Global Markets product group serves clients through key product groups including Corporate Finance, Capital Markets, and Global Markets. Corporate Finance provides advisory services to middle market and mid-corporate clients, including mergers and acquisitions and capital structure advice. The team works closely with industry-sector specialists within debt capital markets to advise our clients. Corporate Finance also provides acquisition and follow-on financing for new and recapitalized portfolio companies of key sponsors, services meeting the unique and time-sensitive needs of private equity firms, management companies and funds, and underwriting and portfolio management expertise for leveraged transactions and relationships. Capital Markets originates, structures and underwrites multi-bank syndicated credit facilities targeting middle market, mid-corporate and private equity sponsors with a focus on offering value-added ideas to optimize their capital structures. Citizens Capital Markets, Inc. (“CCMI”), our commercial broker-dealer, advises on and facilitates mergers and acquisitions, valuations, tender offers, financial restructurings, asset sales, divestitures and other corporate reorganizations and business combinations. Global Markets provides foreign exchange and interest rate risk management services.

The Treasury Solutions product group supports Commercial Banking and certain small business clients with treasury management solutions, including domestic and international products and services related to receivables, payables, information reporting and liquidity management as well as commercial credit cards and trade finance.

Business Strategy

Our mission is to help each of our customers, colleagues and communities reach their potential, and our vision is to be a top-performing bank distinguished by our customer-centric culture, mindset of continuous improvement and excellent capabilities. It is embedded in our culture to make sure we understand our customers’ needs so we can tailor advice and solutions to make our customers more successful. Our business strategy is designed to maximize the full potential of our business and drive sustainable growth and enhanced profitability, and our success rests on our ability to distinguish ourselves as follows:

Maintain a high-performing, customer-centric organization: To accomplish this, we are embedding a “customer-first” culture among our managers and colleagues to deliver the best possible banking experience for our customers. For our colleagues, we are driving talent management to the next level, with a focus on attracting, developing and retaining great people, and ensuring strong leadership, teamwork and a sense of accountability and urgency.

Develop differentiated value propositions to acquire, deepen, and retain core customer segments: We have focused on certain customer segments where we believe we are well positioned to compete. In Consumer Banking, we focus on mass market and mass affluent customers. In Commercial Banking, we focus on customers in the middle market, mid-corporate, and certain industry vertical areas. By developing differentiated and targeted value propositions, we believe we can attract new customers, deepen relationships with existing customers, and deliver an enhanced customer experience.

Build excellent capabilities that will allow us to stand out from our competitors: Across our businesses we strive to deliver seamless, multi-channel experiences and allow customers to interact with us when, where and how they want. We are building out enhanced data analytics capabilities to provide timely, insight-driven and tailored advice and continue to add new capabilities that help deliver solutions for our consumer and business customers throughout their lifecycles. We are also focused on expanding our digital capabilities and related strategies in order to satisfy rapidly changing customer preferences.

CITIZENS FINANCIAL GROUP, INC.

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Operate with financial discipline and a mindset of continuous improvement to self-fund investments: We believe that continued focus on operational efficiency is critical to our profitability and the ability to continue to reinvest to drive future growth. We launched the first Tapping our Potential (“TOP”) initiative in late 2014 which was designed to improve the effectiveness, efficiency, and competitiveness of the franchise, and we commenced the fifth phase of this initiative in the second half of 2018.

Prudently grow and optimize our balance sheet: We operate with a strong balance sheet with regard to capital, liquidity and funding, coupled with a well-defined and prudent risk appetite. We are prudently growing our balance sheet and we strive to deliver attractive risk-adjusted returns by making good capital and resource allocation decisions through our balance sheet optimization initiatives, being good stewards of our resources, and rigorously evaluating our execution.

Modernize our technology and operational models to improve delivery, agility and speed to market: We are continuing to modernize our technology environment so that we can accelerate our speed-to-market and take advantage of technology opportunities in the marketplace. We are also investing in new technologies and leveraging those technologies to deliver better customer outcomes efficiently in order to deliver on our overall financial objectives. We have also engaged in FinTech partnerships that help deliver differentiated digital experiences for our customers.

Embed risk management within our culture and our operations: We are continuing to strengthen our risk management culture and processes as the quality of our risk management program directly affects our ability to execute our strategy, deliver value to our stakeholders and become a top-performing bank. Moreover, our continuous and disciplined enhancements to our processes and talent, as well as our ongoing investments in risk technology and frameworks, serve to support and bolster our risk management capabilities and our regulatory profile.

Competition

The financial services industry is highly competitive. Our branch footprint is in the New England, Mid-Atlantic and Midwest regions, though certain lines of business serve national markets. Within these markets we face competition from community banks, super-regional and national financial institutions, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, hedge funds and private equity firms. Some of our larger competitors may make available to their customers a broader array of product, pricing and structure alternatives while some smaller competitors may have more liberal lending policies and processes. Competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The ability of non-banking financial institutions, including FinTech companies, to provide services previously limited to commercial banks has also intensified competition.

In Consumer Banking, the industry has become increasingly dependent on and oriented toward technology-driven delivery systems, permitting transactions to be conducted through telephone, online and mobile channels. In addition, technology has lowered barriers to entry and made it possible for non-bank institutions to attract funds and provide lending and other financial services in our footprint, despite not having a physical presence there. The emergence of digital-only banking models has increased and we expect this trend to continue. Given their lower cost structure, these institutions are often able to offer on average higher rates on deposit products than retail banking institutions with a traditional branch footprint. The primary factors driving competition for loans and deposits are interest rates, fees charged, tailored value propositions to different customer segments, customer service levels, convenience, including branch location and hours of operation, and the range of products and services offered.

In Commercial Banking, there is intense competition for quality loan originations from traditional banking institutions, particularly large regional banks, as well as commercial finance companies, leasing companies and other non-bank lenders, and institutional investors including CLO managers, hedge funds and private equity firms. Some larger competitors, including certain national banks that compete in our market area, may offer a broader array of products and, due to their asset size, may sometimes be in a position to hold more exposure on their own balance sheet. We compete on a number of factors including providing innovative corporate finance solutions, quality of customer service and execution, range of products offered, price and reputation.

Regulation and Supervision

Our operations are subject to extensive regulation, supervision and examination under federal and state laws. These laws and regulations cover all aspects of our business, including lending practices, safeguarding deposits, customer privacy and information security, capital structure, liquidity, conduct and qualifications of personnel and certain transactions with affiliates. These laws and regulations are intended primarily for the protection of depositors,

CITIZENS FINANCIAL GROUP, INC.

BUSINESS

the Deposit Insurance Fund and the banking system as a whole and not for the protection of shareholders or other investors. The discussion below outlines the material elements of selected laws and regulations applicable to us and our subsidiaries. Changes in applicable law or regulation, and in their interpretation and application by regulatory agencies and other governmental authorities, cannot be predicted, but may have a material effect on our business, financial condition or results of operations.

We and our subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, FINRA and various state insurance and securities regulators. In some cases, regulatory agencies may take supervisory actions that may not be publicly disclosed, and such actions may restrict or limit our activities or activities of our subsidiaries. As part of our regular examination process, our and CBNA’s respective regulators may advise us or CBNA to operate under various restrictions as a prudential matter. We and CBNA have periodically received requests for information from regulatory authorities at the federal and state level, including from state insurance commissions, state attorneys general, federal agencies or law enforcement authorities, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business. For a further discussion of how regulatory actions may impact our business, see “Risk Factors” in Part I, Item 1A, included in this Report. For additional information regarding regulatory and supervisory matters, see Note 18 “Commitments and Contingencies” in the notes to our Consolidated Financial Statements in Part II, Item 8 of this Report.

Overview

We are a bank holding company under the Bank Holding Company Act of 1956 (“Bank Holding Company Act”). We have elected to be treated as a financial holding company under amendments to the Bank Holding Company Act as effected by Gramm-Leach-Bliley Act of 1999 (“GLBA”). As such, we are subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the FRB, including through the Federal Reserve Bank of Boston. Under the system of “functional regulation” established under the Bank Holding Company Act, the FRB serves as the primary regulator of our consolidated organization, and the SEC serves as the primary regulator of our broker-dealer subsidiaries and directly regulates the activities of those subsidiaries, with the FRB exercising a supervisory role. The Dodd-Frank Act amendments to the Bank Holding Company Act require the FRB to examine the activities of non-depository institution subsidiaries of bank holding companies (that are not functionally regulated) that are engaged in depository institution-permissible activities and provide the FRB with back-up examination and enforcement authority for such activities. The FRB also has the authority to require reports of and examine any subsidiary of a bank holding company.

On July 3, 2018, we received regulatory approval from the OCC to consolidate our two banking subsidiaries via a merger of CBPA into CBNA. We completed this consolidation on January 2, 2019, such that CBNA is now our sole banking subsidiary. CBNA is a national banking association. As such, it is subject to regulation, examination and supervision by the OCC as its primary federal regulator and by the FDIC as the insurer of its deposits.

The federal banking regulators have authority to approve or disapprove mergers, acquisitions, consolidations, the establishment of branches and similar corporate actions. These banking regulators also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Federal law governs the activities in which CBNA engages, including the investments it makes and the aggregate amount of loans that it may grant to one borrower. Various consumer and compliance laws and regulations also affect its operations. The actions the FRB takes to implement monetary policy also affect CBNA.

In addition, CBNA is subject to regulation, supervision and examination by the CFPB with respect to consumer protection laws and regulations. The CFPB has broad authority to, among other things, regulate the offering and provision of consumer financial products by depository institutions, such as CBNA, with more than $10 billion in total assets. The CFPB may promulgate rules under a variety of consumer financial protection statutes, including the Truth in Lending Act, the Electronic Funds Transfer Act and the Real Estate Settlement Procedures Act.

Financial Regulatory Reform

The Dodd-Frank Act regulates many aspects of the financial services industry and addresses among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, derivatives and securities markets, restrictions on an insured bank’s transactions with its affiliates, lending limits and mortgage-lending practices. Moreover, as a general matter, in recent years, the federal banking regulators (the FRB, the OCC and the FDIC) as well as the CFPB have taken a more stringent approach to supervising and regulating the financial institutions and financial products and services over which the regulators exercise their respective supervisory authorities, including with respect to enforcement matters. CBNA’s and our products and services have been subject

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to greater supervisory scrutiny and enhanced supervisory requirements and expectations in recent years, and we expect this scrutiny to continue for the foreseeable future.

Prior to amendment by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”), which was signed into law on May 24, 2018, Section 165 of the Dodd-Frank Act directed the FRB to establish enhanced prudential standards applicable to systemically important financial institutions (“SIFIs”), bank holding companies with total consolidated assets of $50 billion or more. The FRB has adopted final rules implementing three aspects of Section 165: liquidity requirements, stress testing of capital, and overall risk management requirements. The current rules’ liquidity requirements are described below under “—Liquidity Requirements”, and their stress testing requirements are described below under “—Capital Planning and Stress Testing Requirements.” In addition, the resolution planning requirements implemented by the FRB and FDIC are described below under “—Resolution Planning”.

EGRRCPA amended the Dodd-Frank Act by increasing the asset threshold for application of these enhanced prudential standards from $50 billion to $250 billion. EGRRCPA’s increased asset threshold took effect immediately for bank holding companies with total consolidated assets less than $100 billion. The increased asset threshold generally will become effective 18 months after the date of enactment (that is, in November 2019) for bank holding companies with total consolidated assets of $100 billion or more but less than $250 billion, including Citizens. The FRB is authorized, however, during the 18-month period to exempt, by order, any bank holding company with assets between $100 billion and $250 billion from any enhanced prudential standard requirement. The FRB is also authorized to apply any enhanced prudential standard requirement to any bank holding company with between $100 billion and $250 billion in total consolidated assets that would otherwise be exempt under EGRRCPA, if the FRB determines that such action is appropriate to address risks to financial stability and promote safety and soundness, taking into consideration certain factors including the bank holding company’s capital structure, riskiness, complexity, financial activities (including financial activities of subsidiaries), size, and any other risk-related factors that the FRB deems appropriate. U.S. global systemically important bank holding companies (“G-SIBs”) and bank holding companies with $250 billion or more in total consolidated assets remain fully subject to the Dodd-Frank Act’s enhanced prudential standards requirements.

In October 2018, the FRB and the other federal banking regulators proposed rules that would tailor the application of the enhanced prudential standards to bank holding companies and depository institutions to implement the EGRRCPA amendments (“Tailoring NPRs”). The proposed rules would assign each U.S. bank holding company with $100 billion or more in total consolidated assets, as well as its bank subsidiaries, to one of four categories based on its size and five risk-based indicators: (i) cross-jurisdictional activity, (ii) weighted short-term wholesale funding, (iii) nonbank assets, (iv) off-balance sheet exposure, and (v) status as a U.S. G-SIB. Under the Tailoring NPRs, “Category IV standards” would apply to banking organizations with at least $100 billion in total consolidated assets that do not meet any of the thresholds specified for Categories I through III. Category I standards would be applicable to U.S. G-SIBs; Category II standards would be applicable to non-G-SIBs with $700 billion or more in total consolidated assets or at least $100 billion in total consolidated assets and $75 billion or more in cross-jurisdictional activity; and Category III standards would be applicable to banking organizations that are not subject to Category I or Category II standards and that have at least $250 billion in total consolidated assets or at least $100 billion in total consolidated assets and $75 billion or more in any of three indicators: (i) nonbank assets, (ii) weighted short-term wholesale funding, or (iii) off-balance sheet exposures.

In connection with the release of the proposed rules, FRB staff indicated which firms would fall into each of the four categories based on data for the second quarter of 2018. According to the FRB staff’s projections, Citizens would be a “Category IV” firm under the proposed rules. Firms subject to Category IV standards would generally be subject to the same capital and liquidity requirements as firms with under $100 billion in total consolidated assets, but would also be required to monitor and report certain risk-based indicators. Accordingly, under the Tailoring NPRs, Category IV firms would (i) no longer be subject to any LCR or proposed NSFR requirement, (ii) remain not subject to advanced approaches capital requirements, (iii) remain eligible to opt-out of the requirement to recognize most elements of Accumulated Other Comprehensive Income in regulatory capital, (iv) remain not subject to the supplementary leverage ratio, (v) remain not subject to the countercyclical capital buffer, (vi) no longer be subject to company-run stress testing requirements and (vii) become subject to supervisory stress testing on a biennial instead of annual basis. We discuss other elements of the proposed rules where relevant below. The Tailoring NPRs are subject to modification through the federal rulemaking process in accordance with the Administrative Procedures Act.

The U.S. Basel III rules, summarized briefly in the “—Capital” section below, have impacted our level of capital, and may influence the types of business we may pursue and how we pursue business opportunities. Among other things, the U.S. Basel III rules raised the required minimums for certain capital ratios, added a common equity

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ratio, included capital buffers, and restricted what constitutes capital. The capital and risk weighting requirements became effective for us on January 1, 2015.

Many of the provisions of the Dodd-Frank Act, EGRRCPA, and other laws are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. The ultimate effects of EGRRCPA and the Tailoring NPRs on Citizens, CBNA and their respective subsidiaries and activities will be subject to the final form of the Tailoring NPRs and additional rulemakings issued by the FRB and other federal regulators. We will continue to evaluate the impact of any changes in law and any new regulations promulgated, including changes in regulatory costs and fees, modifications to consumer products or disclosures required by the CFPB and the requirements of the enhanced supervision provisions, among others.

Financial Holding Company Regulation

The Bank Holding Company Act generally restricts bank holding companies from engaging in business activities other than (i) banking, managing or controlling banks, (ii) furnishing services to or performing services for subsidiaries and (iii) activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. For so long as they continue to meet the eligibility requirements for financial holding company status, financial holding companies may engage in a broader range of activities, including, among other things, securities underwriting and dealing, insurance underwriting and brokerage, merchant banking and other activities that are determined by the FRB, in coordination with the Treasury Department, to be “financial in nature or incidental thereto” or that the FRB determines unilaterally to be “complementary” to financial activities. In addition, a financial holding company may conduct permissible new financial activities or acquire permissible non-bank financial companies with after-the-fact notice to the FRB.

As noted above, we currently have elected to be treated as a financial holding company under amendments to the Bank Holding Company Act as effected by GLBA. To maintain financial holding company status, a financial holding company and all of its insured depository institution subsidiaries must remain well capitalized and well managed (as described below under “Federal Deposit Insurance Act”), and maintain a CRA rating of at least “Satisfactory.” If a financial holding company ceases to meet the capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. In addition, the failure to meet such requirements could result in other material restrictions on the activities of the financial holding company, may also adversely affect the financial holding company’s ability to enter into certain transactions, including acquisition transactions, or obtain necessary approvals in connection therewith, and may result in the bank holding company losing financial holding company status. Any restrictions imposed on our activities by the FRB may not necessarily be made known to the public. If the company does not return to compliance within 180 days, which period may be extended, the FRB may require the financial holding company to divest its subsidiary depository institutions or to discontinue or divest investments in companies engaged in activities permissible only for a bank holding company electing to be treated as a financial holding company. If any insured depository institution subsidiary of a financial holding company fails to maintain a CRA rating of at least “Satisfactory,” the financial holding company would be subject to restrictions on certain new activities and acquisitions. Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state.

Capital

We must comply with the FRB’s capital adequacy rules, and CBNA must comply with similar capital adequacy rules of the OCC. The capital adequacy rules of both agencies are based on the Basel III framework. For more detail on our regulatory capital, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital and Regulatory Matters” in Part II, Item 7, included in this Report.

The U.S. Basel III rules, among other things, (i) impose a capital measure called common equity tier 1 capital, or “CET1 capital”, (ii) specify that tier 1 capital consists of CET1 capital and “additional tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 capital narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to previous regulations. Under the U.S. Basel III rules, the minimum capital ratios are:

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• 4.5% CET1 capital to risk-weighted assets;

• 6.0% tier 1 capital (that is, CET1 capital plus additional tier 1 capital) to risk-weighted assets;

• 8.0% total capital (that is, tier 1 capital plus tier 2 capital) to risk-weighted assets; and

• 4.0% tier 1 capital to total average consolidated assets as defined under U.S. Basel III Standardized

approach (known as the “leverage ratio”).

The U.S. Basel III rules also impose a capital conservation buffer (“CCB”) on top of the three minimum risk-weighted asset ratios listed above. The implementation of the CCB began on January 1, 2016 at 0.625% and increased by 0.625% annually over a three year phase-in period, which ended January 1, 2019. The CCB for 2018 was 1.875%, and increased to its fully phased-in level of 2.5% as of January 1, 2019. Banking institutions that fail to meet the effective minimum ratios once the fully phased-in CCB is taken into account (that is, 7.0% for CET1 capital to risk-weighted assets, 8.5% for tier 1 capital to risk-weighted assets and 10.5% for total capital to risk-weighted assets) will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net income, net of distributions and tax effects not reflected in net income). For more details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital and Regulatory Matters” in Part II, Item 7, included in this Report. On April 10, 2018, the FRB issued a proposal designed to create a single, integrated capital requirement by combining the quantitative assessment of firms’ capital plans with the CCB requirement. Details of this proposal are discussed under “—Capital Planning and Stress Testing Requirements” below. Although the proposal, if adopted, would change the way in which the minimum capital ratios are calculated, firms would continue to be subject to progressively more stringent constraints on capital actions as they approach the minimum ratios.

We are also subject to the FRB's risk-based capital requirements for market risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk — Market Risk Regulatory Capital” in Part II, Item 7, included in this Report, for further discussion.

The U.S. Basel III rules also provide for a number of deductions from, and adjustments to, CET1 capital. For example, certain deferred tax assets (“DTAs”), mortgage servicing assets, and significant investments in non-consolidated financial entities must be deducted from CET1 capital to the extent that any one such category exceeds 10% of CET1 capital or all such items, in the aggregate, exceed 15% of CET1 capital. The deductions and other adjustments to CET1 capital generally became fully phased-in on January 1, 2018, although, as discussed below, the federal banking regulators have extended the transitional treatment for certain items.

In November 2017, the federal banking regulators issued a final rule that extended the 2017 transition provisions for certain U.S. Basel III capital rules for non-advanced approaches banking organizations, including us. Effective January 1, 2018, the final rule retains the 2017 U.S. Basel III transitional treatment of certain DTAs, mortgage servicing assets, investments in unconsolidated financial institutions and minority interests. As a result, since January 1, 2018, our mortgage servicing assets have retained their 2017 risk weight treatment, which will continue until the federal banking regulators revise the extended transitional treatment under the November 2017 final rule, which may occur in connection with the finalization of the related September 2017 proposal to simplify the capital treatment of certain DTAs, mortgage servicing assets, significant investments in unconsolidated financial institutions and minority interests.

The U.S. Basel III rules prescribe a standardized approach for risk weighting many categories of assets. These categories generally range from 0% for U.S. government and agency securities, to 600% for certain equity exposures, to 1,250% for certain securitization exposures.

With respect to CBNA, the U.S. Basel III rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below in “Federal Deposit Insurance Act.”

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card and home equity lines of credit) and provide a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. Basel III rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to CFG or CBNA. The impact of Basel IV on CFG and CBNA will depend on the manner in which it is implemented by the FRB and the OCC.

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Liquidity Requirements

We are currently subject to the Basel III-based U.S. LCR rule, which is a quantitative liquidity metric designed to ensure that a covered bank or bank holding company maintains an adequate level of unencumbered high-quality liquid assets to cover expected net cash outflows over a 30-day time horizon under an acute liquidity stress scenario; however, as noted above, under the Tailoring NPRs, Category IV firms, including Citizens, would no longer be subject to any LCR requirement. The LCR rule currently applies in its most comprehensive form only to advanced approaches bank holding companies (that is, those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures) and depository institution subsidiaries of such bank holding companies with $10 billion or more in total consolidated assets. The LCR rule, following the threshold amendments under EGRRCPA, currently applies in a modified form to bank holding companies such as the Parent Company that have $100 billion or more but less than $250 billion in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. The U.S. version of the LCR differs in certain respects from the Basel Committee’s version; the U.S. version includes a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions, and a shorter phase-in schedule that began on January 1, 2015 and is now complete. The modified LCR currently requires us to maintain a ratio of high-quality liquid assets to net cash outflows of 70% (compared to 100% in the comprehensive LCR applicable to advanced approaches bank holding companies). At December 31, 2018, our LCR on the modified basis was above the minimum requirement.

Until the changes to the LCR requirement contained in the Tailoring NPRs are adopted, as a modified LCR company, we are required to calculate our LCR on a monthly basis. If a covered company fails to meet the minimum required LCR, it must promptly notify its primary federal banking regulator and may be required to take remedial actions. In December 2016, the FRB issued a final rule that requires bank holding companies currently subject to the LCR rule to disclose publicly, on a quarterly basis, quantitative and qualitative information about certain components of their LCR. For modified LCR bank holding companies, this disclosure requirement began with the fourth quarter of 2018 and is required to be disclosed by March 1, 2019. We will publish the required information on quantitative and qualitative components of our LCR on our regulatory filings and disclosures page on our Investor Relations website at http://investor.citizensbank.com.

The Basel III framework also includes a second liquidity standard, the NSFR, which is designed to promote more medium- and long-term funding of the assets and activities of banks over a one-year time horizon. In May 2016, the federal banking regulators issued a proposed rule that would implement the NSFR for large U.S. banking organizations, including Citizens; however, as noted above, under the Tailoring NPRs, Category IV firms, including Citizens, would not be subject to any NSFR requirement. Under the 2016 proposal, the most stringent requirements would apply to advanced approaches bank holding companies, and would have required such organizations to maintain a minimum NSFR of 1.0 on an ongoing basis, calculated by dividing the organization’s available stable funding (“ASF”) by its required stable funding (“RSF”). Bank holding companies with $50 billion or more in total consolidated assets but that are not advanced approaches bank holding companies, including Citizens, would have been subject to a modified NSFR requirement which would have required such bank holding companies to maintain a minimum NSFR of 0.7 on an ongoing basis. Under the 2016 proposal, a banking organization’s ASF would have been calculated by applying specified standard weightings to its equity and liabilities based on their expected stability over a one-year time horizon and its RSF would be calculated by applying specified standardized weightings to its assets, derivative exposures and commitments based on their liquidity characteristics over the same one-year time horizon.

Finally, per the liquidity rules included in the FRB’s enhanced prudential standards adopted pursuant to Section 165 of the Dodd-Frank Act (referred to above under “—Financial Regulatory Reform”), we are also required to maintain a buffer of highly liquid assets based on projected funding needs for 30 days. The liquidity buffer is in addition to the federal banking regulators’ LCR rule and is described by the FRB as being “complementary” to the LCR. Under the Tailoring NPRs, the liquidity buffer requirements for Category IV firms, such as Citizens, would not change, and Category IV firms would remain subject to liquidity risk management requirements; however, these requirements would be tailored such that these firms would be required to: (i) calculate collateral positions monthly, as opposed to weekly as is currently required; (ii) establish a more limited set of liquidity risk limits than are currently required; and (iii) monitor fewer elements of intraday liquidity risk exposures than are currently monitored. Category IV firms would also be subject to liquidity stress testing quarterly, rather than monthly, and would be required to report liquidity data on a monthly basis.

Capital Planning and Stress Testing Requirements

Under the CCAR process, bank holding companies with $100 billion or more in total consolidated assets are required to develop and maintain a capital plan and to submit the plan to the FRB for review. CCAR is designed to

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evaluate a bank holding company’s capital adequacy, capital adequacy process and planned capital distributions, such as dividend payments and common stock repurchases. As part of CCAR, the FRB evaluates whether a bank holding company has sufficient capital to continue operations under various hypothetical scenarios of economic and financial market stress. These scenarios currently include both bank holding company- and FRB-developed scenarios, including an “adverse” and a “severely adverse” stress scenario (although the FRB, on January 8, 2019, proposed amendments that, among other things, would eliminate the adverse scenario). The FRB also evaluates whether the bank holding company has robust, forward-looking capital planning processes that accounts for the bank holding company’s unique risks.

Due to the importance and intensity of the stress tests and the CCAR process, we have dedicated significant resources to comply with stress testing and capital planning requirements and may continue to do so in the future.

Currently, any capital plan submitted to the FRB must cover a “planning horizon” of at least nine quarters beginning with the quarter preceding the submission of the plan (for example, January 1, 2020 for the capital plans required to be filed on or before April 5, 2020). Bank holding companies are also subject to an ongoing requirement to revise and resubmit their capital plans upon the occurrence of certain events specified by rule, or when required by the FRB. The FRB determines whether to object to a company’s capital plan based on whether the plan passes quantitative tests requiring that the company demonstrate that it will continue to meet all minimum capital requirements applicable to it over the nine-quarter planning horizon under all applicable scenarios. The FRB also incorporates an assessment of the qualitative aspects of the firm’s capital planning process into regular, ongoing supervisory activities and through targeted, horizontal assessments of particular aspects of capital planning.

The FRB’s capital planning and stress testing rules generally make our ability to make quarterly capital distributions in the form of dividends and share repurchases contingent on the FRB’s non-objection to our capital plan, and limit our ability to make quarterly capital distributions if the amount of our actual cumulative quarterly capital issuances of instruments that qualify as regulatory capital are less than we indicated in our submitted capital plan for which we received a non-objection from the FRB.

Should the FRB object to a capital plan, a bank holding company may not make any capital distribution other than those capital distributions to which the FRB has indicated its non-objection in writing. Participating firms are currently required to submit their capital plans and stress testing results to the FRB on or before April 5th of each year in which they are participating, and the FRB will publish the results of its supervisory CCAR review of submitted capital plans by June 30th of each year. In addition, the FRB will separately publish the results of its supervisory stress test under both the supervisory severely adverse and adverse scenarios. The information to be released will include, among other things, the FRB’s projection of company-specific information, including post-stress capital ratios and the minimum value of these ratios over the planning horizon.

On February 5, 2019, the FRB announced that certain less-complex BHCs with less than $250 billion in assets, including Citizens, would not be required to be subject to supervisory stress testing, company-run stress testing, or the CCAR quantitative assessment for the 2019 cycle (although firms could elect to submit a capital plan for the 2019 cycle). The FRB has also announced that, unless Citizens elects to submit a capital plan for the 2019 cycle, for the period from July 1, 2019 through June 30, 2020, Citizens may make capital distributions up to the amount that would have allowed Citizens to remain above all minimum capital requirements in CCAR 2018, adjusted for any changes in Citizens’ regulatory capital ratios since the FRB acted on Citizens’ 2018 capital plan. We remain subject to the requirement to develop and maintain an annual capital plan that is reviewed and approved by our Board of Directors (or one of its committees), and we must submit our planned capital actions for the period between July 1, 2019 through June 30, 2020 to the FRB by April 5, 2019.

Additionally, under the Tailoring NPRs, Category IV firms, such as Citizens, would no longer be subject to company-run stress testing requirements (i.e., the requirement to stress test using bank holding company-developed and supervisory scenarios), but would remain subject to the quantitative review of their capital plans under CCAR, which the FRB noted that it plans to propose to conduct on a biennial, instead of annual, basis. In connection with the release of the Tailoring NPRs, the FRB noted that it expects to revise its guidance relating to capital planning to align with the proposed categories of standards set forth in the Tailoring NPRs, and the impact of the future proposal on Citizens and its capital planning process will depend on the final form of the FRB’s revised guidance.

Lastly, and as noted above, the FRB’s April 10, 2018 proposal to create a single, integrated capital requirement by combining the quantitative assessment of CCAR with the CCB requirement would, if adopted, replace the current static 2.5% CCB with a stress capital buffer (“SCB”) requirement. The SCB, subject to a minimum of 2.5%, would reflect stressed losses in the supervisory severely adverse scenario of the FRB’s supervisory stress tests and would also include four quarters of planned common stock dividends. The proposal would also introduce a stress leverage buffer (“SLB”) requirement, similar to the SCB, which would apply to the Tier 1 leverage ratio. In addition, the

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proposal would eliminate the quantitative objection provisions of CCAR but would require a bank holding company to reduce its planned capital distributions if those distributions would not be consistent with the applicable capital buffer constraints based on the bank holding company’s own baseline scenario projections. The FRB has stated that it intends to propose revisions to the stress buffer requirements that would be applicable to Category IV bank holding companies to align with the proposed two-year supervisory stress testing cycle for Category IV bank holding companies. As is currently the case, under the proposal, a bank holding company subject to CCAR would generally not be permitted to exceed the capital distributions reflected in its capital plan either on a gross basis or net of capital issuances without prior approval of the FRB.

Resolution Planning

Under Section 165 of the Dodd-Frank Act, as amended by EGRRCPA, a bank holding company with total consolidated assets of $100 billion or more, such as Citizens, must currently submit a periodic resolution plan to the FRB and FDIC providing for the company’s strategy for rapid and orderly resolution in the event of its material financial distress or failure. We are required to submit our most recent resolution plan to the FRB and FDIC by December 31, 2019. If the FRB and the FDIC jointly determine that our plan is not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code and we do not cure the deficiencies, the FRB and the FDIC may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations. In connection with the release of the Tailoring NPRs, the FRB noted that it expects to release a proposal to amend, with the FDIC, their joint resolution plan rule to address the applicability of resolution plan requirements for U.S. bank holding companies with between $100 billion and $250 billion in total consolidated assets, including Citizens, and to adjust the scope and applicability of resolution plan requirements for firms that remain subject to them.

The FDIC has separately implemented a resolution planning rule that currently requires insured depository institutions of $50 billion or more in total assets, such as CBNA, to periodically submit a resolution plan. CBNA submitted its most recent resolution plan to the FDIC in July 2018.

Standards for Safety and Soundness

The FDIA requires the FRB, OCC and FDIC to prescribe operational and managerial standards for all insured depository institutions, including CBNA. The agencies have adopted regulations and interagency guidelines which set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. If an agency determines that a bank fails to satisfy any standard, it may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans. If, after being notified to submit a compliance plan, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the FDIA. See “Federal Deposit Insurance Act” below. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Federal Deposit Insurance Act

The FDIA requires, among other things, that the federal banking regulators take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements, as described above in “Capital.” The FDIA sets forth the following five capital categories: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital category depends upon how its capital levels compare with various relevant capital measures and certain other factors that are established by regulation. The federal banking regulators must take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions that are undercapitalized, significantly undercapitalized or critically undercapitalized, with the actions becoming more restrictive and punitive the lower the institution’s capital category. Under existing rules, an institution that is not an advanced approaches institution is deemed to be “well capitalized” if it has (i) a CET1 ratio of at least 6.5%, (ii) a tier 1 capital ratio of at least 8%, (iii) a total capital ratio of at least 10%, and (iv) a tier 1 leverage ratio of at least 5%.

The FDIA’s prompt corrective action provisions only apply to depository institutions and not to bank holding companies. The FRB’s regulations applicable to bank holding companies separately define “well capitalized” for bank holding companies to require maintaining a tier 1 capital ratio of at least 6% and a total capital ratio of at least 10%. As described above under “—Financial Holding Company Regulation”, a financial holding company that is not well-capitalized and well-managed (or whose bank subsidiaries are not well capitalized and well managed) under

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applicable prompt corrective action standards may be restricted in certain of its activities and ultimately may lose financial holding company status. As of December 31, 2018, the Parent Company and CBNA were well-capitalized.

The FDIA prohibits insured banks from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited), unless it is “well-capitalized,” or it is “adequately capitalized” and receives a waiver from the FDIC. A bank that is “adequately capitalized” and that accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. The FDIA imposes no such restrictions on a bank that is “well-capitalized.”

Deposit Insurance

The FDIA requires CBNA to pay deposit insurance assessments. FDIC assessment rates for large institutions are calculated based on one of two scorecards, one for most large institutions that have more than $10 billion in assets and another for “highly complex” institutions that have over $50 billion in assets and are fully owned by a parent with over $500 billion in assets. Each scorecard has a performance score and a loss-severity score that are combined to produce a total score, which is translated into an initial assessment rate. In calculating these scores, the FDIC utilizes the CAMELS ratings and forward-looking financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress. The FDIC has the ability to make discretionary adjustments to the total score, up or down, based upon significant risk factors that are not adequately captured in the scorecard. The total score is then translated to an initial base assessment rate on a non-linear, sharply-increasing scale. Since July 1, 2016, for large institutions the initial base assessment rate has ranged from 3 to 30 basis points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 1.5 to 40 basis points on an annualized basis.

The deposit insurance assessment is calculated based on average consolidated total assets less average tangible equity of the insured depository institution during the assessment period. Deposit insurance assessments are also affected by the minimum reserve ratio with respect to the Deposit Insurance Fund (“DIF”). In March 2016, the FDIC issued a final rule that imposed on insured depository institutions with at least $10 billion in assets, including CBNA, a surcharge of 4.5 basis points per annum that continued through September 30, 2018, when the reserve ratio of the DIF reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35%; therefore, the surcharge no longer applies.

Dividends

Various federal statutory provisions and regulations, as well as regulatory expectations, limit the amount of dividends that we and our subsidiaries may pay.

Our payment of dividends to our stockholders is subject to the oversight of the FRB. In particular, the FRB reviews the dividend policies and share repurchases of a large bank holding company based on capital plans submitted as part of the CCAR process and on the results of stress tests, as discussed above. The FRB assesses dividend policies and share repurchases against, among other things, the bank holding company’s ability to achieve the required capital ratios under the Basel III-based U.S. revised capital rules. In addition to other limitations, our ability to make any capital distributions (including dividends and share repurchases) is contingent on the FRB’s non-objection to such planned distributions included in our submitted capital plan or the FRB’s authorization to make distributions if we are exempt from the requirement to submit a capital plan. See “—Capital” and “—Capital Planning and Stress Testing Requirements” above.

Dividends payable by CBNA, as a national bank subsidiary, are limited to the lesser of the amount calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, less any required transfers to surplus, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of the entity’s “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus). Federal bank regulatory agencies have issued policy statements which provide that FDIC-insured depository institutions and their holding companies should generally pay dividends only out of their current operating earnings.

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Support of Subsidiary Bank

Under Section 616 of the Dodd-Frank Act, which codifies the FRB’s long-standing “source of strength” doctrine, we must serve as a source of financial and managerial strength for our depository institution subsidiary. The statute defines “source of financial strength” as the ability to provide financial assistance in the event of the financial distress at the insured depository institution. The FRB may require that we provide such support at times even when we may not have the financial resources to do so, or when doing so may not serve our interests or those of our shareholders or creditors. In addition, any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Transactions with Affiliates and Insiders

Sections 23A and 23B of the Federal Reserve Act and related FRB rules, including Regulation W, restrict CBNA from extending credit to, or engaging in certain other transactions with, us and our non-bank subsidiaries. These restrictions place limits on certain specified “covered transactions” between bank subsidiaries and their affiliates, which must be limited to 10% of a bank’s capital and surplus for any one affiliate and 20% for all affiliates. Furthermore, within the foregoing limitations as to amount, certain covered transactions must meet specified collateral requirements ranging from 100% to 130%. Covered transactions are defined to include, among other things, a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, derivatives transactions and securities lending transactions where the bank has credit exposure to an affiliate, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. All covered transactions, including certain additional transactions (such as transactions with a third party in which an affiliate has a financial interest), must be conducted on market terms. The Dodd-Frank Act significantly enhanced and expanded the scope and coverage of these limitations, in particular, by including within its scope derivative transactions by and between CBNA or its subsidiaries and the Parent Company or its other subsidiaries. The FRB enforces these restrictions and we are audited for compliance.

Section 23B prohibits an institution from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with non-affiliated companies. Except for limitations on low-quality asset purchases and transactions that are deemed to be unsafe or unsound, Regulation W generally excludes affiliated depository institutions from treatment as affiliates. Transactions between a bank and any of its subsidiaries that are engaged in certain financial activities may be subject to the affiliated transaction limits. The FRB also may designate banking subsidiaries as affiliates.

Pursuant to FRB Regulation O, we are also subject to quantitative restrictions on extensions of credit to executive officers, directors, principal stockholders and their related interests. In general, such extensions of credit (i) may not exceed certain dollar limitations, (ii) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (iii) must not involve more than the normal risk of repayment or present other unfavorable features. Certain extensions of credit also require the approval of our Board.

Volcker Rule

The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and investing in, sponsoring and having certain relationships with private funds such as hedge funds or private equity funds that would be an investment company for purposes of the Investment Company Act of 1940 but for the exclusions in sections 3(c)(1) or 3(c)(7) of that act, both subject to certain limited exceptions. The statutory provision is commonly called the “Volcker Rule.” The regulations implementing the Volcker Rule, jointly issued by the FRB, OCC, FDIC, the SEC and the Commodity Futures Trading Commission (“CFTC”), require that large bank holding companies design and implement compliance programs to ensure adherence to the Volcker Rule’s prohibitions. Maintenance and monitoring of the required compliance program requires the expenditure of resources and management attention. In July 2018, the FRB, OCC, FDIC, CFTC and SEC issued a notice of proposed rulemaking intended to tailor the application of the Volcker Rule based on the size and scope of a banking entity’s trading activities and to clarify and amend certain definitions, requirements and exemptions. The ultimate impact of any amendments to the Volcker Rule will depend on, among other things, further rulemaking and implementation guidance from the relevant U.S. federal regulatory agencies and the development of market practices and standards .

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Consumer Financial Protection Regulations

The retail activities of banks are subject to a variety of statutes and regulations designed to protect consumers and promote lending to various sectors of the economy and population. These laws include, but are not limited to, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Service Members Civil Relief Act, the Expedited Funds Availability Act, the Right to Financial Privacy Act, the Truth in Savings Act, the Electronic Funds Transfer Act, and their respective federal regulations and state law counterparts.

In addition to these federal laws and regulations, the guidance and interpretations of the various federal agencies charged with the responsibility of implementing such regulations also influences loan and deposit operations.

The CFPB has broad rulemaking, supervisory, examination and enforcement authority over various consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes. The CFPB also has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, including the authority to prevent unfair, deceptive or abusive acts or practices in connection with the offering of consumer financial products.

The Dodd-Frank Act permits states to adopt stricter consumer protection laws and standards that are more stringent than those adopted at the federal level and in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

The CFPB implemented a number of significant rules which will impact nearly every aspect of the life cycle of a residential mortgage. The final rules require banks to, among other things: (i) develop and implement procedures to ensure compliance with a new “ability to repay” standard and identify whether a loan meets a new definition for a “qualified mortgage;” (ii) implement new or revised disclosures, policies and procedures for servicing mortgages including, but not limited to, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal residence; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; (iv) comply with new disclosure requirements and standards for appraisals and certain financial products; and (v) maintain escrow accounts for “higher priced mortgage loans” for a longer period of time.

Protection of Customer Personal Information and Cybersecurity

The privacy provisions of GLBA generally prohibit financial institutions, including us, from disclosing nonpublic personal financial information of consumer customers to third parties for certain purposes (primarily marketing) unless customers have the opportunity to opt out of the disclosure. The Fair Credit Reporting Act restricts information sharing among affiliates for marketing purposes. Both the Fair Credit Reporting Act and Regulation V, issued by the FRB, govern the use and provision of information to consumer reporting agencies.

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers’ accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties. For a further discussion of risks related to cybersecurity, see “Risk Factors” in Part I, Item 1A, of this Report.

In October 2016, federal regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are intended to increase the operational resilience of large and interconnected entities under their supervision. Once established, the enhanced cyber risk management standards would help to reduce the potential impact of a cyber-attack or other cyber-related failure on the financial system. The advance notice of proposed rulemaking addresses five categories of cyber standards: (i) cyber risk governance; (ii) cyber risk management; (iii) internal dependency management; (iv) external dependency management; and (v) incident response, cyber resilience, and situational awareness. We will continue to monitor any developments related to this proposed rulemaking.

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State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity to continue, and are continually monitoring developments in the states in which we operate.

Community Reinvestment Act Requirements

The CRA requires banking regulators to evaluate us and CBNA in meeting the credit needs of our local communities, including providing credit to individuals residing in low- and moderate- income neighborhoods. The CRA requires each appropriate federal bank regulatory agency, in connection with its examination of a depository institution, to assess such institution’s record in assessing and meeting the credit needs of the community served by that institution and assign ratings. The regulatory agency’s assessment of the institution’s record is made available to the public. These evaluations are also considered in evaluating mergers, acquisitions and applications to open a branch or facility and, in the case of a bank holding company that has elected financial holding company status, a CRA rating of at least “satisfactory” is required to commence certain new financial activities or to acquire a company engaged in such activities. We received a rating of “outstanding” in our most recent CRA evaluation.

In April 2018, the U.S. Department of Treasury issued a memorandum to the Federal banking regulators with recommended changes to the CRA’s implementing regulations to reduce their complexity and associated burden on banks, and in August 2018, the OCC published an advance notice of proposed rulemaking soliciting “ideas for building a new framework to transform or modernize the regulations that implement the Community Reinvestment Act,” without proposing any specific revisions to present CRA requirements. We will continue to evaluate the impact of any changes to the regulations implementing the CRA.

Compensation

Our compensation practices are subject to oversight by the FRB and the OCC. The federal banking regulators have issued guidance designed to ensure that incentive compensation arrangements at banking organizations take into account risk and are consistent with safe and sound practices. The guidance sets forth the following three key principles with respect to incentive compensation arrangements: (i) the arrangements should provide employees with incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (ii) the arrangements should be compatible with effective controls and risk management; and (iii) the arrangements should be supported by strong corporate governance. The guidance provides that supervisory findings with respect to incentive compensation will be incorporated, as appropriate, into the organization’s supervisory ratings.

The U.S. financial regulators, including the FRB, the OCC and the SEC, jointly proposed regulations in 2011 and again in 2016 to implement the incentive compensation requirements of Section 956 of the Dodd-Frank Act. These regulations, among other things, prohibit incentive-based compensation arrangements that encourage inappropriate risk taking at specified regulated entities having at least $1 billion in total assets (including the Parent Company and CBNA). These regulations have not been finalized and the timing of final adoption and the form of any final regulations is uncertain. If the rules are adopted in the form proposed, they may restrict our flexibility with respect to the manner in which we structure compensation and adversely affect our ability to compete for talent.

Anti-Money Laundering

The USA PATRIOT Act, enacted in 2001 and renewed in 2006, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Institutions must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. We are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence in dealings with foreign financial institutions and foreign customers. We also must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Recent laws provide law enforcement authorities with increased access to financial information maintained by banks.

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The USA PATRIOT Act also provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. The statute also creates enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) promulgating rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) requiring reports by non-financial trades and businesses filed with the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) for transactions exceeding $10,000; and (iv) mandating the filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations. The statute also requires enhanced due diligence requirements for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

FinCEN drafts regulations implementing the USA PATRIOT Act and other anti-money laundering and Bank Secrecy Act legislation. In May 2018, a FinCEN rule became effective which requires financial institutions to obtain beneficial ownership information with respect to legal entities with which such institutions conduct business, subject to certain exclusions and exemptions. Bank regulators are focusing their examinations on anti-money laundering compliance, and we continue to monitor and augment, where necessary, our anti-money laundering compliance programs.

Office of Foreign Assets Control Regulation

The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons. We are responsible for, among other things, blocking accounts of and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must freeze such account, file a suspicious activity report and notify the appropriate authorities. Failure to comply with these sanctions could have serious legal and reputational consequences.

Regulation of Broker-Dealers

Our subsidiary CCMI is a registered broker-dealer with the SEC and, as a result, is subject to regulation and examination by the SEC as well as FINRA and other self-regulatory organizations. These regulations cover a broad range of issues, including capital requirements; sales and trading practices; use of client funds and securities; the conduct of directors, officers and employees; record-keeping and recording; supervisory procedures to prevent improper trading on material non-public information; qualification and licensing of sales personnel; and limitations on the extension of credit in securities transactions. In addition to federal registration, state securities commissions require the registration of certain broker-dealers.

Heightened Risk Governance Standards

CBNA is subject to OCC guidelines imposing heightened risk governance standards on large national banks with average total consolidated assets of $50 billion or more. The guidelines set forth minimum standards for the design and implementation of a bank’s risk governance framework, and minimum standards for oversight of that framework by a bank’s board of directors. The guidelines are intended to protect the safety and soundness of covered banks and improve bank examiners’ ability to assess compliance with the OCC’s expectations. Under the guidelines, a bank may use its parent company’s risk governance framework if the framework meets the minimum standards, the risk profiles of the parent company and the covered bank are substantially the same, and certain other conditions are met. CBNA has elected to use the Parent Company’s risk governance framework. A bank’s board of directors is required to have two members who are independent of the bank and parent company management. A bank’s board

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of directors is responsible for ensuring that the risk governance framework meets the standards in the guidelines, providing active oversight and a credible challenge to management’s recommendations and decisions and ensuring that the parent company decisions do not jeopardize the safety and soundness of the bank.

Anti-Tying Restrictions

Generally, a bank may not extend credit, lease, sell property or furnish any services or fix or vary the consideration for them on the condition that (i) the customer obtain or provide some additional credit, property or services from or to that bank or its bank holding company or their subsidiaries or (ii) the customer not obtain some other credit, property or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. A bank may however, offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products. Certain foreign transactions are exempt from the general rule.

Commercial Real Estate Lending

Lending operations that involve concentrations of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. Regulators have advised financial institutions of the risks posed by commercial real estate lending concentrations. Such loans generally include land development, construction loans and loans secured by multifamily property and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The relevant regulatory guidance prescribes the following guidelines for examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory scrutiny:


•	Total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or


•	Total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

In addition, the Dodd-Frank Act contains provisions that may cause us to reduce the amount of our commercial real estate lending and increase the cost of borrowing, including rules relating to risk retention of securitized assets. Section 941 of the Dodd-Frank Act and implementing rules adopted by the U.S. financial services regulators, including the federal banking regulators and the SEC, require, among other things, a loan originator or a securitizer of asset-backed securities to retain a percentage of the credit risk of securitized assets. We continue to analyze the impact that such rules have on our business.

Intellectual Property

In the highly competitive banking industry in which we operate, trademarks, service marks, trade names and logos are important to the success of our business. We own and license a variety of trademarks, service marks, trade names, logos and pending registrations and are spending significant resources to develop our stand-alone brands.

Employees

As of December 31, 2018 , we had approximately 18,100 full-time equivalent employees, including approximately 17,800 full-time colleagues, 100 part-time colleagues and 200 temporary employees. None of our employees are parties to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

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RISK FACTORS

ITEM 1A. RISK FACTORS

We are subject to a number of risks potentially impacting our business, financial condition, results of operations and cash flows. As we are a financial services organization, certain elements of risk are inherent in our transactions and operations and are present in the business decisions we make. We, therefore, encounter risk as part of the normal course of our business and we design risk management processes to help manage these risks. Our success is dependent on our ability to identify, understand and manage the risks presented by our business activities so that we can appropriately balance revenue generation and profitability. These risks include, but are not limited to, credit risk, market risk, liquidity risk, operational risk, model risk, technology, regulatory and legal risk and strategic and reputational risk. We discuss our principal risk management processes and, in appropriate places, related historical performance in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Governance” section in Part II, Item 7, included in this Report.

You should carefully consider the following risk factors that may affect our business, financial condition and results of operations. Other factors that could affect our business, financial condition and results of operation are discussed in the “Forward-Looking Statements” section above. However, there may be additional risks that are not presently material or known, and factors besides those discussed below, or in this or other reports that we file or furnish with the SEC, that could also adversely affect us.

Risks Related to Our Business

We may not be able to successfully execute our business strategy.

Our business strategy is designed to maximize the full potential of our business and drive sustainable growth and enhanced profitability, and our success rests on our ability to: (i) maintain a high-performing, customer-centric organization; (ii) develop differentiated value propositions to acquire, deepen, and retain core customer segments; (iii) build excellent capabilities that will allow us to stand out from our competitors; (iv) operate with financial discipline and a mindset of continuous improvement to self-fund investments; (v) prudently grow and optimize our balance sheet; (vi) modernize our technology and operational models to improve delivery, agility and speed to market; and (vii) embed risk management within our culture and our operations. Our future success and the value of our stock will depend, in part, on our ability to effectively implement our business strategy. There are risks and uncertainties, many of which are not within our control, associated with each element of our strategy. If we are not able to successfully execute our business strategy, we may never achieve our financial performance goals and any shortfall may be material. See “Business Strategy” in Part I, Item 1 — Business, included in this Report for further information.

Supervisory requirements and expectations on us as a financial holding company and a bank holding company and any regulator-imposed limits on our activities could adversely affect our ability to implement our strategic plan, expand our business, continue to improve our financial performance and make capital distributions to our stockholders.

In recent years, the federal banking agencies (the FRB, the OCC and the FDIC), as well as the CFPB have generally taken a more stringent approach to supervising and regulating financial institutions and financial products and services over which they exercise their respective supervisory authorities. This increased supervisory stringency is a result of and in addition to legislation aimed at regulatory reform, such as the Dodd-Frank Act, and the increased capital and liquidity requirements imposed by the U.S. implementation of the Basel III framework. We and CBNA and our products and services are all subject to greater supervisory scrutiny and enhanced supervisory requirements and expectations. We expect to continue to face this heightened level of supervisory scrutiny and enhanced supervisory requirements in the foreseeable future.

In addition, as part of the supervisory and examination process, if we are unsuccessful in meeting the supervisory requirements and expectations that apply to us and CBNA, regulatory agencies may from time to time take supervisory actions against us that may not be publicly disclosed. Such actions may include restrictions on our activities or the activities of our subsidiaries, informal (nonpublic) or formal (public) supervisory actions or public enforcement actions, including the payment of civil money penalties, which could increase our costs and limit our ability to implement our strategic plans and expand our business, and as a result could have a material adverse effect on our business, financial condition or results of operations.

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RISK FACTORS

Changes in interest rates may have an adverse effect on our profitability.

Net interest income historically has been, and in the near-to-medium term we anticipate that it will remain, a significant component of our total revenue. This is due to the fact that a high percentage of our assets and liabilities have been and will likely continue to be in the form of interest-bearing or interest-related instruments. Changes in interest rates can have a material effect on many areas of our business, including net interest income, deposit costs, loan volume and delinquency, and the value of our mortgage servicing rights. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates on our interest-bearing liabilities increase at a faster pace than the interest rates on our interest earning assets, our net interest income may decline and, with it, a decline in our earnings may occur. Our net interest income and our earnings would be similarly affected if the interest rates on our interest earning assets declined at a faster pace than the interest rates on our interest-bearing liabilities.

We cannot control or predict with certainty changes in interest rates. Global, national, regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense. Although we have policies and procedures designed to manage the risks associated with changes in market interest rates, as further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Governance” in Part II, Item 7, included in this Report, changes in interest rates still may have an adverse effect on our profitability.

If our ongoing assumptions regarding borrower or depositor behavior are wrong or overall economic conditions are significantly different than we anticipate, then our risk mitigation may be insufficient to protect against interest rate risk and our net income would be adversely affected.

Changes in the method pursuant to which the LIBOR and other benchmark rates are calculated and their potential discontinuance could adversely impact our business operations and financial results.

Our floating-rate funding, certain hedging transactions and certain of the products that we offer, such as floating-rate loans, financing transactions and derivatives in connection with our customer accommodation trading activities, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to another financial metric. In the event any such benchmark rate or other referenced financial metric is significantly changed, replaced or discontinued, or ceases to be recognized as an acceptable market benchmark rate or financial metric, there may be uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instrument, and there may be significant work required to transition to any new benchmark rate or other financial metric.

In response to concerns regarding the reliability and robustness of commonly used reference rates, in particular LIBOR, the Financial Stability Oversight Council and Financial Stability Board called for the development of alternative interest rate benchmarks. In 2014, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (“ARRC”) in order to identify best practices for alternative reference rates, identify best practices for contract robustness, develop an adoption plan, and create an implementation plan with metrics of success and a timeline. In June 2017, the ARRC identified the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to U.S. dollar LIBOR for use in certain new U.S. dollar derivatives and other financial instruments. Furthermore, in July 2017, the Chief Executive of the U.K. Financial Conduct Authority (“FCA”) announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

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RISK FACTORS

Despite progress made to date by regulators and industry participants to prepare for the anticipated discontinuation of LIBOR, significant uncertainties still remain. Such uncertainties relate to, for example, whether LIBOR will continue to be viewed as an acceptable market benchmark rate, what rate or rates may become accepted alternatives to LIBOR, whether different benchmark rates may become accepted alternatives to LIBOR for different types of transactions and financial instruments, how the terms of any transaction or financial instrument will be adjusted to account for differences between LIBOR and any alternative rate selected (for example, if SOFR is used as an alternative, various adjustments, including a credit spread adjustment, may be necessary to reflect that SOFR is a secured overnight rate and LIBOR is a term unsecured rate), how any replacement would be implemented across the industry, and the effect of any changes in industry views or movement to alternative benchmarks would have on the markets for LIBOR-linked financial instruments.

The discontinuation of a benchmark rate or other financial metric, changes in a benchmark rate or other financial metric, or changes in market perceptions of the acceptability of a benchmark rate or other financial metric, including LIBOR, could, among other things, adversely affect the value of and return on certain of our financial instruments or products, result in changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market volatility, adverse tax or accounting effects, increased compliance, legal and operational costs, and risks associated with customer disclosures and contract negotiations.

We could fail to attract, retain or motivate highly skilled and qualified personnel, including our senior management, other key employees or members of our Board, which could impair our ability to successfully execute our strategic plan and otherwise adversely affect our business.

A cornerstone of our strategic plan involves the hiring of highly skilled and qualified personnel. Accordingly, our ability to implement our strategic plan and our future success depends on our ability to attract, retain and motivate highly skilled and qualified personnel, including our senior management and other key employees and directors, competitive with our peers. The marketplace for skilled personnel is becoming more competitive, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. The failure to attract or retain, including as a result of an untimely death or illness of key personnel, or replace a sufficient number of appropriately skilled and key personnel could place us at a significant competitive disadvantage and prevent us from successfully implementing our strategy, which could impair our ability to implement our strategic plan successfully, achieve our performance targets and otherwise have a material adverse effect on our business, financial condition and results of operations.

Limitations on the manner in which regulated financial institutions, such as Citizens, can compensate their officers and employees, including those contained in pending rule proposals implementing requirements of Section 956 of the Dodd-Frank Act, may make it more difficult for such institutions to compete for talent with financial institutions and other companies not subject to these or similar limitations. If Citizens is unable to compete effectively, our business, financial condition and results of operations could be adversely affected, perhaps materially.

Our ability to meet our obligations, and the cost of funds to do so, depend on our ability to access identified sources of liquidity at a reasonable cost.

Liquidity risk is the risk that we will not be able to meet our obligations, including funding commitments, as they come due. This risk is inherent in our operations and can be heightened by a number of factors, including an over-reliance on a particular source of funding (including, for example, secured FHLB advances), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Like many banking groups, our reliance on customer deposits to meet a considerable portion of our funding has grown over recent years, and we continue to seek to increase the proportion of our funding represented by customer deposits. However, these deposits are subject to fluctuation due to certain factors outside our control, such as increasing competitive pressures for retail or corporate customer deposits, changes in interest rates and returns on other investment classes, or a loss of confidence by customers in us or in the banking sector generally which could result in a significant outflow of deposits within a short period of time. To the extent there is heightened competition among U.S. banks for retail customer deposits, this competition may increase the cost of procuring new deposits and/or retaining existing deposits, and otherwise negatively affect our ability to grow our deposit base. An inability to grow, or any material decrease in, our deposits could have a material adverse effect on our ability to satisfy our liquidity needs.

Maintaining a diverse and appropriate funding strategy for our assets consistent with our wider strategic risk appetite and plan remains challenging, and any tightening of credit markets could have a material adverse

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impact on us. In particular, there is a risk that corporate and financial institution counterparties may seek to reduce their credit exposures to banks and other financial institutions (for example, reductions in unsecured deposits supplied by these counterparties), which may cause funding from these sources to no longer be available. Under these circumstances, we may need to seek funds from alternative sources, potentially at higher costs than has previously been the case, or may be required to consider disposals of other assets not previously identified for disposal, in order to reduce our funding commitments.

A reduction in our credit ratings, which are based on a number of factors, could have a material adverse effect on our business, financial condition and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings are based on a number of factors, including our financial strength. Other factors considered by rating agencies include conditions affecting the financial services industry generally. Any downgrade in our ratings would likely increase our borrowing costs, could limit our access to capital markets, and otherwise adversely affect our business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our securities, including long-term debt, engage in certain longer-term derivatives transactions and retain our customers, particularly corporate customers who may require a minimum rating threshold in order to place funds with us. In addition, under the terms of certain of our derivatives contracts, we may be required to maintain a minimum credit rating or have to post additional collateral or terminate such contracts. Any of these results of a rating downgrade could increase our cost of funding, reduce our liquidity and have adverse effects on our business, financial condition and results of operations.

Our financial performance may be adversely affected by deterioration in borrower credit quality, particularly in the New England, Mid-Atlantic and Midwest regions, where our operations are concentrated.

We have exposure to many different industries and risks arising from actual or perceived changes in credit quality and uncertainty over the recoverability of amounts due from borrowers is inherent in our businesses. Our exposure may be exacerbated by the geographic concentration of our operations, which are predominately located in the New England, Mid-Atlantic and Midwest regions. The credit quality of our borrowers may deteriorate for a number of reasons that are outside our control, including as a result of prevailing economic and market conditions and asset valuation. The trends and risks affecting borrower credit quality, particularly in the New England, Mid-Atlantic and Midwest regions, have caused, and in the future may cause, us to experience impairment charges, increased repurchase demands, higher costs, additional write-downs and losses and an inability to engage in routine funding transactions, which could have a material adverse effect on our business, financial condition and results of operations.

Our framework for managing risks may not be effective in mitigating risk and loss.

Our risk management framework is made up of various processes and strategies to manage our risk exposure. The framework to manage risk, including the framework’s underlying assumptions, may not be effective under all conditions and circumstances. If the risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.

One of the main types of risks inherent in our business is credit risk. An important feature of our credit risk management system is to employ an internal credit risk control system through which we identify, measure, monitor and mitigate existing and emerging credit risk of our customers. As this process involves detailed analyses of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating system.

In addition, we have undertaken certain actions to enhance our credit policies and guidelines to address potential risks associated with particular industries or types of customers, as discussed in more detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Governance” and “— Market Risk” in Part II, Item 7, included in this Report. However, we may not be able to effectively implement these initiatives, or consistently follow and refine our credit risk management system. If any of the foregoing were to occur, it may result in an increase in the level of nonperforming loans and a higher risk exposure for us, which could have a material adverse effect on us.

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Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.

From time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be operationally complex to implement and can materially impact how we record and report our financial condition and results of operations. For example, in June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), that will, effective January 1, 2020, substantially change the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The standard replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. Upon adoption of ASU 2016-13, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the full remaining expected life. Companies must consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. In December 2018, the Federal Reserve, OCC and FDIC released a final rule to revise their regulatory capital rules to address this upcoming change to the treatment of credit expense and allowances. The final rule provides an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard. The impact of this final rule on Citizens and CBNA will depend on whether we elect to phase in the impact of the standard over a three-year period. The standard is likely to have a negative impact, potentially materially, to the allowance and capital at adoption in 2020; however, Citizens is still evaluating the impact. It is also possible that Citizens’ ongoing reported earnings and lending activity will be negatively impacted in periods following adoption.

Our financial and accounting estimates and risk management framework rely on analytical forecasting and models.

The processes we use to estimate our inherent loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models. Some of our tools and metrics for managing risk are based upon our use of observed historical market behavior. We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information. Moreover, our models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur. We seek to incorporate appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data is not at all times predictive of future developments in any particular period and the period of data we incorporate into our models may turn out to be inappropriate for the future period being modeled. In such case, our ability to manage risk would be limited and our risk exposure and losses could be significantly greater than our models indicated. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits. Finally, information we provide to our regulators based on poorly designed or implemented models could also be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our stockholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient.

The preparation of our financial statements requires the use of estimates that may vary from actual results. Particularly, various factors may cause our ALLL to increase.

The preparation of audited Consolidated Financial Statements in conformity with GAAP requires management to make significant estimates that affect the financial statements. Our most critical accounting estimate is the ALLL. The ALLL is a reserve established through a provision for loan and lease losses charged to expense and represents our estimate of incurred but unrealized losses within the existing portfolio of loans. The ALLL is necessary to reserve for estimated loan and lease losses and risks inherent in the loan portfolio. The level of the ALLL reflects our ongoing evaluation of industry concentrations, specific credit risks, loan and lease loss experience, current loan portfolio quality, present economic, political and regulatory conditions and incurred losses inherent in the current loan portfolio.

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The determination of the appropriate level of the ALLL inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, the stagnation of certain economic indicators that we are more susceptible to, such as unemployment and real estate values, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside our control, may require an increase in the ALLL. In addition, bank regulatory agencies periodically review our ALLL and may require an increase in the ALLL or the recognition of further loan charge-offs, based on judgments that can differ from those of our own management. In addition, if charge-offs in future periods exceed the ALLL—that is, if the ALLL is inadequate—we will need additional loan and lease loss provisions to increase the ALLL. Should such additional provisions become necessary, they would result in a decrease in net income and capital and may have a material adverse effect on us.

Operational risks are inherent in our businesses.

Our operations depend on our ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. Operational risk and losses can result from internal and external fraud; improper conduct or errors by employees or third parties; failure to document transactions properly or to obtain proper authorization; failure to comply with applicable regulatory requirements and conduct of business rules; equipment failures, including those caused by natural disasters or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyber-attacks or unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems; or the inadequacy or failure of systems and controls, including those of our suppliers or counterparties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff, it is not possible to be certain that such actions have been or will be effective in controlling each of the operational risks faced by us. Any weakness in these systems or controls, or any breaches or alleged breaches of such laws or regulations, could result in increased regulatory supervision, enforcement actions and other disciplinary action, and have an adverse impact on our business, applicable authorizations and licenses, reputation and results of operations.

The financial services industry, including the banking sector, is undergoing rapid technological changes as a result of competition and changes in the legal and regulatory framework, and we may not be able to compete effectively as a result of these changes.

The financial services industry, including the banking sector, is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. In addition, new, unexpected technological changes could have a disruptive effect on the way banks offer products and services. We believe our success depends, to a great extent, on our ability to address customer needs by using technology to offer products and services that provide convenience to customers and to create additional efficiencies in our operations. However, we may not be able to, among other things, keep up with the rapid pace of technological changes, effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to compete effectively to attract or retain new business may be impaired, and our business, financial condition or results of operations may be adversely affected.

In addition, changes in the legal and regulatory framework under which we operate require us to update our information systems to ensure compliance. Our need to review and evaluate the impact of ongoing rule proposals, final rules and implementation guidance from regulators further complicates the development and implementation of new information systems for our business. Also, recent regulatory guidance has focused on the need for financial institutions to perform increased due diligence and ongoing monitoring of third-party vendor relationships, thus increasing the scope of management involvement and decreasing the efficiency otherwise resulting from our relationships with third-party technology providers. Given the significant number of ongoing regulatory reform initiatives, it is possible that we incur higher than expected information technology costs in order to comply with current and impending regulations. See “—Supervisory requirements and expectations on us as a financial holding company and a bank holding company and any regulator-imposed limits on our activities could adversely affect our ability to implement our strategic plan, expand our business, continue to improve our financial performance and make capital distributions to our stockholders.”

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We are subject to a variety of cybersecurity risks that, if realized, could adversely affect how we conduct our business.

Information security risks for large financial institutions such as CFG have increased significantly in recent years in part because of the proliferation of new technologies, such as Internet and mobile banking to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties. Third parties with whom we or our customers do business also present operational and information security risks to us, including security breaches or failures of their own systems. The possibility of employee error, failure to follow security procedures, or malfeasance also presents these risks. Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. In addition, to access our products and services, our customers may use personal computers, smartphones, tablets, and other mobile devices that are beyond our control environment. Although we believe that we have appropriate information security procedures and controls, our technologies, systems, networks and our customers’ devices may be the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of the confidential, and/or proprietary information of CFG, our customers, our vendors, our counterparties, or our employees. We are under continuous threat of loss due to cyber-attacks, especially as we continue to expand customer capabilities to utilize the Internet and other remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals extract funds directly from customers’ or our accounts using fraudulent schemes that may include Internet-based funds transfers. We have been subject to a number of e-fraud incidents historically. We have also been subject to attempts to steal sensitive customer data, such as account numbers and social security numbers, through unauthorized access to our computer systems including computer hacking. Such attacks are less frequent but could present significant reputational, legal and regulatory costs to us if successful. We have implemented certain technology protections such as Customer Profiling and Set-Up Authentication to be in compliance with the FFIEC Authentication in Internet Banking Environment (“AIBE”) guidelines.

As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our layers of defense or to investigate and remediate any information security vulnerabilities. System enhancements and updates may also create risks associated with implementing new systems and integrating them with existing ones. Due to the complexity and interconnectedness of information technology systems, the process of enhancing our layers of defense can itself create a risk of systems disruptions and security issues. In addition, addressing certain information security vulnerabilities, such as hardware-based vulnerabilities, may affect the performance of our information technology systems. The ability of our hardware and software providers to deliver patches and updates to mitigate vulnerabilities in a timely manner can introduce additional risks, particularly when a vulnerability is being actively exploited by threat actors.

Despite our efforts to prevent a cyber-attack, a successful cyber-attack could persist for an extended period of time before being detected, and, following detection, it could take considerable time for us to obtain full and reliable information about the cybersecurity incident and the extent, amount and type of information compromised. During the course of an investigation, we may not necessarily know the full effects of the incident or how to remediate it, and actions and decisions that are taken or made in an effort to mitigate risk may further increase the costs and other negative consequences of the incident.

The techniques used by cyber criminals change frequently, may not be recognized until launched and can be initiated from a variety of sources, including terrorist organizations and hostile foreign governments. These actors may attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to data or our systems. In the event that a cyber-attack is successful, our business, financial condition or results of operations may be adversely affected. For a discussion of the guidance that federal banking regulators have released regarding cybersecurity and cyber risk management standards, see “Regulation and Supervision” in Part I, Item 1 — Business, included in this Report.

We rely heavily on communications and information systems to conduct our business.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems, including due to hacking or other similar attempts to breach information technology security protocols, could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. Although we have established policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that these policies and procedures will be successful and that any such failure, interruption or

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security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could require us to devote substantial resources (including management time and attention) to recovery and response efforts, damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability. Although we maintain insurance coverage for information security events, we may incur losses as a result of such events that are not insured against or not fully covered by our insurance.

We rely on third parties for the performance of a significant portion of our information technology.

We rely on third parties for the performance of a significant portion of our information technology functions and the provision of information technology and business process services. For example, (i) unaffiliated third parties operate data communications networks on which certain components and services relating to our online banking system rely, (ii) third parties host or maintain many of our applications, including our Commercial Loan System, which is hosted and maintained by Automated Financial Systems, Inc., (iii) Fidelity National Information Services, Inc. maintains our core deposits system, and (iv) IBM Corporation provides us with a wide range of information technology support services, including end user, data center, network, mainframe, storage and database services. The success of our business depends in part on the continuing ability of these (and other) third parties to perform these functions and services in a timely and satisfactory manner, which performance could be disrupted or otherwise adversely affected due to failures or other information security events originating at the third parties or at the third parties’ suppliers or vendors (so-called “fourth party risk”). We may not be able to effectively monitor or mitigate fourth-party risk, in particular as it relates to the use of common suppliers or vendors by the third parties that perform functions and services for us. If we experience a disruption in the provision of any functions or services performed by third parties, we may have difficulty in finding alternate providers on terms favorable to us and in reasonable timeframes. If these services are not performed in a satisfactory manner, we would not be able to serve our customers well. In either situation, our business could incur significant costs and be adversely affected.

We are exposed to reputational risk and the risk of damage to our brands and the brands of our affiliates.

Our success and results depend, in part, on our reputation and the strength of our brands. We are vulnerable to adverse market perception as we operate in an industry where integrity, customer trust and confidence are paramount. We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory or other investigations or actions, press speculation and negative publicity, among other factors, could damage our brands or reputation. Our brands and reputation could also be harmed if we sell products or services that do not perform as expected or customers’ expectations for the product are not satisfied.

We may be adversely affected by unpredictable catastrophic events or terrorist attacks and our business continuity and disaster recovery plans may not adequately protect us from serious disaster.

The occurrence of catastrophic events such as hurricanes, tropical storms, tornadoes and other large-scale catastrophes and terrorist attacks could adversely affect our business, financial condition or results of operations if a catastrophe rendered both our production data center in Rhode Island and our recovery data center in North Carolina unusable. Although we enhanced our disaster recovery capabilities in 2016 through the completion of the new, out-of-region backup data center in North Carolina, there can be no assurance that our current disaster recovery plans and capabilities will adequately protect us from serious disaster.

Risks Related to Our Industry

Any deterioration in national economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Our business is affected by national economic conditions, as well as perceptions of those conditions and future economic prospects. Changes in such economic conditions are not predictable and cannot be controlled. Adverse economic conditions could require us to charge off a higher percentage of loans and increase the provision for credit losses, which would reduce our net income and otherwise have a material adverse effect on our business, financial condition and results of operations. For example, our business was significantly affected by the global economic and financial crisis that began in 2008. The falling home prices, increased rate of foreclosure and high levels of unemployment in the United States triggered significant write-downs by us and other financial institutions. These write-downs adversely impacted our financial results in material respects. Although the U.S. economy

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continues to recover, an interruption or reversal of this recovery would adversely affect the financial services industry and banking sector.

We operate in an industry that is highly competitive, which could result in losing business or margin declines and have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive industry. The industry could become even more competitive as a result of reform of the financial services industry resulting from the Dodd-Frank Act and other legislative, regulatory and technological changes, as well as continued consolidation. We face aggressive competition from other domestic and foreign lending institutions and from numerous other providers of financial services, including non-banking financial institutions that are not subject to the same regulatory restrictions as banks and bank holding companies, securities firms and insurance companies, and competitors that may have greater financial resources.

With respect to non-banking financial institutions, technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Some of our non-bank competitors are not subject to the same extensive regulations we are and, therefore, may have greater flexibility in competing for business. As a result of these and other sources of competition, we could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would adversely affect our profitability and business.

The conditions of other financial institutions or of the financial services industry could adversely affect our operations and financial conditions.

Financial services institutions are typically interconnected as a result of trading, investment, liquidity management, clearing, counterparty and other relationships. Within the financial services industry, the default by any one institution could lead to defaults by other institutions. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many financial institutions are closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial intermediaries, such as clearing agencies, banks and exchanges with which we interact on a daily basis, or key funding providers such as the FHLBs, any of which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Regulations Governing Our Industry

As a financial holding company and a bank holding company, we are subject to comprehensive regulation that could have a material adverse effect on our business and results of operations.

As a financial holding company and a bank holding company, we are subject to comprehensive regulation, supervision and examination by the FRB. In addition, CBNA is subject to comprehensive regulation, supervision and examination by the OCC. Our regulators supervise us through regular examinations and other means that allow the regulators to gauge management’s ability to identify, assess and control risk in all areas of operations in a safe and sound manner and to ensure compliance with laws and regulations. In the course of their supervision and examinations, our regulators may require improvements in various areas. If we are unable to implement and maintain any required actions in a timely and effective manner, we could become subject to informal (non-public) or formal (public) supervisory actions and public enforcement orders that could lead to significant restrictions on our existing business or on our ability to engage in any new business. Such forms of supervisory action could include, without limitation, written agreements, cease and desist orders, and consent orders and may, among other things, result in restrictions on our ability to pay dividends, requirements to increase capital, restrictions on our activities, the imposition of civil monetary penalties, and enforcement of such actions through injunctions or restraining orders. We could also be required to dispose of certain assets and liabilities within a prescribed period. The terms of any such supervisory or enforcement action could have a material adverse effect on our business, financial condition and results of operations.

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We are a bank holding company that has elected to become a financial holding company pursuant to the Bank Holding Company Act. Financial holding companies are allowed to engage in certain financial activities in which a bank holding company is not otherwise permitted to engage. However, to maintain financial holding company status, a bank holding company (and all of its depository institution subsidiaries) must be “well capitalized” and “well managed.” If a bank holding company ceases to meet these capital and management requirements, there are many penalties it would be faced with, including (i) the FRB may impose limitations or conditions on the conduct of its activities, and (ii) it may not undertake any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If a company does not return to compliance within 180 days, which period may be extended, the FRB may require divestiture of that company’s depository institutions. To the extent we do not meet the requirements to be a financial holding company in the future, there could be a material adverse effect on our business, financial condition and results of operations.

We may be unable to disclose some restrictions or limitations on our operations imposed by our regulators.

From time to time, bank regulatory agencies take supervisory actions that restrict or limit a financial institution’s activities and lead it to raise capital or subject it to other requirements. Directives issued to enforce such actions may be confidential and thus, in some instances, we are not permitted to publicly disclose these actions. In addition, as part of our regular examination process, our and CBNA’s respective regulators may advise us or CBNA to operate under various restrictions as a prudential matter. Any such actions or restrictions, if and in whatever manner imposed, could adversely affect our costs and revenues. Moreover, efforts to comply with any such nonpublic supervisory actions or restrictions may require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions, if and in whatever manner imposed, could have a material adverse effect on our business and results of operations; and, in certain instances, we may not be able to publicly disclose these matters.

The regulatory environment in which we operate continues to be subject to significant and evolving regulatory requirements that could have a material adverse effect on our business and earnings.

We are heavily regulated by multiple banking, consumer protection, securities and other regulatory authorities at the federal and state levels. This regulatory oversight is primarily established to protect depositors, the FDIC’s Deposit Insurance Fund, consumers of financial products, and the financial system as a whole, not our security holders. Changes to statutes, regulations, rules or policies, including the interpretation, implementation or enforcement of statutes, regulations, rules or policies, could affect us in substantial and unpredictable ways, including by, for example, subjecting us to additional costs, limiting the types of financial services and other products we may offer, limiting our ability to pursue acquisitions and increasing the ability of third parties, including non-banks, to offer competing financial services and products. In recent years, we, together with the rest of the financial services industry, have faced particularly intense scrutiny, with many new regulatory initiatives and vigorous oversight and enforcement on the part of numerous regulatory and governmental authorities. Legislatures and regulators have pursued a broad array of initiatives intended to promote the safety and soundness of financial institutions, financial market stability, the transparency and liquidity of financial markets, and consumer and investor protection. Certain regulators and law enforcement authorities have also recently required admissions of wrongdoing and, in some cases, criminal pleas as part of the resolutions of matters brought by them against financial institutions. Any such resolution of a matter involving us could lead to increased exposure to civil litigation, could adversely affect our reputation, could result in penalties or limitations on our ability to do business or engage in certain activities and could have other negative effects. In addition, a single event or issue may give rise to numerous and overlapping investigations and proceedings, including by multiple federal and state regulators and other governmental authorities.

We are also subject to laws and regulations relating to the privacy of the information of our customers, employees, counterparties and others, and any failure to comply with these laws and regulations could expose us to liability and/or reputational damage. As new privacy-related laws and regulations are implemented, the time and resources needed for us to comply with those laws and regulations, as well as our potential liability for non-compliance and our reporting obligations in the case of data breaches, may significantly increase.

There have been significant revisions to the laws and regulations applicable to Citizens that have been enacted or proposed in recent months. These and other rules to implement the changes have yet to be finalized, and the final timing, scope and impact of these changes to the regulatory framework applicable to financial institutions remain uncertain. For more information on the regulations to which we are subject and recent initiatives

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to reform financial institution regulation, see “Regulation and Supervision” in Part I, Item 1 — Business, included in this Report.

We are subject to capital adequacy and liquidity standards, and if we fail to meet these standards our financial condition and operations would be adversely affected.

We are subject to several capital adequacy and liquidity standards. To the extent that we are unable to meet these standards, our ability to make distributions of capital will be limited and we may be subject to additional supervisory actions and limitations on our activities. See “Regulation and Supervision” in Part I, Item 1 — Business, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital and Regulatory Requirements” and “— Liquidity” in Part II, Item 7, included in this Report, for further discussion of the regulations to which we are subject.

We could be required to act as a “source of strength” to CBNA, which would have a material adverse effect on our business, financial condition and results of operations.

FRB policy historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. This support may be required by the FRB at times when we might otherwise determine not to provide it or when doing so is not otherwise in the interests of CFG or our stockholders or creditors, and may include one or more of the following:


•	We may be compelled to contribute capital to CBNA, including by engaging in a public offering to raise such capital. Furthermore, any extensions of credit from us to CBNA that are included in CBNA’s capital would be subordinate in right of payment to depositors and certain other indebtedness of CBNA.


•	In the event of a bank holding company’s bankruptcy, any commitment that the bank holding company had been required to make to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.


•	In the event of impairment of the capital stock of CBNA, we, as CBNA’s stockholder, could be required to pay such deficiency.

We depend on CBNA for most of our revenue, and restrictions on dividends and other distributions by CBNA could affect our liquidity and ability to fulfill our obligations.

As a bank holding company, we are a separate and distinct legal entity from CBNA, our banking subsidiary. We typically receive substantially all of our revenue from dividends from CBNA. These dividends are the principal source of funds to pay dividends on our equity and interest and principal on our debt. Various federal and/or state laws and regulations, as well as regulatory expectations, limit the amount of dividends that CBNA may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event CBNA is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our common stock. The inability to receive dividends from CBNA could have a material adverse effect on our business, financial condition and results of operations. See “Supervision and Regulation” in Part I, Item 1 — Business, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital and Regulatory Matters” in Part II, Item 7, included in this Report.

From time-to-time, we may become or are subject to regulatory actions that may have a material impact on our business.

We may become or are involved, from time to time, in reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business. These regulatory actions involve, among other matters, accounting, compliance and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief that may require changes to our business or otherwise materially impact our business.

In regulatory actions, such as those referred to above, it is inherently difficult to determine whether any loss is probable or whether it is possible to reasonably estimate the amount of any loss. We cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual fine, penalty or other relief, conditions or restrictions, if any, may be, particularly for actions that are in their early stages of investigation. We may be required to make significant restitution payments to CBNA customers arising from certain compliance issues and also may be required to pay civil money penalties in connection with certain of these issues. This uncertainty makes it difficult to estimate probable losses, which, in turn, can lead to substantial disparities between the reserves

CITIZENS FINANCIAL GROUP, INC.

RISK FACTORS

we may establish for such proceedings and the eventual settlements, fines, or penalties. Adverse regulatory actions could have a material adverse effect on our business, financial condition and results of operations.

We are and may be subject to litigation that may have a material impact on our business.

Our operations are diverse and complex and we operate in legal and regulatory environments that expose us to potentially significant litigation risk. In the normal course of business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a financial services institution, including with respect to alleged unfair or deceptive business practices and mis-selling of certain products. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress. Moreover, a number of recent judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. This could increase the amount of private litigation to which we are subject. For more information regarding ongoing significant legal proceedings in which we may be involved, see Note 18 “Commitments and Contingencies” to our audited Consolidated Financial Statements included in Part II, Item 8 — Financial Statements and Supplementary Data, included in this Report.

Compliance with anti-money laundering and anti-terrorism financing rules involve significant cost and effort.

We are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and poses significant technical challenges. Although we believe our current policies and procedures are sufficient to comply with applicable rules and regulations, we cannot guarantee that our anti-money laundering and anti-terrorism financing policies and procedures completely prevent situations of money laundering or terrorism financing. Any such failure events may have severe consequences, including sanctions, fines and reputational consequences, which could have a material adverse effect on our business, financial condition or results of operations.

We may become subject to more stringent regulatory requirements and activity restrictions, or have to restructure, if the FRB and FDIC jointly determine that our resolution plan is not credible.

Bank holding companies with more than $100 billion in assets are currently required to submit resolution plans that, in the event of material financial distress or failure, establish the rapid, orderly and systemically safe liquidation of the company under the U.S. Bankruptcy Code. Separately, insured depository institutions with more than $50 billion in assets must submit to the FDIC a resolution plan whereby they can be resolved in a manner that is orderly and that ensures that depositors will receive access to insured funds within certain required timeframes. If the FRB and the FDIC jointly determine that the resolution plan of a bank holding company is not credible, and the company fails to cure the deficiencies in a timely manner, then the FRB and the FDIC may jointly impose on the company, or on any of its subsidiaries, more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations, or require the divestment of certain assets or operations. If the FRB and the FDIC jointly determine that our resolution plan is not credible or would not facilitate our orderly resolution under the U.S. Bankruptcy Code, we could become subject to more stringent regulatory requirements or business restrictions, or have to divest certain of our assets or businesses. Any such measures could have a material adverse effect on our business, financial condition or results of operations.

CITIZENS FINANCIAL GROUP, INC.

RISK FACTORS

Risks Related to our Common Stock

Our stock price may be volatile, and you could lose all or part of your investment as a result.

You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuation in the market value of your investment. The market price of our common stock could be subject to wide fluctuations in response to, among other things, the factors described in this “Risk Factors” section, and other factors, some of which are beyond our control. These factors include:


•	quarterly variations in our results of operations or the quarterly financial results of companies perceived to be similar to us;


•	changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;


•	our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;


•	fluctuations in the market valuations of companies perceived by investors to be comparable to us;


•	future sales of our common stock;


•	additions or departures of members of our senior management or other key personnel;


•	changes in industry conditions or perceptions; and


•	changes in applicable laws, rules or regulations and other dynamics.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market price of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

If any of the foregoing occurs, it could cause our stock price to fall and may expose us to securities class action litigation that, even if unsuccessful, could be costly to defend and a distraction to management.

We may not repurchase shares or pay cash dividends on our common stock.

Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. Also, as a bank holding company, our ability to repurchase shares and declare and pay dividends is dependent on certain federal regulatory considerations, including the rules of the FRB regarding capital adequacy and dividends. Additionally, we are required to submit periodic capital plans to the FRB for review, or otherwise obtain FRB authorization, before we can take certain capital actions, including repurchasing shares, declaring and paying dividends, or repurchasing or redeeming capital securities. If our capital plan or any amendment to our capital plan is objected to for any reason, our ability to repurchase shares and declare and pay dividends on our capital stock may be limited. Further, if we are unable to satisfy the capital requirements applicable to us for any reason, we may be limited in our ability to repurchase shares and declare and pay dividends on our capital stock. See “Regulation and Supervision” in Part I, Item 1 — Business, included in this Report, for further discussion of the regulations to which we are subject.

“Anti-takeover” provisions and the regulations to which we are subject may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders.

We are a bank holding company incorporated in the state of Delaware. Anti-takeover provisions in Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws, as well as regulatory approvals that would be required under federal law, could make it more difficult for a third party to take control of us and may prevent stockholders from receiving a premium for their shares of our common stock. These provisions could adversely affect the market price of our common stock and could reduce the amount that stockholders might get if we are sold.

We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board and by providing our Board with more time to assess any acquisition proposal. However, these provisions apply even if the offer may be determined to be beneficial by some

CITIZENS FINANCIAL GROUP, INC.

RISK FACTORS

stockholders and could delay or prevent an acquisition that our Board determines is not in our best interest and that of our stockholders.

Furthermore, banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws include the Bank Holding Company Act and the Change in Bank Control Act.

CITIZENS FINANCIAL GROUP, INC.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our headquarters is in Providence, Rhode Island. As of December 31, 2018, we leased approximately 4.8 million square feet of office and retail branch space. Our portfolio of leased space consisted of 3.4 million square feet of retail branch space which spanned eleven states and 1.4 million square feet of non-branch space. As of December 31, 2018, we owned an additional 1 million square feet of office and branch space. We operated 76 branches in Rhode Island, 37 in Connecticut, 245 in Massachusetts, 13 in Vermont, 63 in New Hampshire, 120 in New York, 11 in New Jersey, 325 in Pennsylvania, 23 in Delaware, 100 in Ohio and 87 in Michigan. Of these branches, 1,074 were leased and the remainder were owned. These properties were used by both the Consumer Banking and Commercial Banking segments. Management believes the terms of the various leases were consistent with market standards and were derived through arm’s-length bargaining. We also believe that our properties are in good operating condition and adequately serve our current business operations. We anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.

In the Summer of 2018, we completed the construction of our new campus in Johnston, Rhode Island. The three-building complex brought together approximately 3,200 colleagues from various locations to one, creating greater collaboration and efficiency.

ITEM 3. LEGAL PROCEEDINGS

Information required by this item is presented in Note 18 “Commitments and Contingencies” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, and is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

CITIZENS FINANCIAL GROUP, INC.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the New York Stock Exchange under the symbol “CFG.” As of February 1, 2019, our common stock was owned by two holders of record (including Cede & Co.) and approximately 183,000 beneficial shareholders whose shares were held in “street name” through a broker or bank. Information regarding the high and low sale prices of our common stock and cash dividends declared on such shares, as required by this item, is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quarterly Results of Operations” in Part II, Item 7, included in this Report. Information regarding restrictions on dividends, as required by this Item, is presented in Note 24 “Regulatory Matters” and Note 26 “Parent Company Financials” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report. Information relating to compensation plans under which our equity securities are authorized for issuance is presented in “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Part III, Item 12, included in this Report.

The following graph compares the cumulative total stockholder returns for our performance since September 24, 2014 relative to the performance of the Standard & Poor’s 500 ^® index, a commonly referenced U.S. equity benchmark consisting of leading companies from diverse economic sectors; the KBW Nasdaq Bank Index (“BKX”), composed of 24 leading national money center and regional banks and thrifts; and a group of other banks that constitute our peer regional banks (BB&T, Comerica, Fifth Third, KeyCorp, M&T, PNC, Regions, SunTrust and U.S. Bancorp). The graph assumes a $100 investment at the closing price on September 24, 2014 in each of CFG common stock, the S&P 500 index, the BKX and the peer market-capitalization weighted average and assumes all dividends were reinvested on the date paid. The points on the graph represent the date our shares first began to trade on the NYSE and fiscal quarter-end amounts based on the last trading day in each subsequent fiscal quarter.

This graph shall not be deemed “soliciting material” or be filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Citizens Financial Group, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.



	9/24/2014		9/30/2014		12/31/2014		12/31/2015		12/31/2016		12/31/2017		12/31/2018
CFG		$100		$101		$108		$116		$161		$193		$140
S&P 500 Index	100		99		104		105		118		143		137
KBW BKX Index	100		98		103		103		133		157		129
Peer Regional Bank Average		$100		$99		$105		$105		$137		$159		$133

CITIZENS FINANCIAL GROUP, INC.

Issuer Purchase of Equity Securities

Details of the repurchases of our common stock during the fourth quarter 2018 are included in the following table:



Period	Total Number of Shares Repurchased ⁽¹⁾	Weighted-Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾	Maximum Dollar Amount of Shares That May Yet Be Purchased As Part of Publicly Announced Plans or Programs ⁽¹⁾
October 1, 2018 - October 31, 2018	6,214,965	$36.38	6,214,965	$393,897,709
November 1, 2018 - November 30, 2018	—	$—	—	$393,897,709
December 1, 2018 - December 31, 2018	2,031,256	$36.38	2,031,256	$320,000,000

⁽¹⁾ On June 28, 2018, the Company announced that its 2018 Capital Plan, submitted as part of the CCAR process and not objected to by the FRB, included share repurchases of CFG common stock of up to $1.02 billion for the four-quarter period ending with the second quarter of 2019. This share repurchase plan, which was approved by the Company’s Board of Directors at the time of the announcement, allowed for share repurchases that may be executed in the open market or in privately negotiated transactions, including under Rule 10b5-1 plans. All shares repurchased by the Company during the fourth quarter were executed pursuant to an accelerated share repurchase transaction, which was completed by December 31, 2018. The timing and exact amount of future share repurchases will be subject to various factors, including the Company’s capital position, financial performance and market conditions.

CITIZENS FINANCIAL GROUP, INC.

SELECTED CONSOLIDATED FINANCIAL DATA

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected Consolidated Statements of Operations data for the years ended December 31, 2018 , 2017 and 2016 and the selected Consolidated Balance Sheet data as of December 31, 2018 and 2017 are derived from our audited Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, included in this Report. We derived the selected Consolidated Statements of Operations data for the years ended December 31, 2015 and 2014 and the selected Consolidated Balance Sheet data as of December 31, 2016 , 2015 , and 2014 from our prior audited Consolidated Financial Statements, not included herein. Our historical results are not necessarily indicative of the results expected for any future period.

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and our audited Consolidated Financial Statements and the Notes thereto in Part II, Item 8 — Financial Statements and Supplementary Data, both included in this Report.



	For the Year Ended December 31,
(in millions, except per-share and ratio data)	2018			2017			2016			2015			2014
OPERATING DATA:
Net interest income		$4,532			$4,173			$3,758			$3,402			$3,301
Noninterest income	1,596			1,534			1,497			1,422			1,678
Total revenue	6,128			5,707			5,255			4,824			4,979
Provision for credit losses	326			321			369			302			319
Noninterest expense	3,619			3,474			3,352			3,259			3,392
Income before income tax expense	2,183			1,912			1,534			1,263			1,268
Income tax expense ⁽¹⁾	462			260			489			423			403
Net income	1,721			1,652			1,045			840			865
Net income available to common stockholders	1,692			1,638			1,031			833			865
Net income per average common share - basic ⁽²⁾	3.54			3.26			1.97			1.55			1.55
Net income per average common share - diluted ⁽²⁾	3.52			3.25			1.97			1.55			1.55
Dividends declared and paid per common share	0.98			0.64			0.46			0.40			1.43
OTHER OPERATING DATA:
Return on average common equity ⁽³⁾	8.62		%	8.35		%	5.23		%	4.30		%	4.46		%
Return on average tangible common equity ⁽³⁾	12.94			12.35			7.74			6.45			6.71
Return on average total assets ⁽³⁾	1.11			1.10			0.73			0.62			0.68
Return on average total tangible assets ⁽³⁾	1.16			1.15			0.76			0.65			0.71
Efficiency ratio ⁽³⁾	59.06			60.87			63.80			67.56			68.12
Operating leverage ^{(3) (4)}	3.19			4.98			6.08			0.81			61.99
Net interest margin ⁽³⁾	3.19			3.02			2.86			2.75			2.83
Effective income tax rate ⁽¹⁾	21.16			13.62			31.88			33.52			31.80

⁽¹⁾ On December 22, 2017 President Trump signed the 2017 Tax Legislation which reduced the corporate tax rate from 35% to 21%.

⁽²⁾ Earnings per share information reflects a 165,582-for-1 forward stock split effective on August 22, 2014.

⁽³⁾ See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Introduction — Key Performance Metrics Used by Management and Non-GAAP Financial Measures” in Part II, Item 7, for definitions of our key performance metrics.

⁽⁴⁾ “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 2014 calculation, 2013 total revenue was $4.7 billion and noninterest expense was $7.7 billion .

CITIZENS FINANCIAL GROUP, INC.

SELECTED CONSOLIDATED FINANCIAL DATA



	As of December 31,
(in millions, except ratio data)	2018			2017			2016			2015			2014
BALANCE SHEET DATA:
Total assets		$160,518			$152,336			$149,520			$138,208			$132,857
Loans held for sale, at fair value	1,219			497			583			325			256
Other loans held for sale	101			221			42			40			25
Loans and leases	116,660			110,617			107,669			99,042			93,410
Allowance for loan and lease losses	(1,242		)	(1,236		)	(1,236		)	(1,216		)	(1,195		)
Total securities	25,075			25,733			25,610			24,075			24,704
Goodwill	6,923			6,887			6,876			6,876			6,876
Total liabilities	139,701			132,066			129,773			118,562			113,589
Total deposits	119,575			115,089			109,804			102,539			95,707
Federal funds purchased and securities sold under agreements to repurchase	1,156			815			1,148			802			4,276
Other short-term borrowed funds	1,653			1,856			3,211			2,630			6,253
Long-term borrowed funds	14,433			11,765			12,790			9,886			4,642
Total stockholders’ equity	20,817			20,270			19,747			19,646			19,268
OTHER BALANCE SHEET DATA:
Asset Quality Ratios:
Allowance for loan and lease losses as a % of total loans and leases	1.06		%	1.12		%	1.15		%	1.23		%	1.28		%
Allowance for loan and lease losses as a % of nonperforming loans and leases	156			142			118			115			109
Nonperforming loans and leases as a % of total loans and leases	0.68			0.79			0.97			1.07			1.18
Capital Ratios: ⁽⁵⁾
CET1 capital ratio ⁽⁶⁾	10.6			11.2			11.2			11.7			12.4
Tier 1 capital ratio ⁽⁷⁾	11.3			11.4			11.4			12.0			12.4
Total capital ratio ⁽⁸⁾	13.3			13.9			14.0			15.3			15.8
Tier 1 leverage ratio ⁽⁹⁾	10.0			10.0			9.9			10.5			10.6

⁽⁵⁾ The capital ratios and associated components as of December 31, 2018, 2017, 2016 and 2015 are prepared using the U.S. Basel III Standardized approach. 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 December 31, 2014 are prepared using the U.S. Basel I approach. The December 31, 2017 capital ratios reflect the retrospective adoption of FASB ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — 2017 compared with 2016 — Income Tax Expense” for additional information.

⁽⁶⁾ “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

⁽⁷⁾ “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.

⁽⁸⁾ “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

⁽⁹⁾ “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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



		Page
Introduction		42
Financial Performance		44
Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations		102
Results of Operations - 2018 compared with 2017		46
Net Income		46
Net Interest Income		47
Noninterest Income		50
Provision for Credit Losses		50
Noninterest Expense		50
Income Tax Expense		51
Business Operating Segments		51
Results of Operations - 2017 compared with 2016		56
Net Income		56
Net Interest Income		57
Noninterest Income		60
Provision for Credit Losses		60
Noninterest Expense		60
Income Tax Expense		61
Business Operating Segments		62
Analysis of Financial Condition		66
Securities		66
Loans and Leases		67
Allowance for Credit Losses and Nonperforming Assets		69
Deposits		77
Borrowed Funds		78
Quarterly Results of Operations		80
Capital and Regulatory Matters		82
Liquidity		86
Contractual Obligations		90
Off-Balance Sheet Arrangements		90
Critical Accounting Estimates		90
Risk Governance		93
Market Risk		96

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 $160.5 billion in assets as of December 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 2,900 ATMs and approximately 1,100 branches in 11 states in the New England, Mid-Atlantic and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.

The following MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data of this Form 10-K, as well as other information contained in this document.

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

As a banking institution, we manage and evaluate 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, which represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

This document contains non-GAAP financial measures denoted as “Underlying” or “Adjusted/Underlying” results. Underlying or Adjusted/Underlying results for any given reporting period exclude certain items that may

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

occur in that period which Management does not consider indicative of the Company’s on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying or Adjusted/Underlying results in any given reporting period reflect our on-going financial performance in that period and, accordingly, are useful to consider in addition to our GAAP financial results. We further believe the presentation of Underlying or Adjusted/Underlying results 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 such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for our results 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 or Adjusted/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

2018 compared with 2017 - Key Highlights

Full year 2018 net income of $1.7 billion increase d $69 million , or 4% , from 2017 , with earnings per diluted common share of $3.52 , up 8% from $3.25 per diluted common share for 2017 . 2018 ROTCE of 12.9% improved from 12.3% in 2017 .

Full year 2018 results include $16 million after-tax, or $0.04 per diluted common share, of notable items compared with $340 million after-tax, or $0.67 per diluted common share, in 2017 as outlined in the tables below.

The following table presents selected GAAP and non-GAAP measures:*



	Year Ended December 31, 2018
(in millions)	Noninterest income			Noninterest expense		Credit-related costs		Income tax expense			Net Income
Reported results (GAAP)		$1,596			$3,619		$326		$462			$1,721
Less: Notable items
Tax Legislation DTL adjustment	—			—		—		(29		)	29
TOP efficiency initiatives and other actions	(1		)	33		—		(8		)	(26		)
FAMC integration costs	(4		)	21		—		(6		)	(19		)
Total notable items		($5	)		$54		$—		($43	)		($16	)
Underlying results (non-GAAP)		$1,601			$3,565		$326		$505			$1,737

* 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.”



	Year Ended December 31, 2017
(in millions)	Noninterest income			Noninterest expense		Credit-related costs			Income tax expense			Net Income
Reported results (GAAP)		$1,534			$3,474		$321			$260			$1,652
Less: Notable items
Tax and tax-related notable items:
Tax Legislation DTL adjustment	—			—		—			(331		)	331
Colleague and community reinvestment	—			22		—			(9		)	(13		)
Settlement of certain tax matters	—			—		—			(23		)	23
TOP efficiency initiatives	—			15		—			(6		)	(9		)
Lease impairment credit-related costs	(11		)	15		(26		)	—			—
Gain on mortgage/home equity TDR Transaction	17			—		—			7			10
Home equity operational items	—			3		—			(1		)	(2		)
Total notable items		$6			$55		($26	)		($363	)		$340
Underlying results (non-GAAP)		$1,528			$3,419		$347			$623			$1,312


•	Net income available to common stockholders of $1.7 billion increase d $54 million , or 3% , compared to $1.6 billion in 2017 .


◦	On an Underlying basis,* net income available to common stockholders increased 32% led by revenue growth of 8% , with a 9% increase in net interest income and a 5% increase in noninterest income.


•	Total revenue of $6.1 billion increase d $421 million , or 7% , from 2017 , driven by strong net interest income and noninterest income growth:


◦	Net interest income of $4.5 billion increase d $359 million , or 9% , compared to $4.2 billion in 2017 , driven by higher loan yields and 4% average loan growth.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS


◦	Net interest margin of 3.19% increase d 17 basis points, compared to 3.02% in 2017, reflecting the benefit of higher interest rates and continued mix shift towards higher-yielding assets, partially offset by higher deposit and other funding costs.


–	Average loans and leases of $113.5 billion increase d $4.2 billion , or 4% , from $109.3 billion in 2017, reflecting a $2.5 billion increase in commercial loans and leases and a $1.7 billion increase in retail loans.


–	Average deposits of $115.9 billion increase d $4.0 billion , or 4% , from $111.9 billion in 2017, reflecting strength in term, checking with interest, savings and demand deposits.


◦	Noninterest income of $1.6 billion increase d $62 million , or 4% , from 2017, driven by strength in mortgage banking fees, including the $57 million impact of the FAMC acquisition, as well as foreign exchange and interest rate products, trust and investment services fees, letter of credit and loan fees and card fees, partially offset by lower capital market fees and service charges and fees.


–	On an Underlying basis,* noninterest income increase d $73 million from $1.5 billion in 2017.

•

Noninterest expense of $3.6 billion increase d $145 million , or 4% , compared to $3.5 billion in 2017, reflecting higher salaries and employee benefits driven by higher revenue-based incentives and merit increases, higher outside services expense, including continued investments to drive growth, $60 million of FAMC costs, primarily in salaries and employee benefits, and $54 million of notable items. These increases were partially offset by lower other operating expenses.


◦	On an Underlying basis,* noninterest expense increase d 4% from 2017.


•	Positive operating leverage was 3.2% , the efficiency ratio improved by 181 basis points to 59.1% compared to 2017, and ROTCE was 12.9% .


◦	On an Underlying basis,* operating leverage was 3.3% , the efficiency ratio improved 183 basis points to 58.1% from 60.0% in 2017 and ROTCE increased 327 basis points to 13.1% from 9.8% .


•	Return on average common equity was 8.6% compared to 8.3% in 2017.


◦	On an Underlying basis,* return on average common equity of 8.7% improved 207 basis points from 6.6% in 2017.


•	Earnings per diluted common share increase d $0.27 , or 8% , from 2017.


◦	On an Underlying basis,* earnings per diluted common share increase d $0.98 , or 38% , from 2017.


•	Tangible book value per common share improved 5% to $28.73 from 2017. Fully diluted average common shares outstanding decrease d by 23.3 million shares from 2017.


•	Provision for credit losses of $326 million increase d $5 million , or 2% , from $321 million in 2017.


◦	On an Underlying basis,* total credit-related costs decrease d $21 million , or 6% , from $347 million in 2017, driven primarily by the $26 million impact of 2017 aircraft lease impairments.


•	Net charge-offs of $317 million increased $12 million , or 4% , from $305 million in 2017. The ALLL of $1.2 billion increased $6 million compared to December 31, 2017.


◦	ALLL to total loans and leases of 1.06% decreased from 1.12% as of December 31, 2017.


◦	The ALLL to nonperforming loans and leases ratio of 156% increased from 142% as of December 31, 2017.


•	The effective income tax rate increase d to 21.2% from 13.6% in 2017, primarily attributable to the revaluation of our deferred tax liability as a result of 2017 Tax Legislation.


◦	On an Underlying basis,* the effective income tax rate decreased to 22.5% from 32.2% in 2017, primarily attributable to the reduction in the federal statutory tax rate from 35% to 21% under the 2017 Tax Legislation, partially offset by an increase in state and local income taxes and non-deductible FDIC premiums.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS — 2018 compared with 2017

Net Income

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



	Year Ended December 31,
(dollars in millions)	2018			2017			Change			Percent
Net interest income		$4,532			$4,173			$359		9	%
Noninterest income	1,596			1,534			62			4
Total revenue	6,128			5,707			421			7
Provision for credit losses	326			321			5			2
Noninterest expense	3,619			3,474			145			4
Income before income tax expense	2,183			1,912			271			14
Income tax expense	462			260			202			78
Net income		$1,721			$1,652			$69		4	%
Net income available to common stockholders		$1,692			$1,638			$54		3	%
Return on average tangible common equity	12.94		%	12.35		%	59		bps

Return on Equity and Assets

The following table presents our return on average total assets, return on average common equity, dividend payout ratio and average equity to average assets ratio:



	December 31,
	2018		2017
Return on average total assets	1.11	%	1.10	%
Return on average common equity	8.62		8.35
Dividend payout ratio	28		20
Average equity to average assets ratio	13.02		13.25

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Interest Income

The following table presents the major components of net interest income and net interest margin:



	Year Ended December 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		$1,579			$29	1.82	%		$1,807			$18	0.96	%		($228	)	86 bps
Taxable investment securities	25,233			672		2.66		25,696			625		2.43		(463		)	23
Non-taxable investment securities	6			—		2.60		7			—		2.60		(1		)	—
Total investment securities	25,239			672		2.66		25,703			625		2.43		(464		)	23
Commercial	39,363			1,621		4.06		37,631			1,334		3.50		1,732			56
Commercial real estate	12,299			557		4.47		11,178			402		3.55		1,121			92
Leases	3,038			82		2.71		3,437			86		2.50		(399		)	21
Total commercial loans and leases	54,700			2,260		4.08		52,246			1,822		3.44		2,454			64
Residential mortgages	17,883			644		3.60		16,017			571		3.57		1,866			3
Home equity loans	1,215			72		5.91		1,610			91		5.68		(395		)	23
Home equity lines of credit	13,043			592		4.54		13,706			514		3.75		(663		)	79
Home equity loans serviced by others	463			34		7.36		642			46		7.09		(179		)	27
Home equity lines of credit serviced by others	124			5		4.23		181			7		4.07		(57		)	16
Automobile	12,555			461		3.68		13,491			442		3.27		(936		)	41
Education	8,486			487		5.74		7,557			403		5.33		929			41
Credit cards	1,891			202		10.68		1,725			185		10.75		166			(7)
Other retail	3,113			253		8.09		2,117			168		7.94		996			15
Total retail loans	58,773			2,750		4.68		57,046			2,427		4.25		1,727			43
Total loans and leases ⁽¹⁾	113,473			5,010		4.39		109,292			4,249		3.87		4,181			52
Loans held for sale, at fair value	844			37		4.38		490			18		3.58		354			80
Other loans held for sale	164			10		6.18		190			10		5.36		(26		)	82
Interest-earning assets	141,299			5,758		4.05		137,482			4,920		3.56		3,817			49
Allowance for loan and lease losses	(1,245		)					(1,225		)					(20		)
Goodwill	6,912							6,883							29
Other noninterest-earning assets	7,587							6,813							774
Total assets		$154,553							$149,953							$4,600
Liabilities and Stockholders’ Equity
Checking with interest		$21,856			$138	0.63	%		$21,458			$79	0.37	%		$398		26 bps
Money market accounts	36,497			343		0.94		37,450			198		0.53		(953		)	41
Regular savings	10,238			15		0.15		9,384			4		0.04		854			11
Term deposits	18,035			289		1.61		15,448			160		1.04		2,587			57
Total interest-bearing deposits	86,626			785		0.91		83,740			441		0.53		2,886			38
Federal funds purchased and securities sold under agreements to repurchase ⁽²⁾	654			6		0.94		776			3		0.38		(122		)	56
Other short-term borrowed funds	1,808			57		3.18		2,321			31		1.32		(513		)	186
Long-term borrowed funds	13,455			378		2.79		12,479			272		2.17		976			62
Total borrowed funds	15,917			441		2.76		15,576			306		1.96		341			80
Total interest-bearing liabilities	102,543			1,226		1.19		99,316			747		0.75		3,227			44
Demand deposits	29,231							28,134							1,097
Other liabilities	2,651							2,637							14
Total liabilities	134,425							130,087							4,338
Stockholders’ equity	20,128							19,866							262
Total liabilities and stockholders’ equity		$154,553							$149,953							$4,600
Interest rate spread						2.86	%						2.81	%				5
Net interest income					$4,532							$4,173
Net interest margin						3.19	%						3.02	%				17 bps
Memo: Total deposits (interest-bearing and demand)		$115,857			$785	0.68	%		$111,874			$441	0.39	%		$3,983		29 bps

⁽¹⁾ Interest income and rates on loans include loan fees. Additionally, $836 million and $970 million of average nonaccrual loans were included in the average loan balances used to determine the average yield on loans for December 2018 and 2017 , respectively.

⁽²⁾ 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 margin of 3.19% increase d 17 basis points compared to 3.02% in the year ended 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 other funding costs. Average interest-earning asset yields of 4.05% increase d 49 basis points from 3.56% for the year ended 2017 , while average interest-bearing liability costs of 1.19% increase d 44 basis points from 0.75% for the year ended 2017 .

Average interest-earning assets of $141.3 billion increase d $ 3.8 billion , or 3% , from the year ended 2017 , driven by a $2.5 billion increase in average commercial loans and leases and a $1.7 billion increase in average retail loans, partially offset by a $692 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by commercial and commercial real estate. Retail loan growth was driven by residential mortgage, education and other retail.

Average deposits of $115.9 billion increase d $4.0 billion from the year ended 2017 , reflecting growth in term deposits, savings, demand deposits, and checking with interest. Total interest-bearing deposit costs of $785 million increase d $344 million , or 78% , from $441 million in 2017 , primarily due to rising rates.

Average total borrowed funds of $15.9 billion increase d $341 million from the year ended 2017 , reflecting an increase in long term borrowed funds, primarily senior debt, partially offset by a decrease in other short-term borrowed funds and a decrease in federal funds purchased and repurchase agreements. The total borrowed funds costs of 2.76% increase d 80 basis points from 1.96% for the year ended 2017 due to an increase in long-term rates and a mix shift to long-term senior debt.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the change in interest income and interest expense due to changes in both average volume and average rate. Average volume and rate changes have been allocated between the average rate and average volume variances on a consistent basis using the respective percentage changes in average balances and average rates.



	Year Ended December 31,
	2018 Versus 2017
(in millions)	Average Volume			Average Rate			Net Change
Interest Income
Interest-bearing cash and due from banks and deposits in banks		($2	)		$13			$11
Taxable investment securities	(11		)	58			47
Non-taxable investment securities	—			—			—
Total investment securities	(11		)	58			47
Commercial	61			226			287
Commercial real estate	40			115			155
Leases	(10		)	6			(4		)
Total commercial loans and leases	91			347			438
Residential mortgages	67			6			73
Home equity loans	(22		)	3			(19		)
Home equity lines of credit	(25		)	103			78
Home equity loans serviced by others	(13		)	1			(12		)
Home equity lines of credit serviced by others	(2		)	—			(2		)
Automobile	(31		)	50			19
Education	50			34			84
Credit cards	18			(1		)	17
Other retail	79			6			85
Total retail loans	121			202			323
Total loans and leases	212			549			761
Loans held for sale, at fair value	13			6			19
Other loans held for sale	(1		)	1			—
Total interest income		$211			$627			$838
Interest Expense
Checking with interest		$1			$58			$59
Money market accounts	(5		)	150			145
Regular savings	—			11			11
Term deposits	27			102			129
Total interest-bearing deposits	23			321			344
Federal funds purchased and securities sold under agreements to repurchase	—			3			3
Other short-term borrowed funds	(7		)	33			26
Long-term borrowed funds	21			85			106
Total borrowed funds	14			121			135
Total interest expense	37			442			479
Net interest income		$174			$185			$359

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Noninterest Income

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



	Year Ended December 31,
(in millions)	2018		2017		Change			Percent
Service charges and fees		$513		$516		($3	)	(1	%)
Card fees	244		233		11			5
Capital markets fees	179		194		(15		)	(8	)
Trust and investment services fees	171		158		13			8
Mortgage banking fees	152		108		44			41
Letter of credit and loan fees	128		121		7			6
Foreign exchange and interest rate products	126		109		17			16
Securities gains, net	19		11		8			73
Other income ⁽¹⁾	64		84		(20		)	(24	)
Noninterest income ⁽²⁾		$1,596		$1,534		$62		4	%

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

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

Noninterest income of $1.6 billion in 2018 , increase d $62 million , or 4% , compared to $1.5 billion in 2017 , driven by strength in mortgage banking fees, reflecting the $57 million impact of FAMC, as well as foreign exchange and interest rate products, trust and investment services fees, card fees and letter of credit and loan fees, partially offset by lower capital market fees and service charges and fees. Excluding the impact of notable items and 2017 aircraft finance lease impairments, Underlying noninterest income* for the year ended 2018 increased $73 million, or 5%.

Provision for Credit Losses

Provision for credit losses of $326 million increase d $5 million , or 2% , from $321 million in 2017 , which reflected moderately lower reserve growth and partially offset slightly higher net charge-offs. Full year 2018 results reflected a $9 million reserve build, compared to a $16 million reserve build in 2017 . Net charge-offs in 2018 of $317 million were $12 million higher compared to 2017. On an Underlying basis,* total credit-related costs decreased $21 million, primarily due to the impact of 2017 aircraft lease impairments.

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:



	Year Ended December 31,
(in millions)	2018		2017		Change			Percent
Salaries and employee benefits ⁽¹⁾		$1,880		$1,766		$114		6	%
Outside services	447		404		43			11
Occupancy	333		319		14			4
Equipment expense	275		263		12			5
Amortization of software	189		180		9			5
Other operating expense ⁽¹⁾	495		542		(47		)	(9	)
Noninterest expense		$3,619		$3,474		$145		4	%

⁽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 $3.6 billion in 2018 increase d $145 million , or 4% , compared to 2017 , reflecting higher salaries and employee benefits driven by higher revenue-based incentives and merit increases, as well as higher outside services expense, including continued investments to drive growth. Full year 2018 results also reflected

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

$60 million of FAMC costs, primarily in salaries and employee benefits, and $54 million of FAMC integration costs and other notable items. These increases were partially offset by lower other operating expenses. Excluding FAMC integration costs, other notable items and the impact of 2017 aircraft operating lease impairments, Underlying noninterest expense* increased $146 million, or 4%.

Income Tax Expense

Income tax expense of $462 million increase d $202 million , or 78% , from $260 million in 2017 . The 2018 effective tax rate of 21.2% increased from 13.6% in 2017 , primarily attributable to the revaluation of our deferred tax liability as a result of 2017 Tax Legislation. On an Underlying basis,* the effective income tax rate decreased to 22.5% from 32.2% in 2017, primarily attributable to the reduction in the federal statutory tax rate from 35% to 21% under the 2017 Tax Legislation, partially offset by an increase in state and local income taxes and non-deductible FDIC premiums.

At December 31, 2018 , our net deferred tax liability of $573 million compared to a $571 million liability at December 31, 2017 . The increase in the net deferred tax liability was primarily attributable to the tax effect of differences in the timing of deductions and income items for financial statement purposes versus taxable income purposes almost fully offset by the tax effect of the net unrealized losses on securities and derivatives arising during the period. For further discussion, see Note 22 “Income Taxes” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, included in this Report.

Business Operating Segments

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



	As of and for the Year Ended December 31, 2018
(dollars in millions)	Consumer Banking			Commercial Banking			Other ⁽⁴⁾			Consolidated
Net interest income ⁽¹⁾		$3,064			$1,497			($29	)		$4,532
Noninterest income	973			545			78			1,596
Total revenue	4,037			2,042			49			6,128
Noninterest expense	2,723			813			83			3,619
Profit before provision for credit losses	1,314			1,229			(34		)	2,509
Provision for credit losses	289			26			11			326
Income (loss) before income tax expense (benefit)	1,025			1,203			(45		)	2,183
Income tax expense (benefit)	258			276			(72		)	462
Net income		$767			$927			$27			$1,721
Loans and leases (period-end) ⁽²⁾		$62,250			$53,439			$2,291			$117,980
Average Balances:
Total assets		$62,444			$52,362			$39,747			$154,553
Total loans and leases ⁽²⁾	60,691			51,344			2,446			114,481
Deposits	77,542			30,704			7,611			115,857
Interest-earning assets	60,743			51,572			28,984			141,299
Key Performance Metrics:
Net interest margin	5.04		%	2.90		%	NM			3.19		%
Efficiency ratio	67.47			39.80			NM			59.06
Loans-to-deposits ratio (average balances) ⁽³⁾	77.42			166.09			NM			97.94
Return on average total tangible assets	1.23			1.77			NM			1.16

⁽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⁾ We revised our method of calculating the loans-to-deposits ratio in third quarter 2018 to exclude loans held for sale. Prior periods have been adjusted to conform with the current period presentation.

⁽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, expenses and 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 — Non-Core Assets.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and 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, expenses and 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.

Our capital levels are evaluated and managed centrally; however, capital is allocated on a risk-adjusted basis considering economic and regulatory capital requirements to the business operating segments to support evaluation of business performance. 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.

Provision for credit losses is allocated to each business operating segment based on respective actual net charge-offs. 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 are directly attributed to each business operating segment, including fees, service charges, salaries and benefits, and other direct revenues and costs and are respectively accounted for in a manner similar to our 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 are updated, or our organizational structure changes.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Consumer Banking



	As of and for the Year Ended December 31,
(dollars in millions)	2018			2017			Change			Percent
Net interest income ⁽¹⁾		$3,064			$2,651			$413		16	%
Noninterest income	973			905			68			8
Total revenue	4,037			3,556			481			14
Noninterest expense	2,723			2,593			130			5
Profit before provision for credit losses	1,314			963			351			36
Provision for credit losses	289			265			24			9
Income before income tax expense	1,025			698			327			47
Income tax expense	258			246			12			5
Net income		$767			$452			$315		70
Loans (period-end) ⁽²⁾		$62,250			$60,096			$2,154		4
Average Balances:
Total assets		$62,444			$59,714			$2,730		5	%
Total loans and leases ⁽²⁾	60,691			58,371			2,320			4
Deposits	77,542			74,873			2,669			4
Interest-earning assets	60,743			58,422			2,321			4
Key Performance Metrics:
Net interest margin	5.04		%	4.54		%	50		bps
Efficiency ratio	67.47			72.93			(546		) bps
Loans-to-deposits ratio (average balances) ⁽³⁾	77.42			77.49			(7		) bps
Return on average total tangible assets	1.23			0.76			47		bps

⁽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.

Consumer Banking net interest income of $3.1 billion increased $413 million , or 16% , from 2017 , driven by the impact of an FTP methodology enhancement as well as the benefit of a $2.3 billion increase in average loans led by residential mortgage, education and unsecured retail with higher loan yields that included the benefit of higher rates and continued mix shift towards higher yielding assets, partially offset by an increase in deposit costs. Noninterest income increased $68 million , or 8% , from 2017 , driven by a $57 million increase in mortgage banking fees related to FAMC, and higher trust and investment services fees. Noninterest expense of $2.7 billion increased $130 million , or 5% , from 2017 , driven by a $60 million increase related to FAMC, higher salaries and benefits, occupancy expense, outside services, and advertising. Provision for credit losses of $289 million increased $24 million , or 9% , from $265 million for the year ended 2017 , reflecting balance growth and seasoning in unsecured retail and education.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Commercial Banking



	As of and for the Year Ended December 31,
(dollars in millions)	2018			2017			Change			Percent
Net interest income ⁽¹⁾		$1,497			$1,411			$86		6	%
Noninterest income	545			538			7			1
Total revenue	2,042			1,949			93			5
Noninterest expense	813			772			41			5
Profit before provision for credit losses	1,229			1,177			52			4
Provision for credit losses	26			19			7			37
Income before income tax expense	1,203			1,158			45			4
Income tax expense	276			384			(108		)	(28	)
Net income		$927			$774			$153		20
Loans and leases (period-end) ⁽²⁾		$53,439			$48,623			$4,816		10
Average Balances:
Total assets		$52,362			$49,747			$2,615		5	%
Total loans and leases ⁽²⁾	51,344			48,655			2,689			6
Deposits	30,704			30,005			699			2
Interest-earning assets	51,572			48,802			2,770			6
Key Performance Metrics:
Net interest margin	2.90		%	2.89		%	1		bps
Efficiency ratio	39.80			39.62			18		bps
Average loans to average deposits ratio ⁽³⁾	166.09			161.15			494		bps
Return on average total tangible assets	1.77			1.56			21		bps

⁽²⁾ Includes loans held for sale.

Commercial Banking net interest income of $1.5 billion increased $86 million , or 6% , from $1.4 billion for 2017 , reflecting a $2.7 billion increase in average loans and leases and a $699 million increase in average deposits. Noninterest income of $545 million increased $7 million , or 1% , from $538 million for 2017 , reflecting strength in foreign exchange fees, card fees and letter of credit and loan fees, partially offset by decreases in capital market fees. Noninterest expense of $813 million increased $41 million , or 5% , from $772 million for 2017 , largely d riven by higher salaries and benefits expense and outside services. Provision for credit losses of $26 million increased $7 million from 2017 , driven by higher net charge-offs in 2018.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other



	As of and for the Year Ended December 31,
(in millions)	2018			2017			Change			Percent
Net interest income ⁽¹⁾		($29	)		$111			($140	)	(126	%)
Noninterest income	78			91			(13		)	(14	)
Total revenue	49			202			(153		)	(76	)
Noninterest expense	83			109			(26		)	(24	)
Profit before provision for credit losses	(34		)	93			(127		)	(137	)
Provision for credit losses	11			37			(26		)	(70	)
(Loss) income before income tax benefit	(45		)	56			(101		)	(180	)
Income tax benefit	(72		)	(370		)	298			81
Net income		$27			$426			($399	)	(94	)
Loans and leases (period-end) ⁽²⁾		$2,291			$2,616			($325	)	(12	)
Average Balances:
Total assets		$39,747			$40,492			($745	)	(2	%)
Total loans and leases ⁽²⁾	2,446			2,946			(500		)	(17	)
Deposits	7,611			6,996			615			9
Interest-earning assets	28,984			30,258			(1,274		)	(4	)

⁽²⁾ Includes loans held for sale.

Other net income of $27 million decreased from $426 million for 2017, primarily driven by a $331 million benefit attributable to the revaluation of our deferred tax liability as a result of 2017 Tax Legislation. Other net interest income decrease d $140 million reflecting an FTP methodology enhancement, higher funding costs, the declining benefit of swaps and non-core portfolio runoff. Results also reflected lower net charge-offs and a reserve build of $9 million for 2018 compared to a reserve build of $16 million for 2017.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS — 2017 compared with 2016

Net Income

The following table presents the significant components of our net income for the periods indicated:



	Year Ended December 31,
(dollars in millions)	2017			2016			Change			Percent
Net interest income		$4,173			$3,758			$415		11	%
Noninterest income	1,534			1,497			37			2
Total revenue	5,707			5,255			452			9
Provision for credit losses	321			369			(48		)	(13	)
Noninterest expense	3,474			3,352			122			4
Income before income tax expense	1,912			1,534			378			25
Income tax expense	260			489			(229		)	(47	)
Net income		$1,652			$1,045			$607		58	%
Net income available to common stockholders		$1,638			$1,031			$607		59	%
Return on average tangible common equity	12.35		%	7.74		%	461		bps

Return on Equity and Assets

The following table presents our return on average total assets, return on average common equity, dividend payout ratio and average equity to average assets ratio:



	December 31,
	2017		2016
Return on average total assets	1.10	%	0.73	%
Return on average common equity	8.35		5.23
Dividend payout ratio	19.62		23.30
Average equity to average assets ratio	13.25		13.93

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Interest Income

The following table presents the major components of net interest income and net interest margin:



	Year Ended December 31,
	2017							2016							Change
(dollars in millions)	Average Balances			Income/ Expense		Yields/ Rates		Average Balances			Income/ Expense		Yields/ Rates		Average Balances			Yields/ Rates
Assets
Interest-bearing cash and due from banks and deposits in banks		$1,807			$18	0.96	%		$1,931			$8	0.41	%		($124	)	55 bps
Taxable investment securities	25,696			625		2.43		24,643			584		2.37		1,053			6
Non-taxable investment securities	7			—		2.60		8			—		2.60		(1		)	—
Total investment securities	25,703			625		2.43		24,651			584		2.37		1,052			6
Commercial	37,631			1,334		3.50		35,652			1,136		3.13		1,979			37
Commercial real estate	11,178			402		3.55		9,741			278		2.81		1,437			74
Leases	3,437			86		2.50		3,841			93		2.41		(404		)	9
Total commercial loans and leases	52,246			1,822		3.44		49,234			1,507		3.01		3,012			43
Residential mortgages	16,017			571		3.57		14,005			504		3.60		2,012			(3)
Home equity loans	1,610			91		5.68		2,180			123		5.64		(570		)	4
Home equity lines of credit	13,706			514		3.75		14,402			457		3.18		(696		)	57
Home equity loans serviced by others	642			46		7.09		867			62		7.11		(225		)	(2)
Home equity lines of credit serviced by others	181			7		4.07		281			7		2.41		(100		)	166
Automobile	13,491			442		3.27		13,953			411		2.94		(462		)	33
Education	7,557			403		5.33		5,558			282		5.08		1,999			25
Credit cards	1,725			185		10.75		1,620			181		11.22		105			(47)
Other retail	2,117			168		7.94		1,288			119		9.23		829			(129)
Total retail loans	57,046			2,427		4.25		54,154			2,146		3.96		2,892			29
Total loans and leases ⁽¹⁾	109,292			4,249		3.87		103,388			3,653		3.51		5,904			36
Loans held for sale, at fair value	490			18		3.58		425			15		3.40		65			18
Other loans held for sale	190			10		5.36		141			6		4.55		49			81
Interest-earning assets	137,482			4,920		3.56		130,536			4,266		3.25		6,946			31
Allowance for loan and lease losses	(1,225		)					(1,227		)					2
Goodwill	6,883							6,876							7
Other noninterest-earning assets	6,813							6,998							(185		)
Total assets		$149,953							$143,183							$6,770
Liabilities and Stockholders’ Equity
Checking with interest		$21,458			$79	0.37	%		$19,320			$34	0.18	%		$2,138		19 bps
Money market accounts	37,450			198		0.53		37,106			133		0.36		344			17
Regular savings	9,384			4		0.04		8,691			4		0.04		693			—
Term deposits	15,448			160		1.04		12,696			99		0.78		2,752			26
Total interest-bearing deposits	83,740			441		0.53		77,813			270		0.35		5,927			18
Federal funds purchased and securities sold under agreements to repurchase ⁽²⁾	776			3		0.38		947			2		0.22		(171		)	16
Other short-term borrowed funds	2,321			31		1.32		3,207			40		1.22		(886		)	10
Long-term borrowed funds	12,479			272		2.17		10,472			196		1.86		2,007			31
Total borrowed funds	15,576			306		1.96		14,626			238		1.62		950			34
Total interest-bearing liabilities	99,316			747		0.75		92,439			508		0.55		6,877			20
Demand deposits	28,134							27,634							500
Other liabilities	2,637							3,165							(528		)
Total liabilities	130,087							123,238							6,849
Stockholders’ equity	19,866							19,945							(79		)
Total liabilities and stockholders’ equity		$149,953							$143,183							$6,770
Interest rate spread						2.81	%						2.70	%				11
Net interest income					$4,173							$3,758
Net interest margin						3.02	%						2.86	%				16 bps
Memo: Total deposits (interest-bearing and demand)		$111,874			$441	0.39	%		$105,447			$270	0.26	%		$6,427		13 bps

⁽¹⁾ Interest income and rates on loans include loan fees. Additionally, $970 million and $1.1 billion of average nonaccrual loans were included in the average loan balances used to determine the average yield on loans for December 2017 and 2016.

⁽²⁾ Balances are net of certain short-term receivables associated with reverse repurchase agreements. Interest expense includes the full cost of the repurchase agreements and certain hedging costs. The rate on federal funds purchased is elevated due to the impact from pay-fixed interest rate swaps that ran off in 2016. See “—Analysis of Financial Condition— Derivatives” for further information.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net interest income of $4.2 billion in the year ended 2017 increased $415 million , or 11% , compared to $3.8 billion in the year ended 2016 , reflecting 6% average loan growth and a 16 basis point improvement in net interest margin.

Average interest-earning assets of $137.5 billion increased $6.9 billion , or 5% , from the year ended 2016 , driven by a $3.0 billion increase in average commercial loans and leases, a $2.9 billion increase in average retail loans, and a $928 million increase 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 balances.

Average deposits of $111.9 billion increased $6.4 billion from the year ended 2016 , reflecting growth in all categories with particular strength in checking with interest and term deposits. Total interest-bearing deposit costs of $441 million increased $171 , or 63% , from $270 million in 2016 , primarily due to the impact of rising rates and a slight shift in mix toward commercial deposits.

Average total borrowed funds of $15.6 billion increased $1.0 billion from the year ended 2016 , reflecting an increase in average long-term borrowed funds driven by issuances of senior notes. Total borrowed funds costs of $306 million increased $68 million from the year ended 2016 . The total borrowed funds yield of 1.96% in the year ended 2017 increased 34 basis points from 1.62% in the year ended 2016 due to an increase in long-term rates and a mix shift to long-term senior debt.

Net interest margin of 3.02% increased 16 basis points compared to 2.86% in the year ended 2016 , driven by improved loan yields reflecting both higher interest rates and balance sheet optimization initiatives. These results were partially offset by the impact of investment portfolio growth and higher deposit cost and funding costs. Average interest-earning asset yields of 3.56% increased 31 basis points from 3.25% in the year ended 2016 , while average interest-bearing liability costs of 0.75% increased 20 basis points from 0.55% in the year ended 2016 .

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	Year Ended December 31,
	2017 Versus 2016
(in millions)	Average Volume			Average Rate			Net Change
Interest Income
Interest-bearing cash and due from banks and deposits in banks		$—			$10			$10
Taxable investment securities	25			16			41
Non-taxable investment securities	—			—			—
Total investment securities	25			16			41
Commercial	62			136			198
Commercial real estate	41			83			124
Leases	(10		)	3			(7		)
Total commercial loans and leases	93			222			315
Residential mortgages	72			(5		)	67
Home equity loans	(33		)	1			(32		)
Home equity lines of credit	(22		)	79			57
Home equity loans serviced by others	(16		)	—			(16		)
Home equity lines of credit serviced by others	(3		)	3			—
Automobile	(14		)	45			31
Education	102			19			121
Credit cards	12			(8		)	4
Other retail	76			(27		)	49
Total retail loans	174			107			281
Total loans and leases	267			329			596
Loans held for sale, at fair value	2			1			3
Other loans held for sale	2			2			4
Total interest income		$296			$358			$654
Interest Expense
Checking with interest		$4			$41			$45
Money market accounts	1			64			65
Regular savings	—			—			—
Term deposits	21			40			61
Total interest-bearing deposits	26			145			171
Federal funds purchased and securities sold under agreements to repurchase	—			1			1
Other short-term borrowed funds	(11		)	2			(9		)
Long-term borrowed funds	37			39			76
Total borrowed funds	26			42			68
Total interest expense	52			187			239
Net interest income		$244			$171			$415

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Noninterest Income

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



	Year Ended December 31,
(dollars in millions)	2017		2016		Change			Percent
Service charges and fees ⁽¹⁾		$516		$522		($6	)	(1	%)
Card fees	233		203		30			15
Capital markets fees ⁽¹⁾	194		136		58			43
Trust and investment services fees	158		146		12			8
Mortgage banking fees	108		112		(4		)	(4	)
Letter of credit and loan fees ⁽¹⁾	121		112		9			8
Foreign exchange and interest rate products ⁽¹⁾	109		103		6			6
Securities gains, net	11		16		(5		)	(31	)
Other income ⁽¹⁾	84		147		(63		)	(43	)
Noninterest income		$1,534		$1,497		$37		2	%

⁽¹⁾ 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. These changes had no effect on net income as previously reported.

Noninterest income of $1.5 billion in 2017 , increased $37 million , or 2% , compared to 2016 driven by capital market fees, card fees, trust and investment service fees, letter of credit and loan fees and foreign exchange and interest rate products, partially offset by a reduction in service charges and fees, securities gains, mortgage banking fees and other income. Capital market fees increased $58 million , reflecting underlying business momentum and the impact of building capabilities. Card fees increased $30 million from 2016 results. Service charges decreased $6 million and mortgage banking fees decreased $4 million from 2016 . On an Adjusted/Underlying basis,* noninterest income increased $98 million, or 7%, compared to 2016 .

Provision for Credit Losses

Provision for credit losses of $321 million decreased $48 million, or 13% from $369 million in 2016. The $48 million decrease was primarily due to continued asset quality improvement and the decline in net charge-offs when compared to 2016 . The 2017 results reflected a $16 million reserve build, compared to a $34 million reserve build for the full year 2016 . Net charge-offs for the full year 2017 of $305 million were $30 million lower compared to the full year 2016 .

Noninterest Expense

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



	Year Ended December 31,
(dollars in millions)	2017		2016		Change		Percent
Salaries and employee benefits		$1,766		$1,714		$52	3	%
Outside services	404		377		27		7
Occupancy	319		307		12		4
Equipment expense	263		263		—		—
Amortization of software	180		170		10		6
Other operating expense	542		521		21		4
Noninterest expense		$3,474		$3,352		$122	4	%

Noninterest expense of $3.5 billion in 2017 increased $122 million , or 4% , compared to 2016 . Salaries and benefits increased $52 million , or 3% , driven by merit increases and the impact of hiring associated with strategic growth initiatives. Outside services increased $27 million , or 7% , tied to consumer strategic growth initiatives and technology initiatives. Occupancy expense increased $12 million , or 4% , reflecting costs associated with our branch

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

strategy, rent and maintenance. Other operating expense increased $21 million , or 4% . On an Adjusted/Underlying basis,* noninterest expense increased $103 million, or 3%, compared to 2016 .

Income Tax Expense

Income tax expense was $260 million and $489 million in 2017 and 2016 , respectively. This resulted in an effective tax rate of 13.6% and 31.9% in 2017 and 2016 , respectively. The decrease in the effective income tax rate from 2016 to 2017 was primarily attributable to the revaluation of our deferred tax liability as a result of 2017 Tax Legislation.

At December 31, 2017 , we reported a net deferred tax liability of $571 million , compared to a $714 million liability at December 31, 2016 . The decrease in the net deferred tax liability was primarily attributable to the revaluation of our deferred tax liability as a result of 2017 Tax Legislation.

On December 22, 2017, President Trump signed the 2017 Tax Legislation which included a reduction in the corporate tax rate from 35% to 21%. For Citizens, this required a revaluation of our net deferred tax liability with a corresponding adjustment to current tax expense, and resulted in a $331 million net tax benefit. Included in this net tax benefit was $145 million of expense related to the revaluation of our deferred tax assets associated with unrealized losses in AOCI. FASB standards in-place at December 31, 2017 required us to revalue all deferred taxes, including those related to balances in AOCI, through current tax expense. As a result, our unrealized loss balance in AOCI was not revalued to reflect the new corporate tax rate. This impact, commonly referred to as the “stranded tax effect”, was taken under consideration by FASB in January 2018 to address concerns primarily raised by banking institutions, including distortion of net income and regulatory capital. In February 2018, to address the “stranded tax effect”, FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which provides entities the election to reclassify the difference between the new and old corporate tax rates resulting from the 2017 Tax Legislation between retained earnings and AOCI for fiscal years beginning after December 15, 2018, with early adoption permitted. We have retrospectively adopted ASU 2018-02, elected to reclassify $145 million between AOCI and retained earnings, including indirect impacts from the decreased federal tax effect on future state tax benefits, and reflected this reclassification in our 2017 Consolidated 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 Year Ended December 31, 2017
(dollars in millions)	Consumer Banking			Commercial Banking			Other ⁽³⁾			Consolidated
Net interest income		$2,651			$1,411			$111			$4,173
Noninterest income	905			538			91			1,534
Total revenue	3,556			1,949			202			5,707
Noninterest expense	2,593			772			109			3,474
Profit before provision for credit losses	963			1,177			93			2,233
Provision for credit losses	265			19			37			321
Income before income tax expense (benefit)	698			1,158			56			1,912
Income tax expense (benefit)	246			384			(370		)	260
Net income		$452			$774			$426			$1,652
Loans and leases and loans held for sale (year-end)		$60,096			$48,623			$2,616			$111,335
Average Balances:
Total assets		$59,714			$49,747			$40,492			$149,953
Total loans and leases ⁽¹⁾	58,371			48,655			2,946			109,972
Deposits	74,873			30,005			6,996			111,874
Interest-earning assets	58,422			48,802			30,258			137,482
Key Performance Metrics:
Net interest margin	4.54		%	2.89		%	NM			3.02		%
Efficiency ratio	72.93			39.62			NM			60.87
Loans-to-deposits ratio (average balances) ⁽²⁾	77.49			161.15			NM			97.69
Return on average total tangible assets	0.76			1.56			NM			1.15

⁽¹⁾ Includes loans held for sale.

⁽²⁾ We revised our method of calculating the loans-to-deposits ratio in third quarter 2018 to exclude loans held for sale. Prior periods have been adjusted to conform with the current period presentation.

⁽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, expenses and 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 — Non-Core Assets.”

We operate our business through two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived from our business-line profitability reporting systems by specifically attributing managed assets, liabilities, capital and their related revenues, provision for credit losses and expenses and income tax expense. Residual assets, liabilities, capital and their related revenues, provision for credit losses and expenses are attributed to Other. For further information, see “—Results of Operations — 2018 compared with 2017 — Business Operating Segments.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Consumer Banking



	As of and for the Year Ended December 31,
(dollars in millions)	2017			2016			Change			Percent
Net interest income		$2,651			$2,443			$208		9	%
Noninterest income	905			883			22			2
Total revenue	3,556			3,326			230			7
Noninterest expense	2,593			2,547			46			2
Profit before provision for credit losses	963			779			184			24
Provision for credit losses	265			243			22			9
Income before income tax expense	698			536			162			30
Income tax expense	246			191			55			29
Net income		$452			$345			$107		31
Loans (year-end) ⁽¹⁾		$60,096			$57,383			$2,713		5
Average Balances:
Total assets		$59,714			$56,388			$3,326		6	%
Total loans ⁽¹⁾	58,371			55,052			3,319			6
Deposits	74,873			72,003			2,870			4
Interest-earning assets	58,422			55,101			3,321			6
Key Performance Metrics:
Net interest margin	4.54		%	4.43		%	11		bps
Efficiency ratio	72.93			76.57			(364		) bps
Loans-to-deposits ratio (average balances) ⁽²⁾	77.49			75.97			152		bps
Return on average total tangible assets	0.76			0.61			15		bps

⁽¹⁾ Includes loans held for sale.

Consumer Banking net income of $452 million increased $107 million, or 31%, from $345 million in the year ended 2016, as the benefit of a $230 million increase in total revenue more than offset a $46 million increase in noninterest expense. Net interest income of $2.7 billion increased $208 million, or 9%, from the year ended 2016, driven by the benefit of a $3.3 billion increase in average loans driven by residential mortgage, education and retail unsecured categories, partially offset by an increase in deposit costs.

Noninterest income increased $22 million, or 2%, from the year ended 2016, driven by an increase in card fees and investment and trust fees, partially offset by lower service charges and fees and mortgage banking fees. Noninterest expense of $2.6 billion increased $46 million, or 2%, from the year ended 2016, driven by higher outside services, FDIC expense, salaries and benefits, occupancy costs and advertising expense. These results were partially offset by lower credit collection costs and software amortization. Provision for credit losses of $265 million increased $22 million, or 9%, from $243 million in the year ended 2016, largely driven by higher net charge-offs in auto.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Commercial Banking



	As of and for the Year Ended December 31,
(dollars in millions)	2017			2016			Change			Percent
Net interest income		$1,411			$1,288			$123		10	%
Noninterest income	538			466			72			15
Total revenue	1,949			1,754			195			11
Noninterest expense	772			741			31			4
Profit before provision for credit losses	1,177			1,013			164			16
Provision for credit losses	19			47			(28		)	(60	)
Income before income tax expense	1,158			966			192			20
Income tax expense	384			335			49			15
Net income		$774			$631			$143		23
Loans and leases and loans (year-end) ⁽¹⁾		$48,623			$47,629			$994		2
Average Balances:
Total assets		$49,747			$47,159			$2,588		5	%
Total loans and leases ⁽¹⁾	48,655			45,903			2,752			6
Deposits	30,005			26,811			3,194			12
Interest-earning assets	48,802			45,978			2,824			6
Key Performance Metrics:
Net interest margin	2.89		%	2.80		%	9		bps
Efficiency ratio	39.62			42.26			(264		) bps
Loans-to-deposits ratio (average balances) ⁽²⁾	161.15			170.81			(966		) bps
Return on average total tangible assets	1.56			1.34			22		bps

⁽¹⁾ Includes loans held for sale.

Commercial Banking net income of $774 million increased $143 million, or 23%, from $631 million in the year ended 2016, as the benefit of a $195 million increase in total revenue and a $28 million decrease in provision for credit losses was partially offset by a $31 million increase in noninterest expense. Net interest income of $1.4 billion increased $123 million, or 10%, from $1.3 billion in the year ended 2016, reflecting a $2.8 billion increase in average loans and leases, improved loan and deposit spreads, and a $3.2 billion increase in average deposits.

Noninterest income of $538 million increased $72 million, or 15%, from $466 million in the year ended 2016, reflecting strength in capital markets, letter of credit and loan fees, card fees and foreign exchange and interest rate products, partially offset by runoff of the Asset Finance portfolio. Noninterest expense of $772 million increased $31 million, or 4%, from $741 million in the year ended 2016, largely driven by higher salaries and employee benefits, FDIC expense, software amortization and equipment expense, partially offset by a reduction in outside services. Provision for credit losses of $19 million decreased $28 million from the year ended 2016, driven by lower net charge-offs in 2016.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other



	As of and for the Year Ended December 31,
(dollars in millions)	2017			2016			Change			Percent
Net interest income		$111			$27			$84		NM
Noninterest income	91			148			(57		)	(39	)
Total revenue	202			175			27			15
Noninterest expense	109			64			45			70
Profit before provision for credit losses	93			111			(18		)	(16	)
Provision for credit losses	37			79			(42		)	(53	)
Income before income tax benefit	56			32			24			75
Income tax benefit	(370		)	(37		)	(333		)	NM
Net income		$426			$69			$357		NM
Loans and leases (year-end) ⁽¹⁾		$2,616			$3,282			($666	)	(20	)
Average Balances:
Total assets		$40,492			$39,636			$856		2	%
Total loans and leases ⁽¹⁾	2,946			2,999			(53		)	(2	)
Deposits	6,996			6,633			363			5
Interest-earning assets	30,258			29,457			801			3

⁽¹⁾ Includes loans held for sale.

Other net income of $426 million increased from $69 million in the year ended 2016, primarily driven by $331 million benefit related to our deferred tax liability in connection with the December 2017 Tax Legislation. Results also reflected an increase of $84 million in net interest income and lower net charge-offs and a reserve build of $16 million in the year ended 2017, compared to a reserve build of $34 million in the year ended 2016.

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:



	December 31, 2018				December 31, 2017				December 31, 2016				Change in Fair Value from 2018-2017
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Change in Fair Value from 2018-2017
Debt Securities Available for Sale, at Fair Value: ⁽¹⁾
U.S. Treasury and other		$24		$24		$12		$12		$30		$30		$12		100	%
State and political subdivisions	5		5		6		6		8		8		(1		)	(17	)
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	20,211		19,634		20,065		19,828		19,231		19,045		(194		)	(1	)
Other/non-agency	236		232		311		311		427		401		(79		)	(25	)
Total mortgage-backed securities	20,447		19,866		20,376		20,139		19,658		19,446		(273		)	(1	)
Total debt securities available for sale, at fair value	20,476		19,895		20,394		20,157		19,696		19,484		(262		)	(1	%)
Marketable equity securities	—		—		—		—		5		5		—			—
Other equity securities	—		—		—		—		12		12		—			—
Total equity securities	—		—		—		—		17		17		—			—
Total securities available for sale, at fair value		$20,476		$19,895		$20,394		$20,157		$19,713		$19,501		($262	)	(1	)%
Debt Securities Held to Maturity: ⁽¹⁾
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities		$3,425		$3,293		$3,853		$3,814		$4,126		$4,094		($521	)	(14	%)
Other/non-agency	740		748		832		854		945		964		(106		)	(12	)
Total mortgage-backed securities		$4,165		$4,041		$4,685		$4,668		$5,071		$5,058		($627	)	(13	%)
Total debt securities held to maturity		$4,165		$4,041		$4,685		$4,668		$5,071		$5,058		($627	)	(13	%)
Total securities available for sale and held to maturity		$24,641		$23,936		$25,079		$24,825		$24,784		$24,559		($889	)	(4	%)
Equity Securities: ⁽¹⁾
Equity securities, at fair value		$181		$181		$169		$169		$96		$96		$12		7	%
Equity securities, at cost	834		834		722		722		942		942		112			16
Total equity securities		$1,015		$1,015		$891		$891		$1,038		$1,038		$124		14	%

⁽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 December 31, 2018 , the fair value of the AFS and HTM debt securities portfolio decreased $889 million to $23.9 billion , compared with $24.8 billion as of December 31, 2017 , primarily driven by net sales of $438 million for liquidity management purposes.

As of December 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

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

government-sponsored entity-issued mortgage-backed securities represent 96% 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 FHLB for collateral purposes. For further discussion of the liquidity coverage ratios, see “Regulation and Supervision — Liquidity Requirements” in Part I, Item 1 — Business, included in this Report.

The following table presents an analysis of the amortized cost, remaining contractual maturities, and weighted-average yields by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.



	As of December 31, 2018
	Distribution of Maturities
(dollars in millions)	Due in 1 Year or Less			Due After 1 Through 5 Years			Due After 5 Through 10 Years			Due After 10 Years			Total
Amortized cost:
Debt securities available for sale:
U.S. Treasury and other		$24			$—			$—			$—			$24
State and political subdivisions	—			—			—			5			5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—			281			1,540			18,390			20,211
Other/non-agency	1			10			—			225			236
Total debt securities available for sale	25			291			1,540			18,620			20,476
Debt securities held to maturity:
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—			—			—			3,425			3,425
Other/non-agency	—			—			—			740			740
Total debt securities held to maturity	—			—			—			4,165			4,165
Total amortized cost of debt securities ⁽¹⁾		$25			$291			$1,540			$22,785			$24,641
Weighted-average yield ⁽²⁾	2.31		%	1.87		%	2.37		%	2.67		%	2.64		%

⁽¹⁾ As of December 31, 2018 , no investments exceeded 10% of Stockholders’ Equity.

⁽²⁾ Yields on tax-exempt securities are not computed on a tax-equivalent basis.

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.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents the composition of loans and leases, including non-core loans, as of:



	December 31,										Change from 2018-2017
(in millions)	2018		2017		2016		2015		2014		$			%
Commercial		$40,857		$37,562		$37,274		$33,264		$31,431		$3,295		9	%
Commercial real estate	13,023		11,308		10,624		8,971		7,809		1,715			15
Leases	2,903		3,161		3,753		3,979		3,986		(258		)	(8	)
Total commercial loans and leases	56,783		52,031		51,651		46,214		43,226		4,752			9
Residential mortgages	18,978		17,045		15,115		13,318		11,832		1,933			11
Home equity loans	1,073		1,392		1,858		2,557		3,424		(319		)	(23	)
Home equity lines of credit	12,710		13,483		14,100		14,674		15,423		(773		)	(6	)
Home equity loans serviced by others	399		542		750		986		1,228		(143		)	(26	)
Home equity lines of credit serviced by others	104		149		219		389		550		(45		)	(30	)
Automobile	12,106		13,204		13,938		13,828		12,706		(1,098		)	(8	)
Education	8,900		8,134		6,610		4,359		2,256		766			9
Credit cards	1,991		1,848		1,691		1,634		1,693		143			8
Other retail	3,616		2,789		1,737		1,083		1,072		827			30
Total retail loans	59,877		58,586		56,018		52,828		50,184		1,291			2
Total loans and leases		$116,660		$110,617		$107,669		$99,042		$93,410		$6,043		5	%

Total loans and leases of $116.7 billion as of December 31, 2018 , increased $6.0 billion , or 5% , from $110.6 billion as of December 31, 2017 , reflecting growth in commercial and retail products. Total commercial loans and leases of $56.8 billion increased $4.8 billion , or 9% , from $52.0 billion as of December 31, 2017 , reflecting increases in commercial and commercial real estate loans, partially offset by a decrease in leases. Total retail loans of $59.9 billion increased $1.3 billion , or 2% , from $58.6 billion as of December 31, 2017 , largely driven by increases in residential mortgages, other retail, education and credit card loans, partially offset by lower home equity balances and run-off in auto loans.

Maturities and Sensitivities of Loans and Leases to Changes in Interest Rates

The following table is a summary of loans and leases by remaining maturity or repricing date:



	December 31, 2018
(in millions)	Due in 1 Year or Less		Due After 1 Year Through 5 Years		Due After 5 Years		Total Loans and Leases
Commercial		$36,506		$2,757		$1,594		$40,857
Commercial real estate	12,720		128		175		13,023
Leases	585		1,854		464		2,903
Total commercial loans and leases	49,811		4,739		2,233		56,783
Residential mortgages	1,046		2,206		15,726		18,978
Home equity loans	18		329		726		1,073
Home equity lines of credit	12,470		61		179		12,710
Home equity loans serviced by others	1		374		24		399
Home equity lines of credit serviced by others	104		—		—		104
Automobile	155		7,532		4,419		12,106
Education	14		799		8,087		8,900
Credit cards	1,646		345		—		1,991
Other retail	501		2,297		818		3,616
Total retail loans	15,955		13,943		29,979		59,877
Total loans and leases		$65,766		$18,682		$32,212		$116,660
Loans and leases due after one year at fixed interest rates				$15,277		$21,362		$36,639
Loans and leases due after one year at variable interest rates			3,405		10,850		14,255

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Loan and Lease Concentrations

At December 31, 2018 , we did not identify any concentration of loans and leases exceeding 10% of total loans and leases that were not otherwise disclosed as a category of loans and leases. For further information on how we manage concentration exposures, see Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

Allowance for Credit Losses and Nonperforming Assets

The ACL, which consists of an ALLL and a reserve for unfunded lending commitments, is created through charges to the provision for credit losses in order to provide appropriate reserves to absorb future estimated credit losses in accordance with GAAP. For further information on our processes to determine our ACL, see “—Critical Accounting Estimates — Allowance for Credit Losses,” and Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

Summary of Loan and Lease Loss Experience

The following table presents a summary of the changes to our ALLL:



	As of and for the Year Ended December 31,
(dollars in millions)	2018		2017		2016		2015		2014
Allowance for Loan and Lease Losses — Beginning:
Commercial		$541		$516		$376		$388		$361
Commercial real estate	121		99		111		61		78
Leases	23		48		23		23		24
Qualitative ⁽¹⁾	—		—		86		72		35
Total commercial loans and leases	685		663		596		544		498
Residential mortgages	44		55		46		63		104
Home equity loans	19		24		39		50		85
Home equity lines of credit	87		139		132		152		159
Home equity loans serviced by others	12		15		29		47		85
Home equity lines of credit serviced by others	4		4		3		11		18
Automobile	139		127		106		58		23
Education	120		102		96		93		83
Credit cards	72		74		60		68		72
Other retail	54		33		28		32		34
Qualitative ⁽¹⁾	—		—		81		77		60
Total retail loans	551		573		620		651		723
Total allowance for loan and lease losses — beginning		$1,236		$1,236		$1,216		$1,195		$1,221

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of and for the Year Ended December 31,
(dollars in millions)	2018			2017			2016			2015			2014
Gross Charge-offs:
Commercial		($48	)		($62	)		($56	)		($30	)		($31	)
Commercial real estate	(4		)	(13		)	(14		)	(6		)	(12		)
Leases	—			—			(9		)	—			—
Total commercial loans and leases	(52		)	(75		)	(79		)	(36		)	(43		)
Residential mortgages	(8		)	(11		)	(21		)	(22		)	(36		)
Home equity loans	(6		)	(11		)	(16		)	(34		)	(55		)
Home equity lines of credit	(26		)	(34		)	(43		)	(59		)	(80		)
Home equity loans serviced by others	(9		)	(15		)	(38		)	(32		)	(55		)
Home equity lines of credit serviced by others	(4		)	(5		)	(12		)	(14		)	(12		)
Automobile	(158		)	(181		)	(160		)	(117		)	(41		)
Education	(68		)	(59		)	(52		)	(51		)	(54		)
Credit cards	(68		)	(61		)	(58		)	(59		)	(64		)
Other retail	(95		)	(60		)	(57		)	(56		)	(53		)
Total retail loans	(442		)	(437		)	(457		)	(444		)	(450		)
Total gross charge-offs		($494	)		($512	)		($536	)		($480	)		($493	)
Gross Recoveries:
Commercial		$15			$37			$21			$18			$35
Commercial real estate	4			3			12			31			23
Leases	—			—			—			—			—
Total commercial loans and leases	19			40			33			49			58
Residential mortgages	5			6			9			12			11
Home equity loans	11			13			18			11			24
Home equity lines of credit	16			16			18			18			15
Home equity loans serviced by others	15			18			19			17			21
Home equity lines of credit serviced by others	7			7			6			8			5
Automobile	67			73			65			49			20
Education	16			15			11			12			9
Credit cards	8			7			8			8			7
Other retail	13			12			14			12			—
Total retail loans	158			167			168			147			112
Total gross recoveries		$177			$207			$201			$196			$170
Net (Charge-offs)/Recoveries:
Commercial		($33	)		($25	)		($35	)		($12	)		$4
Commercial real estate	—			(10		)	(2		)	25			11
Leases	—			—			(9		)	—			—
Total commercial loans and leases	(33		)	(35		)	(46		)	13			15
Residential mortgages	(3		)	(5		)	(12		)	(10		)	(25		)
Home equity loans	5			2			2			(23		)	(31		)
Home equity lines of credit	(10		)	(18		)	(25		)	(41		)	(65		)
Home equity loans serviced by others	6			3			(19		)	(15		)	(34		)
Home equity lines of credit serviced by others	3			2			(6		)	(6		)	(7		)
Automobile	(91		)	(108		)	(95		)	(68		)	(21		)
Education	(52		)	(44		)	(41		)	(39		)	(45		)
Credit cards	(60		)	(54		)	(50		)	(51		)	(57		)
Other retail	(82		)	(48		)	(43		)	(44		)	(53		)
Total retail loans	(284		)	(270		)	(289		)	(297		)	(338		)
Total net charge-offs		($317	)		($305	)		($335	)		($284	)		($323	)
Ratio of net charge-offs to average loans and leases	(0.28		%)	(0.28		%)	(0.32		%)	(0.30		%)	(0.36		%)

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of and for the Year Ended December 31,
(dollars in millions)	2018			2017			2016			2015			2014
Provision for Loan and Lease Losses ⁽²⁾ :
Commercial		$22			$50			$117			$—			$23
Commercial real estate	17			32			(17		)	25			(28		)
Leases	(1		)	(25		)	34			—			(1		)
Qualitative ⁽¹⁾	—			—			(21		)	14			37
Total commercial loans and leases	38			57			113			39			31
Residential mortgages	(5		)	(6		)	8			(7		)	(16		)
Home equity loans	(14		)	(7		)	(22		)	12			(4		)
Home equity lines of credit	8			(34		)	9			21			58
Home equity loans serviced by others	(8		)	(6		)	(1		)	(3		)	(4		)
Home equity lines of credit serviced by others	(4		)	(2		)	6			(2		)	—
Automobile	79			120			99			116			56
Education	33			62			21			42			55
Credit cards	71			52			53			43			53
Other retail	125			69			42			40			51
Qualitative ⁽¹⁾	—			—			27			4			17
Total retail loans	285			248			242			266			266
Total provision for loan and lease losses		$323			$305			$355			$305			$297
Total Allowance for Loan and Lease Losses — Ending:
Commercial	530			541				$458			$376			$388
Commercial real estate	138			121			92			111			61
Leases	22			23			48			23			23
Qualitative ⁽¹⁾	—			—			65			86			72
Total commercial loans and leases	690			685			663			596			544
Residential mortgages	36			44			42			46			63
Home equity loans	10			19			19			39			50
Home equity lines of credit	85			87			116			132			152
Home equity loans serviced by others	10			12			9			29			47
Home equity lines of credit serviced by others	3			4			3			3			11
Automobile	127			139			110			106			58
Education	101			120			76			96			93
Credit cards	83			72			63			60			68
Other retail	97			54			27			28			32
Qualitative ⁽¹⁾	—			—			108			81			77
Total retail loans	552			551			573			620			651
Total allowance for loan and lease losses — ending		$1,242			$1,236			$1,236			$1,216			$1,195
Reserve for Unfunded Lending Commitments — Beginning		$88			$72			$58			$61			$39
Provision for unfunded lending commitments	3			16			14			(3		)	22
Reserve for unfunded lending commitments — ending		$91			$88			$72			$58			$61
Total Allowance for Credit Losses — Ending		$1,333			$1,324			$1,308			$1,274			$1,256

⁽¹⁾ As discussed in Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report, as of December 31, 2017, we enhanced the method for assessing various qualitative risks, factors and events that may not be measured in the modeled results. The qualitative allowance is presented within each loan class beginning in 2017, and prior periods have not been reclassified to conform to the current presentation.

⁽²⁾ During December 2016, changes to the incurred loss period were reflected as components of the provision for retail property secured products.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Allocation of the Allowance for Loan and Lease Losses

The following table presents an allocation of the ALLL by class and the percent of each class of loans and leases to the total loans and leases:



	December 31,
(dollars in millions)	2018				2017				2016				2015				2014
Commercial		$530	35	%		$541	34	%		$458	35	%		$376	34	%		$388	34	%
Commercial real estate	138		11		121		10		92		10		111		9		61		8
Leases	22		3		23		3		48		3		23		4		23		4
Qualitative ⁽¹⁾	—		N/A		—		N/A		65		N/A		86		N/A		72		N/A
Total commercial loans and leases	690		49		685		47		663		48		596		47		544		46
Residential mortgages	36		16		44		15		42		14		46		13		63		13
Home equity loans	10		1		19		1		19		2		39		3		50		4
Home equity lines of credit	85		11		87		12		116		13		132		15		152		16
Home equity loans serviced by others	10		—		12		1		9		1		29		1		47		1
Home equity lines of credit serviced by others	3		—		4		—		3		—		3		—		11		1
Automobile	127		10		139		12		110		13		106		14		58		14
Education	101		8		120		7		76		6		96		4		93		2
Credit cards	83		2		72		2		63		1		60		2		68		2
Other retail	97		3		54		3		27		2		28		1		32		1
Qualitative ⁽¹⁾	—		N/A		—		N/A		108		N/A		81		N/A		77		N/A
Total retail loans	552		51		551		53		573		52		620		53		651		54
Total loans and leases		$1,242	100	%		$1,236	100	%		$1,236	100	%		$1,216	100	%		$1,195	100	%

⁽¹⁾ The qualitative allowance was presented within each loan class beginning in 2017 and prior periods have not been reclassified to conform to the current presentation.

The allowance for credit losses totaled $1.3 billion at December 31, 2018 and 2017 , respectively. The ALLL represented 1.06% of total loans and leases and 156% of nonperforming loans and leases as of December 31, 2018 compared with 1.12% and 142% , respectively, as of December 31, 2017 .

Overall credit quality remained strong, reflecting growth in higher-quality, lower-risk retail loans and a broadly stable risk profile in the commercial loans and leases portfolios. Nonperforming loans and leases of $797 million as of December 31, 2018 decreased $74 million from December 31, 2017 , driven by a $64 million decrease in commercial nonperforming loans, mainly due to repayments and returns to accrual status, and a $10 million decrease in retail nonperforming loans, largely in home equity. Net charge-offs of $317 million increased $12 million , or 4% , from $305 million in 2017 . Net charge-offs as a percentage of total average loans of 0.28% remained stable compared to 2017 .

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Risk Elements

The following table presents a summary of nonaccrual, past due and restructured loans and leases by class:



	December 31,
(in millions)	2018		2017		2016		2015		2014
Nonaccrual loans and leases
Commercial		$194		$238		$322		$70		$113
Commercial real estate	7		27		50		77		50
Leases	—		—		15		—		—
Total commercial loans and leases	201		265		387		147		163
Residential mortgages	136		128		144		331		345
Home equity loans	50		72		98		135		203
Home equity lines of credit	231		233		243		272		257
Home equity loans serviced by others	17		25		32		38		47
Home equity lines of credit serviced by others	15		18		33		32		25
Automobile	81		70		50		42		21
Education	38		38		38		35		11
Credit cards	20		17		16		16		16
Other retail	8		5		4		3		5
Total retail loans	596		606		658		904		930
Total nonaccrual loans and leases		$797		$871		$1,045		$1,051		$1,093
Loans and leases that are accruing and 90 days or more delinquent
Commercial	1		5		2		1		1
Commercial real estate	—		3		—		—		—
Leases	—		—		—		—		—
Total commercial loans and leases	1		8		2		1		1
Residential mortgages	15		16		18		—		—
Home equity loans	—		—		—		—		—
Home equity lines of credit	—		—		—		—		—
Home equity loans serviced by others	—		—		—		—		—
Home equity lines of credit serviced by others	—		—		—		—		—
Automobile	—		—		—		—		—
Education	2		3		5		6		6
Credit cards	—		—		—		—		1
Other retail	7		5		1		2		—
Total retail loans	24		24		24		8		7
Total accruing and 90 days or more delinquent	25		32		26		9		8
Total		$822		$903		$1,071		$1,060		$1,101
Troubled debt restructurings ⁽¹⁾		$723		$629		$633		$909		$955

⁽¹⁾ TDR balances reported in this line item consist of only those TDRs not reported in the nonaccrual loan or accruing and 90 days or more delinquent loan categories. Thus, only those TDRs that are in compliance with their modified terms and not past due, or those TDRs that are past due 30-89 days and still accruing are included in the TDR balances listed above.

Potential Problem Loans and Leases

At December 31, 2018 , we did not identify any potential problem loans or leases within the portfolio that were not already included in “—Risk Elements.” Potential problem loans or leases consist of loans and leases where information about a borrower’s possible credit problems cause management to have serious doubts as to the ability of such borrowers to comply with the present repayment terms.

Commercial Loan Asset Quality

Our commercial loan and lease portfolio consists of traditional commercial loans, commercial leases and commercial real estate loans. The portfolio is predominantly focused on customers in our footprint and adjacent states in which we have a physical presence where our local delivery model provides for strong client connectivity. Additionally, we also do business in certain specialized industry sectors on a national basis.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

For commercial loans and leases, we utilize regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that we believe will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness or potential weakness that indicate an increased probability of future loss. “Criticized” loans are grouped into three categories, “special mention,” “substandard” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of our credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection of the debt. Doubtful loans have the same weaknesses as substandard, with the added characteristics that the possibility of loss is high and collection of the full amount of the loan is improbable. These credit quality indicators for commercial loans are continually updated and monitored. See Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

Nonperforming commercial loans and leases decreased $64 million to $201 million as of December 31, 2018 from $265 million as of December 31, 2017 , largely tied to a reduction in nonperforming commodities-related credits. As of December 31, 2018 , total commercial nonperforming loans were 0.4% of the commercial loan portfolio compared to 0.5% as of December 31, 2017 . Total 2018 commercial loan and lease portfolio net charge-offs of $33 million remained stable with $35 million in 2017 .

The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:



	December 31, 2018
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$38,600		$1,231		$828		$198		$40,857
Commercial real estate	12,523		412		82		6		13,023
Leases	2,823		39		41		—		2,903
Total commercial loans and leases		$53,946		$1,682		$951		$204		$56,783



	December 31, 2017
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$35,430		$1,143		$785		$204		$37,562
Commercial real estate	10,706		500		74		28		11,308
Leases	3,069		73		19		—		3,161
Total commercial loans and leases		$49,205		$1,716		$878		$232		$52,031

Total commercial criticized loans and leases of $2.8 billion as of December 31, 2018 were stable compared with December 31, 2017 . Commercial criticized loans and leases over total commercial loans and leases of 5.0% at December 31, 2018 improved from 5.4% at December 31, 2017 , driven by loan growth. Commercial criticized balances of $2.3 billion , or 5.5% of the commercial loan portfolio as of December 31, 2018 , increased from $2.1 billion, or 5.7% , as of December 31, 2017 . Commercial real estate criticized balances of $500 million , or 3.8% of the commercial real estate portfolio, decreased from $602 million , or 5.3% , as of December 31, 2017 . Commercial criticized loans represented 80% of total criticized loans as of December 31, 2018 compared to 75% as of December 31, 2017 . Commercial real estate accounted for 18% of total criticized loans as of December 31, 2018 compared to 21% as of December 31, 2017 .

Retail Loan Asset Quality

For retail loans, we primarily utilize payment and delinquency status to regularly review and monitor credit quality trends. Historical experience indicates that the longer a loan is past due, the greater the likelihood of future credit loss. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-Atlantic and Midwest regions, although we have continued to grow selectively in areas outside the footprint primarily in the auto finance, education lending and unsecured portfolios.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following tables present asset quality metrics for the retail loan portfolio:



	December 31, 2018		December 31, 2017
Average refreshed FICO for total portfolio	763		762
CLTV ratio for secured real estate ⁽¹⁾	58		59
Nonperforming retail loans as a percentage of total retail	1.00	%	1.03	%

⁽¹⁾ The real estate secured portfolio CLTV is calculated as the mortgage and second lien loan balance divided by the most recently available value of the property.



	Year Ended December 31,
(dollars in millions)	2018			2017			Change		Percent
Net charge-offs		$284			$270			$14	5	%
Annualized net charge-off rate	0.48		%	0.47		%	1 bps

Retail asset quality remains stable with a net charge-off rate of 0.48% for the year ended December 31, 2018 , an increase of one basis point from the year ended December 31, 2017 , driven by growth in credit cards as well as continued expected seasoning in our personal loan and education refinance loan portfolios.

HELOC Payment Shock

Payment shock in the HELOC portfolio occurs when the 10-year interest only draw period ends, and the payment converts to a fully amortizing principal and interest payment. We monitor the risk associated with the payment increase and have a comprehensive program designed to provide heightened customer outreach to inform, educate and assist customers through the reset process as well as to offer alternative financing and forbearance options. Results of this program indicate that our efforts to assist customers at risk of default have successfully reduced delinquency and charge-off rates compared to our original expectations.

The table below outlines the population expected to mature between January 1, 2019 and December 31, 2021, compared to the overall HELOC population, reflecting a similar credit profile for each population:



(dollars in millions)	Balance		% Secured by First Lien		FICO	LTV
Total HELOCs as of December 31, 2018		$12,814	51	%	766	57	%
HELOCs scheduled to reset 1/1/19 - 12/31/21	1,598		54		758	51

The performance of our historical vintages that have entered repayment remains stable. The following table presents the asset quality metrics as of December 31, 2018 , for the HELOCs reset at each year ending:



(dollars in millions)	2014/2015			2016			2017
Balance reset		$1,688			$738			$730
Percent refinanced, paid off, or current	93		%	95		%	94		%
Percent past due	3			3			4
Percent charged-off	4			2			2

Factors that affect our future expectations for continued relatively low charge-off risk in the face of rising interest rates for the portion of our HELOC portfolio subject to reset in future periods include a relatively high level of first lien collateral positions, improved loan-to-value ratios resulting from continued home price appreciation, relatively stable portfolio credit score profiles and continued robust loss mitigation efforts.

Troubled Debt Restructurings

TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower experiencing financial hardship that we would not otherwise make. TDRs typically result from our loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our borrower’s financial needs. The types of concessions include interest rate reductions, term extensions, principal forgiveness and other modifications to the structure of the loan that fall outside our lending policy. Depending on the specific facts and circumstances of the customer, restructuring can involve loans moving to nonaccrual, remaining on nonaccrual, or remaining on accrual status.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

As of December 31, 2018 , $723 million of retail loans were classified as TDRs, compared with $761 million as of December 31, 2017 . The decrease was in part, attributable to both loan repayments and the increasing amortization of balances as more seasoned accounts age. As of December 31, 2018 , $181 million of retail TDRs were in nonaccrual status with 49% current on payments, stable compared with $211 million in nonaccrual status with 51% current on payments at December 31, 2017 . TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated for impairment and loans, once classified as TDRs, remain classified as TDRs until paid off, sold or refinanced at market terms.

For additional information regarding TDRs, see “—Critical Accounting Estimates — Allowance for Credit Losses” and Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

The following tables present retail TDRs by loan class, including delinquency status for accruing TDRs and TDRs in nonaccrual:



	December 31, 2018
			As a % of Accruing Retail TDRs
(dollars in millions)	Accruing		30-89 Days Past Due		90+ Days Past Due		Nonaccruing		Total
Residential mortgages		$111	3.0	%	1.6	%		$44		$155
Home equity loans	85		0.7		—		25		110
Home equity lines of credit	138		0.9		—		64		202
Home equity loans serviced by others	31		0.3		—		10		41
Home equity lines of credit serviced by others	3		—		—		5		8
Automobile	13		0.2		—		10		23
Education	131		0.9		0.3		22		153
Credit cards	24		0.4		—		1		25
Other retail	6		—		—		—		6
Total		$542	6.4	%	1.9	%		$181		$723



	December 31, 2017
			As a % of Accruing Retail TDRs
(dollars in millions)	Accruing		30-89 Days Past Due		90+ Days Past Due		Nonaccruing		Total
Residential mortgages		$98	2.7	%	2.0	%		$53		$151
Home equity loans	86		0.7		—		35		121
Home equity lines of credit	128		1.1		—		69		197
Home equity loans serviced by others	38		0.4		—		13		51
Home equity lines of credit serviced by others	4		—		—		5		9
Automobile	12		0.2		—		11		23
Education	152		1.3		0.5		23		175
Credit cards	24		0.4		—		1		25
Other retail	8		—		—		1		9
Total		$550	6.7	%	2.5	%		$211		$761

Impact of Nonperforming Loans and Leases on Interest Income

The following table presents the gross interest income for both nonaccrual and restructured loans that would have been recognized if those loans had been current in accordance with their original contractual terms, and had been outstanding throughout the year, or since origination if held for only part of the year. The table also presents the interest income related to these loans that was actually recognized for the year.



(in millions)	For the Year Ended December 31, 2018
Gross amount of interest income that would have been recorded ⁽¹⁾		$125
Interest income actually recognized	7
Total interest income foregone		$118

⁽¹⁾ Based on the contractual rate that was being charged at the time the loan was restructured or placed on nonaccrual status.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cross-Border Outstandings

Cross-border outstandings can include loans, receivables, interest-bearing deposits with other banks, other interest-bearing investments and other monetary assets that are denominated in either dollars or other non-local currency. As of December 31, 2018 , 2017 and 2016 , there were no aggregate cross-border outstandings from borrowers or counterparties in any country that exceeded 1%, or were between 0.75% and 1% of consolidated total assets.

Non-Core Assets

The table below presents the composition of our non-core assets:



	December 31,
(in millions)	2018		2017		Change			Percent
Commercial		$72		$56		$16		29	%
Commercial real estate	14		19		(5		)	(26	)
Leases	670		752		(82		)	(11	)
Total commercial loans and leases	756		827		(71		)	(9	)
Residential mortgages	110		136		(26		)	(19	)
Home equity loans	31		40		(9		)	(23	)
Home equity lines of credit	21		30		(9		)	(30	)
Home equity loans serviced by others	399		542		(143		)	(26	)
Home equity lines of credit serviced by others	104		149		(45		)	(30	)
Education	210		254		(44		)	(17	)
Total retail loans	875		1,151		(276		)	(24	)
Total non-core loans	1,631		1,978		(347		)	(18	)
Other assets	96		112		(16		)	(14	)
Total non-core assets		$1,727		$2,090		($363	)	(17	%)

Non-core assets are primarily liquidating loan and lease portfolios inconsistent with our strategic priorities, generally as a result of geographic location, industry, product type or risk level and are included in Other. Non-core assets of $1.7 billion as of December 31, 2018 decrease d $363 million , or 17% , from December 31, 2017 .

Retail non-core loan balances of $875 million decreased $276 million , or 24% , compared to December 31, 2017 . The largest component of our retail non-core portfolio is the home equity SBO portfolio, a $503 million portfolio of home equity loans and lines of credit purchased between 2003 and 2007 that were initially serviced by other institutions, but now about 45% is serviced internally. The credit profile of this portfolio is stable, and losses have remained in a net recovery position in 2017 and 2018.

Commercial non-core loan and lease balances of $756 million decreased $71 million , or 9% , from $827 million as of December 31, 2017 . The largest component of our commercial non-core portfolio is an aircraft-related loan and lease portfolio tied to legacy-Royal Bank of Scotland Group plc aircraft leasing borrowers, which totaled $670 million and $752 million as of December 31, 2018 and 2017 , respectively.

Deposits

The table below presents the major components of our deposits:



	December 31,
(in millions)	2018		2017		Change			Percent
Demand		$29,458		$29,279		$179		1	%
Checking with interest	23,067		22,229		838			4
Regular savings	12,007		9,518		2,489			26
Money market accounts	35,701		37,454		(1,753		)	(5	)
Term deposits	19,342		16,609		2,733			16
Total deposits		$119,575		$115,089		$4,486		4	%

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Total deposits as of December 31, 2018 , increased $4.5 billion , or 4% , to $119.6 billion compared to $115.1 billion and reflected particular strength in regular savings, term deposits and checking with interest products.

The following table presents the average balances and average interest rates paid for deposits.



	For the Year Ended December 31,
	2018				2017				2016
(dollars in millions)	Average Balances		Yields/ Rates		Average Balances		Yields/ Rates		Average Balances		Yields/ Rates
Noninterest-bearing demand deposits ⁽¹⁾		$29,231	—			$28,134	—			$27,634	—
Checking with interest		$21,856	0.63	%		$21,458	0.37	%		$19,320	0.18	%
Money market accounts	36,497		0.94		37,450		0.53		37,106		0.36
Regular savings	10,238		0.15		9,384		0.04		8,691		0.04
Term deposits	18,035		1.61		15,448		1.04		12,696		0.78
Total interest-bearing deposits ⁽¹⁾		$86,626	0.91	%		$83,740	0.53	%		$77,813	0.35	%

⁽¹⁾ The aggregate amount of deposits by foreign depositors in domestic offices was $1.2 billion, $1.0 billion and $1.4 billion as of December 31, 2018 , 2017 and 2016.

Borrowed Funds

Short-term borrowed funds

A summary of our short-term borrowed funds is presented below:



	December 31,
(in millions)	2018		2017		Change			Percent
Federal funds purchased		$820		$460		$360		78	%
Securities sold under agreements to repurchase	336		355		(19		)	(5	)
Other short-term borrowed funds ⁽¹⁾	1,653		1,856		(203		)	(11	)
Total short-term borrowed funds		$2,809		$2,671		$138		5	%

⁽¹⁾ December 31, 2018 includes $1.5 billion of debt issued under CBNA’s Global Bank Note Program maturing within one year, with unamortized deferred issuance costs and/or discounts of ($1) million and other basis adjustments of ($8) million . December 31, 2017 includes $750 million of debt issued under CBNA’s Global Bank Note Program maturing within one year, with unamortized deferred issuance costs and/or discounts of ($1) million and other basis adjustments of ($4) million .

The net decrease in other short-term borrowed funds of $203 million resulted from a reduction of $951 million in short-term FHLB advances partially offset by an increase of $746 million in senior bank debt, issued under CBNA’s Global Note Program, with a remaining maturity within one year.

Our advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $13.0 billion and $9.4 billion at December 31, 2018 and 2017 , respectively, and our available FHLB borrowing capacity was $4.8 billion and $8.0 billion at December 31, 2018 and 2017 , respectively. We can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At December 31, 2018 , our unused secured borrowing capacity was approximately $36.2 billion , which included unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Key data related to short-term borrowed funds is presented in the following table:



	As of and for the Year Ended December 31,
(dollars in millions)	2018			2017			2016
Weighted-average interest rate at year-end: ⁽¹⁾
Federal funds purchased and securities sold under agreements to repurchase	1.72		%	0.74		%	0.26		%
Other short-term borrowed funds	2.50			1.72			0.94
Maximum amount outstanding at any month-end during the year:
Federal funds purchased and securities sold under agreements to repurchase ⁽²⁾		$1,282			$1,174			$1,522
Other short-term borrowed funds	2,509			3,508			5,461
Average amount outstanding during the year:
Federal funds purchased and securities sold under agreements to repurchase ⁽²⁾		$654			$776			$947
Other short-term borrowed funds	1,808			2,321			3,207
Weighted-average interest rate during the year: ⁽¹⁾
Federal funds purchased and securities sold under agreements to repurchase	0.92		%	0.36		%	0.09		%
Other short-term borrowed funds	2.42			1.32			0.64

⁽¹⁾ Rates exclude certain hedging costs.

⁽²⁾ Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable.

Long-term borrowed funds

A summary of our long-term borrowed funds is presented below:



	December 31,
(in millions)	2018		2017
Parent Company:
2.375% fixed-rate senior unsecured debt, due 2021		$349		$349
4.150% fixed-rate subordinated debt, due 2022	348		348
5.158% fixed-to-floating rate callable subordinated debt, due 2023 ⁽¹⁾	—		333
3.750% fixed-rate subordinated debt, due 2024	250		250
4.023% fixed-rate subordinated debt, due 2024	42		42
4.350% fixed-rate subordinated debt, due 2025	249		249
4.300% fixed-rate subordinated debt, due 2025	749		749
Banking Subsidiaries:
2.450% senior unsecured notes, due 2019 ⁽²⁾⁽³⁾	—		743
2.500% senior unsecured notes, due 2019 ⁽²⁾⁽³⁾	—		741
2.250% senior unsecured notes, due 2020 ⁽²⁾	691		692
3.278% floating-rate senior unsecured notes, due 2020 ^{(2) (4)}	300		299
3.247% floating-rate senior unsecured notes, due 2020 ^{(2) (4)}	250		249
2.200% senior unsecured notes, due 2020 ⁽²⁾	499		498
2.250% senior unsecured notes, due 2020 ⁽²⁾	738		742
2.550% senior unsecured notes, due 2021 ⁽²⁾	964		964
3.487% floating-rate senior unsecured notes, due 2022 ^{(2) (4)}	249		249
2.650% senior unsecured notes, due 2022 ⁽²⁾	487		491
3.700% senior unsecured notes, due 2023 ⁽²⁾	502		—
3.753% floating-rate senior unsecured notes, due 2023 ^{(2) (4)}	249		—
Federal Home Loan Bank advances, 2.725% weighted average rate, due through 2038	7,508		3,761
Other	9		16
Total long-term borrowed funds		$14,433		$11,765

⁽¹⁾ Redeemed on June 29, 2018.

⁽²⁾ Issued under CBNA’s Global Bank Note Program.

⁽³⁾ Reclassified to short-term borrowed funds.

⁽⁴⁾ Rate disclosed reflects the floating rate as of December 31, 2018.

Long-term borrowed funds of $14.4 billion as of December 31, 2018 increased $2.7 billion from December 31, 2017 , reflecting an increase of $3.7 billion in long-term FHLB borrowings, partially offset by the redemption of

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

$333 million of Parent Company subordinated debt and a net decrease of $739 million in Banking Subsidiaries senior unsecured notes with a remaining maturity greater than one year.

The Parent Company’s long-term borrowed funds as of December 31, 2018 and 2017 included principal balances of $2.0 billion and $2.3 billion and unamortized deferred issuance costs and/or discounts of ($5) million for each period. The banking subsidiaries’ long-term borrowed funds as of December 31, 2018 and 2017 include principal balances of $12.5 billion and $9.5 billion , respectively, with unamortized deferred issuance costs and/or discounts of ($14) million and ($19) million , respectively, and hedging basis adjustments of ($58) million and ($63) million , respectively. See Note 13 “Derivatives” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report for further information about our hedging of certain long-term borrowed funds.

QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly Consolidated Statements of Operations data and Consolidated Balance Sheet data as of and for the four quarters of 2018 and 2017 , respectively. We have prepared the Consolidated Statements of Operations data and Balance Sheet data on the same basis as our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, included in this Report and, in the opinion of management, each Consolidated Statement of Operations and Balance Sheet includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations and balance sheet data as of and for these periods. This information should be read in conjunction with our Consolidated Financial Statements and the related notes, of this Report.

Supplementary Summary Consolidated Financial and Other Data (unaudited)



	For the Three Months Ended
(dollars in millions, except per share amounts)	December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
Operating Data:
Net interest income		$1,172			$1,148			$1,121			$1,091			$1,080			$1,062			$1,026			$1,005
Noninterest income ^{(1) (6) (7)}	421			416			388			371			404			381			370			379
Total revenue	1,593			1,564			1,509			1,462			1,484			1,443			1,396			1,384
Provision for credit losses	85			78			85			78			83			72			70			96
Noninterest expense ^{(2) (5) (6) (7)}	951			910			875			883			898			858			864			854
Income before income tax expense (benefit)	557			576			549			501			503			513			462			434
Income tax expense (benefit) ^{(3) (5) (6) (8)}	92			133			124			113			(163		)	165			144			114
Net income ^{(4) (5) (6) (8)}		$465			$443			$425			$388			$666			$348			$318			$320
Net income available to common stockholders ⁽⁴⁾ ⁽⁵⁾ ⁽⁶⁾ ⁽⁸⁾		$450			$436			$425			$381			$666			$341			$318			$313
Net income per average common share- basic ^{(6) (8)}		$0.96			$0.92			$0.88			$0.78			$1.35			$0.68			$0.63			$0.61
Net income per average common share- diluted ⁽⁶⁾ ⁽⁸⁾	0.96			0.91			0.88			0.78			1.35			0.68			0.63			0.61
Other Operating Data:
Return on average common equity ⁽⁹⁾	9.16		%	8.82		%	8.65		%	7.83		%	13.46		%	6.87		%	6.48		%	6.52		%
Return on average tangible common equity ⁽⁹⁾	13.85			13.29			12.93			11.71			19.92			10.13			9.57			9.68
Return on average total assets ⁽⁹⁾	1.17			1.13			1.11			1.04			1.75			0.92			0.85			0.87
Return on average total tangible assets ⁽⁹⁾	1.22			1.18			1.16			1.08			1.83			0.96			0.89			0.91
Efficiency ratio ⁽⁹⁾	59.69			58.20			57.95			60.43			60.52			59.41			61.94			61.68
Net interest margin ⁽⁹⁾	3.22			3.19			3.18			3.16			3.08			3.05			2.97			2.96
Share Data:
Cash dividends declared and paid per common share		$0.27			$0.27			$0.22			$0.22			$0.18			$0.18			$0.14			$0.14
Dividend payout ratio	28		%	29		%	25		%	28		%	13		%	26		%	22		%	23		%

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of
(dollars in millions)	December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
Balance Sheet Data:
Total assets		$160,518			$158,598			$155,431			$153,453			$152,336			$151,356			$151,407			$150,285
Loans and leases ⁽¹⁰⁾	116,660			114,720			113,407			111,425			110,617			110,151			109,046			108,111
Allowance for loan and lease losses	1,242			1,242			1,253			1,246			1,236			1,224			1,219			1,224
Total securities	25,075			25,485			25,513			25,433			25,733			25,742			25,115			25,996
Goodwill	6,923			6,946			6,887			6,887			6,887			6,887			6,887			6,876
Total liabilities	139,701			138,322			134,964			133,394			132,066			131,247			131,343			130,438
Deposits	119,575			117,075			117,073			115,730			115,089			113,235			113,613			112,112
Federal funds purchased and securities sold under agreements to repurchase	1,156			374			326			315			815			453			429			1,093
Other short-term borrowed funds	1,653			2,006			1,499			1,494			1,856			1,505			2,004			2,762
Long-term borrowed funds	14,433			15,639			13,641			13,486			11,765			13,400			13,154			11,780
Total stockholders’ equity	20,817			20,276			20,467			20,059			20,270			20,109			20,064			19,847
Other Balance Sheet Data:
Asset Quality Ratios:
Allowance for loan and lease losses as a percentage of total loans and leases	1.06		%	1.08		%	1.10		%	1.12		%	1.12		%	1.11		%	1.12		%	1.13		%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases	156			149			148			144			142			131			119			117
Nonperforming loans and leases as a percentage of total loans and leases	0.68			0.73			0.75			0.78			0.79			0.85			0.94			0.97
Capital ratios: ⁽¹¹⁾
CET1 capital ratio ⁽¹²⁾	10.6			10.8			11.2			11.2			11.2			11.1			11.2			11.2
Tier 1 capital ratio ⁽¹³⁾	11.3			11.2			11.6			11.4			11.4			11.3			11.4			11.4
Total capital ratio ⁽¹⁴⁾	13.3			13.4			13.8			13.9			13.9			13.8			14.0			14.0
Tier 1 leverage ratio ⁽¹⁵⁾	10.0			9.9			10.2			10.0			10.0			9.9			9.9			9.9

⁽¹⁾ Fourth quarter 2018 noninterest income included $5 million of pre-tax notable items ($4 million in FAMC integration costs and $1 million in other pre-tax notable items).

⁽²⁾ Fourth quarter 2018 noninterest expense included $45 million of pre-tax notable items consisting of $33 million in other notable items ($33 million in TOP efficiency initiatives) and $12 million of FAMC integration costs.

⁽³⁾ Fourth quarter 2018 income tax expense included $41 million of benefit associated with notable items ($37 million in other notable items consisting of $8 million in TOP efficiency initiatives and $29 million of net deferred tax liability adjustment) and $4 million in FAMC integration costs.

⁽⁴⁾ Fourth quarter 2018 net income included $9 million of after-tax notable items consisting of $12 million of FAMC integration costs offset by $3 million other notable items (including $29 million of net deferred tax liability adjustment offset by $25 million in after-tax TOP efficiency initiatives and $1 million of noninterest income notable items).

⁽⁵⁾ Third quarter 2018 noninterest expense included $9 million of pre-tax notable items for FAMC integration costs. Income tax expense included $2 million of benefits associated with notable items for FAMC integration costs and net income included $7 million of after-tax notable items for FAMC integration costs.

⁽⁶⁾ Fourth quarter 2017 noninterest income included $17 million of pre-tax notable items related to a gain on mortgage/home equity TDR Transaction. Noninterest expense included $40 million of pre-tax notable items consisting of $22 million of 2017 Tax Legislation-related notable items (colleague and community investment) and $18 million related to other notable items ($15 million in TOP efficiency initiatives and $3 million of home equity operational items); income tax expense included $340 million of benefit associated with notable items driven by the 2017 Tax Legislation of $331 million of net deferred tax liability adjustment and $9 million of tax benefit related to colleague and community investment; net income included $317 million of after-tax notable items consisting of a $318 million benefit related the December 2017 Tax Legislation ($331 million of net deferred tax liability adjustment partially offset by $13 million of after-tax colleague and community investment), $10 million of after-tax gain on mortgage/home equity TDR Transaction offset by $11 million of after-tax other notable items ($9 million in after-tax TOP efficiency initiatives and $2 million of after-tax home equity operational items); and net income per average common share, basic and diluted, included $0.64 related to notable items, primarily driven by the 2017 Tax Legislation.

⁽⁷⁾ Second quarter 2017 noninterest income included $11 million of lease impairment credit-related costs and noninterest expense included $15 million of lease impairment credit-related costs.

⁽⁸⁾ First quarter 2017 income tax expense and net income included a $23 million benefit related to the settlement of certain tax matters and net income per average common share, basic and diluted, included $0.04 benefit related to the settlement of certain tax matters.

⁽⁹⁾ Ratios for the periods above are presented on an annualized basis.

⁽¹⁰⁾ Excludes loans held for sale of $1.3 billion , $1.3 billion , $710 million , $800 million , $718 million , $1.2 billion , $707 million , and $669 million as of December 31, 2018 , September 30, 2018 , June 30, 2018 , March 31, 2018 , December 31, 2017 , September 30, 2017 , June 30, 2017 and March 31, 2017 , respectively.

⁽¹¹⁾ The capital ratios and associated components are prepared using the U.S. Basel III Standardized transitional approach. The December 31, 2017 capital ratios reflect the retrospective adoption of FASB ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See “—Results of Operations — 2017 compared with 2016 — Income Tax Expense” for additional information.

⁽¹²⁾ “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

⁽¹³⁾ “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.

⁽¹⁴⁾ “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.

⁽¹⁵⁾ “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

CAPITAL AND REGULATORY MATTERS

As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. As of December 31, 2018, our primary subsidiaries were CBNA, a national banking association whose primary federal regulator is the OCC, and CBPA, a Pennsylvania-chartered savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the FDIC as its primary federal regulator. On January 2, 2019, we consolidated our banking subsidiaries via a merger of CBPA into CBNA in order to streamline governance and enterprise risk management, improve CBNA’s risk profile and gain operational efficiencies. CBNA is now our primary subsidiary and our sole banking subsidiary.

Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. The current operating environment reflects heightened regulatory expectations around many regulations including consumer compliance, the Bank Secrecy Act, anti-money laundering compliance, and increased internal audit activities. For more information, see “Regulation and Supervision” in Part I, Item 1 — Business, included in this Report.

Dodd-Frank Act and Economic Growth, Regulatory Relief and Consumer Protection Act

Under the Dodd-Frank Act, until the stress testing amendments of EGRRCPA take effect, we are required to submit our annual capital plan and the results of our annual company-run stress tests to the FRB by April 5th of each year and disclose certain results within 15 days after the FRB discloses the results of its supervisory-run tests. EGRRCPA amended the Dodd-Frank Act by, among other things, effective November 24, 2019, removing the requirements for firms with between $100 billion or more but less than $250 billion, such as Citizens, to conduct company-run stress tests and to be subject to supervisory stress testing (although the FRB retains discretion to subject such firms to these requirements). In light of these amendments, the FRB has exempted Citizens from supervisory and company-run stress testing requirements for the 2019 cycle and proposed to conduct supervisory stress tests on a biennial basis and to eliminate company-run stress testing requirements for certain BHCs, including Citizens. We publish estimated DFAST results under the supervisory severely adverse scenario on our regulatory filings and disclosures page on our Investor Relations website at http://investor.citizensbank.com. On April 5, 2018, we submitted our 2018 Capital Plan, Capital Policy and annual stress test results to the FRB as part of the 2018 CCAR process. On June 28, 2018, the FRB announced that it did not object to our 2018 Capital Plan including our proposed capital actions for the period beginning July 1, 2018 and ending June 30, 2019. Our 2018 Capital Plan includes quarterly common dividends of $0.27 per share in third and fourth quarter 2018, increasing to $0.32 per share in first and second quarter 2019, and common share repurchases of up to $1.02 billion through second quarter 2019. While the regulatory landscape of capital planning and stress testing continues to evolve, we maintain a robust inventory of potential actions that could be taken to restore capital, liquidity or both in the event of market or idiosyncratic financial stress. We continue to comply with all regulatory requirements for capital planning and stress testing as well as internal policy governing capital actions.

The Dodd-Frank Act also required our bank subsidiary to conduct stress tests on an annual basis and to disclose the stress test results. Under EGRRCPA, effective November 2019, banks with total consolidated assets between $100 billion and $250 billion, such as CBNA, will not be required to conduct annual company-run stress tests. In December 2018, the OCC proposed to implement this change and, if enacted as proposed, we believe that CBNA will not be required to conduct its annual company-run stress tests during 2019. CBNA submitted its 2018 annual stress tests to the OCC on April 5, 2018 and published, on our Investor Relations website referenced above, a summary of those results along with the stress test results of the Parent Company on June 21, 2018.

Similarly, we are required to submit the results of our mid-cycle company-run DFAST stress tests by October 5 ^th of each year to the FRB and disclose the summary results of our internally developed stress tests under the internally developed severely adverse scenario between October 5 ^th and November 4 ^th . We submitted the results of our 2018 mid-cycle stress test to the FRB and disclosed a summary of the results on October 5, 2018. We publish these company-run estimated impacts of stress on our Investor Relations website referenced above. The FRB has proposed to eliminate mid-cycle company-run DFAST stress tests, effective with the 2020 capital planning and stress testing cycle and, as with the other capital planning and stress testing requirements for the 2019 cycle, has exempted Citizens from this requirement for the 2019 cycle.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Capital Framework

Under the U.S. Basel III capital framework, we and our banking subsidiaries must meet specific minimum requirements for the following ratios: common equity tier 1 capital, tier 1 capital, total capital, and tier 1 leverage. The table below presents our actual regulatory capital ratios under the U.S. Basel III Standardized rules:



	Actual				Required Minimum plus Required CCB for Non-Leverage Ratios ⁽⁵⁾⁽⁶⁾
(in millions, except ratio data)	Amount		Ratio
December 31, 2018
Common equity tier 1 capital ⁽¹⁾		$14,485	10.6	%	6.4
Tier 1 capital ⁽²⁾	15,325		11.3		7.9
Total capital ⁽³⁾	18,157		13.3		9.9
Tier 1 leverage ⁽⁴⁾	15,325		10.0		4.0
Risk-weighted assets	136,202
Quarterly adjusted average assets	153,026
December 31, 2017
Common equity tier 1 capital ⁽¹⁾		$14,309	11.2	%	5.8	%
Tier 1 capital ⁽²⁾	14,556		11.4		7.3
Total capital ⁽³⁾	17,781		13.9		9.3
Tier 1 leverage ⁽⁴⁾	14,556		10.0		4.0
Risk-weighted assets	127,692
Quarterly adjusted average assets	145,601

⁽¹⁾ “Common equity tier 1 capital ratio” is 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.

⁽⁵⁾ Required “Minimum Capital ratio” for 2018 and 2017 are: Common equity tier 1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%.

⁽⁶⁾ “Minimum Capital ratio” includes capital conservation buffer for Transitional Basel III of 1.875% for 2018 and 1.250% for 2017 ; N/A to Tier 1 leverage.

At December 31, 2018 , our CET1 capital, tier 1 capital and total capital ratios were 10.6% , 11.3% and 13.3% , respectively, as compared with 11.2% , 11.4% and 13.9% , respectively, as of December 31, 2017 . The CET1 capital ratio decreased as $8.5 billion of risk-weighted asset growth, including $1.5 billion from FAMC, goodwill and intangible growth attributable to the FAMC acquisition, and Capital Plan actions that included common dividends of $471 million , preferred dividends of $29 million and repurchase of $1.025 billion of our outstanding common stock, were partially offset by net income for the year ended December 31, 2018. The tier 1 capital ratio decreased due to the changes in CET1 capital ratio, partially offset by the issuance of preferred stock. The total capital ratio decreased due to the changes in CET1 and tier 1 capital ratios, as well as the June 2018 redemption of subordinated debt and an increase in non-qualifying subordinated debt. At December 31, 2018 , our CET1 capital, tier 1 capital and total capital ratios were approximately 363 basis points, 275 basis points and 283 basis points, respectively, above their regulatory minima plus the fully phased-in capital conservation buffer. All ratios remained well above the U.S. Basel III minima.

Regulatory Capital Ratios and Capital Composition

CET1 capital under U.S. Basel III Standardized rules totaled $14.5 billion at December 31, 2018 , and increased $176 million from $14.3 billion at December 31, 2017 , as net income for the year ended December 31, 2018 was partially offset by the impact of common share repurchases, dividends and an increase in goodwill and intangibles related to the FAMC acquisition. Tier 1 capital at December 31, 2018 totaled $15.3 billion , reflecting a $769 million increase from $14.6 billion at December 31, 2017 , driven by the changes in CET1 capital and the issuance of preferred stock. At December 31, 2018, we had $840 million of fixed-to-floating non-cumulative perpetual preferred stock issued and outstanding, an increase of $593 million from $247 million at December 31, 2017. The increase is attributable to the second quarter 2018 issuance of 300,000 shares of Series B Preferred Stock and the fourth quarter 2018 issuance of 300,000 shares of Series C Preferred Stock, both of which qualified as additional tier 1 capital. Total capital of $18.2 billion at December 31, 2018 , increased $376 million from December 31, 2017 , driven by the changes in CET1 and tier 1 capital, partially offset by the June 2018 redemption of subordinated debt and an increase in non-qualifying subordinated debt.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Risk-weighted assets (“RWA”) totaled $136.2 billion at December 31, 2018 , based on U.S. Basel III Standardized rules, up $8.5 billion from December 31, 2017 . This increase was driven by growth in commercial loans and commitments, as well as growth in retail loans including residential mortgages, education and unsecured retail portfolios. The increase in RWA was also driven by the acquisition of FAMC mortgage servicing rights. These increases were partially offset by run-off in the auto and home equity portfolios.

As of December 31, 2018 , the tier 1 leverage ratio was 10.0% and was stable with December 31, 2017 as the $7.4 billion increase in quarterly adjusted average assets was offset by the increase in tier 1 capital.

The following table presents our capital composition under the U.S. Basel III capital framework:



(in millions)	December 31, 2018			December 31, 2017
Total common stockholders’ equity		$19,977			$20,023
Exclusions: ⁽¹⁾
Net unrealized losses recorded in accumulated other comprehensive income, net of tax:
Debt and equity securities	490			236
Derivatives	143			143
Unamortized net periodic benefit costs	463			441
Deductions:
Goodwill	(6,923		)	(6,887		)
Deferred tax liability associated with goodwill	366			355
Other intangible assets	(31		)	(2		)
Total common equity tier 1	14,485			14,309
Qualifying preferred stock	840			247
Total tier 1 capital	15,325			14,556
Qualifying subordinated debt ⁽²⁾	1,499			1,901
Allowance for loan and lease losses	1,242			1,236
Allowance for credit losses for off-balance sheet exposure	91			88
Total capital		$18,157			$17,781

⁽¹⁾ As a U.S. Basel III Standardized approach institution, we selected the one-time election to opt-out of the requirements to include all the components of AOCI.

⁽²⁾ As of December 31, 2018 and 2017 , the amount of non-qualifying subordinated debt excluded from regulatory capital was $139 million and $70 million, respectively.

Capital Adequacy Process

Our assessment of capital adequacy begins with our risk appetite and risk management framework. This framework provides for the identification, measurement and management of material risks. Capital requirements are determined for actual and forecasted risk portfolios using applicable regulatory capital methodologies. The assessment also considers the possible impacts of approved and proposed changes to regulatory capital requirements. Key analytical frameworks, including stress testing, which enable the assessment of capital adequacy versus unexpected loss under a variety of stress scenarios, supplement our base line forecast. A governance framework supports our capital planning process, including capital management policies and procedures that document capital adequacy metrics and limits, as well as our Capital Contingency Plan and the active engagement of both the legal-entity boards and senior management in oversight and decision-making.

Forward-looking assessments of capital adequacy feed development of a single capital plan covering us and our banking subsidiary that is periodically submitted to the FRB. We prepare this plan in full compliance with the FRB’s Capital Plan Rule and we participate annually in the FRB’s horizontal capital review, which is the FRB’s assessment of specific capital planning areas as part of their normal supervisory process.

All distributions proposed under our Capital Plan are subject to consideration and approval by our Board of Directors prior to execution. The timing and exact amount of future dividends and share repurchases will depend on various factors, including our capital position, financial performance and market conditions.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Capital Transactions

The following capital actions were completed by the Company during 2018:


•	Declared and paid quarterly common stock dividends of $0.22 per share for the first and second quarters of 2018 , and $0.27 per share for the third and fourth quarters of 2018 , aggregating to common stock dividend payments of $471 million ;


•	Declared semi-annual dividends of $27.50 per share on the 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock, aggregating to $14 million;


•	Issued $300 million, or 300,000 shares, of 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock (the “Series B Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, and received net proceeds of $296 million;


•	Declared semi-annual dividends of $37.00 per share on the 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, aggregating to $11 million;


•	Issued $300 million, or 300,000 shares, of 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock (the “Series C Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, and received net proceeds of $297 million;


•	Declared quarterly dividends of $12.57 per share on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $4 million;


•	Repurchased $1.025 billion of our outstanding common stock; and


•	Redeemed $333 million of our 5.158% fixed-to-floating rate callable subordinated debt due June 29, 2023.

Banking Subsidiaries’ Capital

The following table presents our banking subsidiaries’ capital ratios under U.S. Basel III Standardized rules:



	December 31, 2018				December 31, 2017
(dollars in millions)	Amount		Ratio		Amount		Ratio
Citizens Bank, National Association
Common equity tier 1 capital ⁽¹⁾		$11,994	10.6	%		$11,917	11.4	%
Tier 1 capital ⁽²⁾	11,994		10.6		11,917		11.4
Total capital ⁽³⁾	14,252		12.5		14,127		13.5
Tier 1 leverage ⁽⁴⁾	11,994		9.9		11,917		10.3
Risk-weighted assets	113,610				104,767
Quarterly adjusted average assets	121,686				115,291
Citizens Bank of Pennsylvania ⁽⁵⁾
Common equity tier 1 capital ⁽¹⁾		$3,026	13.2	%		$3,045	12.9	%
Tier 1 capital ⁽²⁾	3,026		13.2		3,045		12.9
Total capital ⁽³⁾	3,226		14.1		3,284		13.9
Tier 1 leverage ⁽⁴⁾	3,026		9.0		3,045		8.7
Risk-weighted assets	22,922				23,659
Quarterly adjusted average assets	33,462				34,821

⁽¹⁾ “Common equity tier 1 capital ratio” is CET1 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.

⁽⁵⁾ On January 2, 2019, we consolidated our banking subsidiaries via a merger of CBPA into CBNA.

CBNA CET1 capital totaled $12.0 billion at December 31, 2018 , up $77 million from $11.9 billion at December 31, 2017 reflecting net income for the year ended December 31, 2018, partially offset by dividend payments and an increase in goodwill and intangibles related to the FAMC acquisition. At December 31, 2018 , CBNA held minimal additional tier 1 capital. Total capital was $14.3 billion at December 31, 2018 , an increase of $125 million from December 31, 2017 , driven by the increase in CET1 capital, and an increase in the ACL.

CBNA had RWA of $113.6 billion at December 31, 2018 , an increase of $8.8 billion from December 31, 2017 driven by growth in commercial loans and commitments, as well as growth in retail loans including residential

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

mortgages, education and unsecured retail portfolios. The increase in RWA was also driven by FAMC, which resulted in higher mortgage servicing rights. These increases were partially offset by run-off in the auto and home equity portfolios.

As of December 31, 2018 , the CBNA tier 1 leverage ratio decreased 48 basis points to 9.9% from 10.3% as of December 31, 2017 , primarily driven by a $6.4 billion increase in quarterly adjusted average assets that drove a 54 basis point decline in the ratio.

CBPA CET1 capital totaled $3.0 billion at December 31, 2018 , a decrease of $19 million at December 31, 2017 , as dividend payments exceeded net income. Total capital was $3.2 billion at December 31, 2018 , a decrease of $58 million from December 31, 2017 , driven by the decrease in CET1 capital and a decrease in the ACL.

CBPA had RWA of $22.9 billion at December 31, 2018 , a decrease of $737 million from December 31, 2017 , driven by decreases in the auto, education, residential mortgage and home equity portfolios. These decreases were partially offset by an increase in commercial loans.

As of December 31, 2018 , the CBPA tier 1 leverage ratio was 9.0% , an increase of 30 basis points from December 31, 2017 , primarily driven by a $1.4 billion decrease in quarterly adjusted average assets that drove a 35 basis point increase in the ratio.

LIQUIDITY

Liquidity is defined as our ability to meet our cash-flow and collateral obligations in a timely manner, at a reasonable cost. An institution must maintain operating liquidity to meet its expected daily and forecasted cash-flow requirements, as well as contingent liquidity to meet unexpected (stress scenario) funding requirements. As noted earlier, reflecting the importance of meeting all unexpected and stress-scenario funding requirements, we identify and manage contingent liquidity (consisting of cash balances at the FRB, unencumbered high-quality and liquid securities, and unused FHLB borrowing capacity). Separately, we also identify and manage asset liquidity as a subset of contingent liquidity (consisting of cash balances at the FRB and unencumbered high-quality securities). We consider the effective and prudent management of liquidity to be fundamental to our health and strength.

We manage liquidity at the consolidated enterprise level and at each material legal entity, including at the Parent Company and CBNA.

Parent Company Liquidity

Our Parent Company’s primary sources of cash are (i) dividends and interest received from CBNA as a result of investing in bank equity and subordinated debt and (ii) externally issued preferred stock and senior and subordinated debt. Uses of cash include the following: (i) routine cash flow requirements as a bank holding company, including periodic share repurchases and payments of dividends, interest and expenses; (ii) needs of subsidiaries, including CBNA, for additional equity and, as required, its need for debt financing; and (iii) support for extraordinary funding requirements when necessary. To the extent that the Parent Company has relied on wholesale borrowings, uses also include payments of related principal and interest.

On January 29, 2019, the Parent Company issued $300 million , or 12,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). For further discussion, see Note 16 “Stockholders’ Equity” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

For further information on outstanding debt and preferred stock, see Note 12 “Borrowed Funds” and Note 16 “Stockholders’ Equity” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

During the years ended December 31, 2018 and 2017 , the Parent Company declared and paid dividends on common stock of $471 million and $322 million , respectively, and declared dividends on preferred stock of $29 million and $14 million , respectively. During the years ended December 31, 2018 and 2017 , the Parent Company repurchased $1.025 billion and $820 million of its outstanding common stock, respectively.

Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $911 million as of December 31, 2018 compared with $443 million as of December 31, 2017 . The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At December 31, 2018 , the Parent Company’s double-leverage ratio was 99% .

CBNA Liquidity

In the ordinary course of business, the liquidity of CBNA is managed by matching sources and uses of cash. The primary sources of bank liquidity include (i) deposits from our consumer and commercial customers; (ii) payments of principal and interest on loans and debt securities; and (iii) wholesale borrowings, as needed, and as described under “—Liquidity Risk Management and Governance.” The primary uses of bank liquidity include (i) withdrawals and maturities of deposits; (ii) payment of interest on deposits; (iii) funding of loans and related commitments; and (iv) funding of securities purchases. To the extent that CBNA has relied on wholesale borrowings, uses also include payments of related principal and interest. For further information on CBNA’s outstanding debt, see Note 12 “Borrowed Funds” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

CBNA’s major businesses involve taking deposits and making loans. Hence, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary.

On February 14, 2019, CBNA issued $1.5 billion in senior notes, consisting of $700 million in three-year fixed-rate notes, $300 million in three-year floating-rate notes, and $500 million in seven-year fixed-rate notes.

Liquidity Risk

We define liquidity risk as the risk that an entity will be unable to meet its payment obligations in a timely manner, at a reasonable cost. Liquidity risk can arise due to contingent liquidity risk and/or funding liquidity risk.

Contingent liquidity risk is the risk that market conditions may reduce an entity’s ability to liquidate, pledge and/or finance certain assets and thereby substantially reduce the liquidity value of such assets. Drivers of contingent liquidity risk include general market disruptions as well as specific issues regarding the credit quality and/or valuation of a security or loan, issuer or borrower and/or asset class.

Funding liquidity risk is the risk that market conditions and/or entity-specific events may reduce an entity’s ability to raise funds from depositors and/or wholesale market counterparties. Drivers of funding liquidity risk may be idiosyncratic or systemic, reflecting impediments to operations and/or damaged market confidence.

Factors Affecting Liquidity

Given the composition of its assets and borrowing sources, contingent liquidity risk at CBNA would be materially affected by such events as deterioration of financing markets for high-quality securities (e.g., mortgage-backed securities and other instruments issued by the GNMA, FNMA and the FHLMC), by any inability of the FHLBs to provide collateralized advances and/or by a refusal of the FRB to act as lender of last resort in systemic stress.

Similarly, given the structure of its balance sheet, the funding liquidity risk of CBNA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both (e.g., the financial crisis of 2008-2010). However, during the financial crisis, CBNA reduced its dependence on unsecured wholesale funding to virtually zero. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our contingent liquidity risk and our funding liquidity risk to be relatively modest.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

An additional variable affecting our access, and the access of CBNA, to unsecured wholesale market funds and to large denomination (i.e., uninsured) customer deposits is the credit ratings assigned by such agencies as Moody’s, Standard & Poor’s and Fitch. The following table presents our credit ratings:



	December 31, 2018
	Moody’s	Standard and Poor’s	Fitch
	Moody’s	Standard and Poor’s	Fitch
Citizens Financial Group, Inc.:
Long-term issuer	NR	BBB+	BBB+
Short-term issuer	NR	A-2	F2
Subordinated debt	NR	BBB	BBB
Preferred Stock	NR	BB+	BB-
Citizens Bank, National Association:
Long-term issuer	Baa1	A-	BBB+
Short-term issuer	NR	A-2	F2
Long-term deposits	A1	NR	A-
Short-term deposits	P-1	NR	F2

NR = Not Rated

Changes in our public credit ratings could affect both the cost and availability of our wholesale funding. As a result and in order to maintain a conservative funding profile, CBNA continues to minimize reliance on unsecured wholesale funding. At December 31, 2018 , our wholesale funding consisted primarily of secured borrowings from the FHLBs collateralized by high-quality residential mortgages and term debt issued by the Parent Company and CBNA.

The FRB and the OCC regularly evaluate our liquidity as part of the overall supervisory process. In addition we are subject to existing and evolving regulatory liquidity requirements, some of which are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. For further discussion, see “Regulation and Supervision — Financial Regulatory Reform” and “—Liquidity Requirements” in Part I, Item 1 — Business, included in this Report.

Liquidity Risk Management and Governance

Liquidity risk is measured and managed by the Funding and Liquidity unit within our Treasury unit in accordance with policy guidelines promulgated by our Board and the Asset Liability Committee. In managing liquidity risk, the Funding and Liquidity unit delivers regular and comprehensive reporting, including current levels versus threshold limits for a broad set of liquidity metrics and early warning indicators, explanatory commentary relating to emerging risk trends and, as appropriate, recommended remedial strategies.

The mission of our Funding and Liquidity unit is to deliver and otherwise maintain prudent levels of operating liquidity (to support expected and projected funding requirements), and contingent liquidity (to support unexpected funding requirements resulting from idiosyncratic, systemic, and combination stress events, and regulatory liquidity requirements). Additionally, we will deliver this liquidity from stable funding sources, in a timely manner and at a reasonable cost, without significant adverse consequences.

We seek to accomplish this mission by funding loans with stable deposits; by prudently controlling dependence on wholesale funding, particularly short-term unsecured funding; and by maintaining ample available liquidity, including a contingent liquidity buffer of unencumbered high-quality loans and securities. As of December 31, 2018 :


•	Core deposits continued to be our primary source of funding and our consolidated year-end loan-to-deposit ratio was 97.6% ;


•	Our cash position (which is defined as cash balance held at the FRB) totaled $3.0 billion ;

•

Contingent liquidity was $26.9 billion , consisting of unencumbered high-quality liquid assets of $19.1 billion , unused FHLB capacity of $4.8 billion , and our cash position (defined above) of $3.0 billion . Asset liquidity (a component of contingent liquidity) was $22.1 billion , consisting of our cash position of $3.0 billion and unencumbered high-quality and liquid securities of $19.1 billion ; and


•	Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $12.3 billion . Use of this borrowing capacity would be considered only during exigent circumstances.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Funding and Liquidity unit monitors a variety of liquidity and funding metrics and early warning indicators and metrics, including specific risk thresholds limits. These monitoring tools are broadly classified as follows:


•	Current liquidity sources and capacities, including cash at the FRBs, free and liquid securities and available and secured FHLB borrowing capacity;


•	Liquidity stress sources, including idiosyncratic, systemic and combined stresses, in addition to evolving regulatory requirements such as the LCR and the NSFR; and


•	Current and prospective exposures, including secured and unsecured wholesale funding and spot and cumulative cash-flow gaps across a variety of horizons.

Further, certain of these metrics are monitored individually for CBNA, and for our consolidated enterprise on a daily basis, including cash position, unencumbered securities, asset liquidity, and available FHLB borrowing capacity. In order to identify emerging trends and risks and inform funding decisions, specific metrics are also forecasted over a one-year horizon.

Cash flows from operating activities contributed $1.8 billion in 2018 , led by net income of $1.7 billion , proceeds from sales of mortgage loans held for sale of $8.1 billion and proceeds from sales of commercial loans held for sale of $1.9 billion , partially offset by originations of mortgage loans held for sale of $8.0 billion and purchases of commercial loans held for sale of $1.9 billion . Net cash used by investing activities was $7.1 billion , primarily reflecting a net increase in loans and leases of $6.4 billion , purchases of debt securities available for sale of $4.3 billion and the acquisition of FAMC, partially offset by proceeds from maturities, paydowns and sales of securities available for sale of $4.3 billion . Cash provided by financing activities was $6.4 billion , driven by proceeds from issuance of long-term borrowed funds of $22.5 billion , a net increase in deposits of $4.5 billion and net proceeds from issuance of preferred stock of $593 million , partially offset by repayments of long-term FHLB advances of $14.5 billion and a net decrease in other short-term borrowed funds of $5.2 billion . The $22.5 billion proceeds included $21.8 billion in FHLB advances and $750 million from issuances of medium term debt. These activities represented a cumulative increase in cash and cash equivalents of $1.0 billion , which, when added to the cash and cash equivalents balance of $3.0 billion at the beginning of the year, resulted in an ending balance of cash and cash equivalents of $4.1 billion as of December 31, 2018 .

Cash flows from operating activities contributed $1.9 billion in 2017, led by net income of $1.7 billion, proceeds from sales of mortgage loans held for sale of $3.2 billion and proceeds from sales of commercial loans held for sale of $2.0 billion, partially offset by originations of mortgage loans held for sale of $2.9 billion and purchases of commercial loans held for sale of $2.1 billion. Net cash used by investing activities was $4.0 billion, primarily reflecting a net increase in loans and leases of $3.6 billion and securities available for sale portfolio purchases of $5.4 billion, partially offset by proceeds from maturities, paydowns and sales of securities available for sale of $4.7 billion. Cash provided by financing activities was $1.4 billion, driven by proceeds from issuance of long-term borrowed funds of $15.4 billion and a net increase in deposits of $5.3 billion, partially offset by repayments of long-term borrowed funds of $12.8 billion and a net decrease in other short-term borrowed funds of $5.0 billion. The $15.4 billion proceeds included $3.3 billion from issuances of medium term debt and $12.1 billion in FHLB advances. The $12.8 billion of repayments were all related to FHLB advances. These activities represented a cumulative decrease in cash and cash equivalents of $672 million, which, when added to the cash and cash equivalents balance of $3.7 billion at the beginning of the year, resulted in an ending balance of cash and cash equivalents of $3.0 billion as of December 31, 2017.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

CONTRACTUAL OBLIGATIONS

The following table presents our outstanding contractual obligations as of December 31, 2018 :



(in millions)	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years
Deposits with a stated maturity of less than one year ^{(1) (2)}		$100,233		$100,233		$—		$—		$—
Term deposits ⁽¹⁾	19,342		15,889		3,168		280		5
Long-term borrowed funds ^{(1) (3)}	14,433		—		11,298		1,838		1,297
Contractual interest payments ⁽⁴⁾	1,105		418		397		176		114
Operating lease obligations	895		165		289		194		247
Purchase obligations ⁽⁵⁾	725		408		203		88		26
Total outstanding contractual obligations		$136,733		$117,113		$15,355		$2,576		$1,689

⁽¹⁾ Deposits and long-term borrowed funds exclude interest.

⁽²⁾ Includes demand, checking with interest, regular savings, and money market account deposits. See “—Deposits” for further information.

⁽³⁾ Includes obligations under capital leases.

⁽⁴⁾ Includes accrued interest and future contractual interest obligations related to long-term borrowed funds.

⁽⁵⁾ Includes purchase obligations for goods and services covered by non-cancelable contracts and contracts including cancellation fees.

OFF-BALANCE SHEET ARRANGEMENTS

The following table presents our outstanding off-balance sheet arrangements. See Note 18 “Commitments and Contingencies” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report:



	December 31,
(in millions)	2018		2017		Change			Percent
Undrawn commitments to extend credit		$69,553		$62,959		$6,594		10	%
Letters of credit	2,125		2,136		(11		)	(1	)
Marketing rights	37		41		(4		)	(10	)
Risk participation agreements	19		16		3			19
Residential mortgage loans sold with recourse	5		7		(2		)	(29	)
Total		$71,739		$65,159		$6,580		10	%

CRITICAL ACCOUNTING ESTIMATES

Our audited Consolidated Financial Statements, which are included in this Report, are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish accounting policies and make estimates that affect amounts reported in our audited Consolidated Financial Statements.

An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on our audited Consolidated Financial Statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. The most significant accounting policies and estimates and their related application are discussed below.

See Note 1 “Basis of Presentation” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report, for further discussion of our significant accounting policies.

Allowance for Credit Losses

Management’s estimate of probable losses in our loan and lease portfolios including unfunded lending commitments is recorded in the ALLL and the reserve for unfunded lending commitments, at levels that we believe to be appropriate as of the balance sheet date. The reserve for unfunded lending commitments is reported as a component of other liabilities in the Consolidated Balance Sheets. Our determination of such estimates is based on a periodic evaluation of the loan and lease portfolios and unfunded credit facilities, as well as other relevant factors. This evaluation is inherently subjective and requires significant estimates and judgments of underlying factors, all of which are susceptible to change.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The ALLL and reserve for unfunded lending commitments could be affected by a variety of internal and external factors. Internal factors include portfolio performance such as delinquency levels, assigned risk ratings, the mix and level of loan balances, differing economic risks associated with each loan category and the financial condition of specific borrowers. External factors include fluctuations in the general economy, unemployment rates, bankruptcy filings, developments within a particular industry, changes in collateral values and factors particular to a specific commercial credit such as competition, business and management performance. The ALLL may be adjusted to reflect our current assessment of various qualitative risks, factors and events that may not be measured in our statistical procedures. There is no certainty that the ALLL and reserve for unfunded lending commitments will be appropriate over time to cover losses because of unanticipated adverse changes in any of these internal, external or qualitative factors. There were no material changes in assumptions or estimation techniques compared with prior years that impacted the determination of the current year’s ALLL and the reserve for unfunded lending commitments.

The evaluation of the adequacy of the commercial, commercial real estate, and lease ALLL and reserve for unfunded lending commitments is primarily based on risk rating models that assess probability of default (“PD”), loss given default (“LGD”) and exposure at default on an individual loan basis. The models are primarily driven by individual customer financial characteristics and are validated against historical experience. Additionally, qualitative factors are included in the risk rating models. After the aggregation of individual borrower incurred loss, additional overlays can be made based on back-testing against historical losses and forward loss curve ratios.

For nonaccruing commercial and commercial real estate loans with an outstanding balance of $3 million or greater and for all commercial and commercial real estate TDRs (regardless of size), we conduct specific analysis on a loan level basis to determine the probable amount of credit loss. If appropriate, a specific ALLL is established for the loan through a charge to the provision for credit losses. For all classes of impaired loans, individual loan measures of impairment may result in a charge-off to the ALLL, if deemed appropriate. In such cases, the provision for credit losses is not affected when a specific reserve for at least that amount already exists. Techniques utilized include comparing the loan’s carrying amount to the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. The technique applied to each impaired loan is based on the workout officer’s opinion of the most probable workout scenario. Historically, this has generally led to the use of the estimated present value of future cash flows approach. The fair value of underlying collateral will be used if the loan is deemed collateral dependent. For loans that use the fair value of underlying collateral approach, a charge-off assessment is performed quarterly to write the loans down for declines in value to fair value less cost to sell.

For most non-impaired retail loan portfolio types, the ALLL is based upon the incurred loss model utilizing the PD, LGD and exposure at default on an individual loan basis. When developing these factors, we may consider the loan product and collateral type, delinquency status, LTV ratio, lien position, borrower’s credit, time outstanding, geographic location and incurred loss period. Incurred loss periods are reviewed and updated at least annually, and potentially more frequently when economic situations change rapidly, as they tend to fluctuate with economic cycles. Incurred loss periods are generally longer in good economic times and shorter in bad times. Certain retail portfolios, including education, unsecured personal loans, SBO home equity loans and credit card receivables utilize roll rate or vintage models to estimate the ALLL.

For home equity lines and loans, a number of factors impact the PD. Specifically, the borrower’s current FICO score, the utilization rate, delinquency statistics, borrower income, current CLTV ratio and months on books are all used to assess the borrower’s creditworthiness. Similarly, LGD is also impacted by various factors, including the utilization rate, the CLTV ratio, the lien position, the Housing Price Index change for the location (as measured by the Case-Shiller index), age of the loan and current loan balance.

When we are not in a first lien position, we use delinquency information on the first lien exposures obtained from third-party credit information providers in the credit assessment. For all first liens, whether owned by a third party or by us, an additional assessment is performed on a quarterly basis. In this assessment, the most recent three months’ performance of the senior liens is reviewed for delinquency (90 days or more past due), modification, foreclosure and/or bankruptcy statuses. If any derogatory status is present, the junior lien will be placed on nonaccrual status regardless of its delinquency status on our books. This subsequent change to nonaccrual status will alter the treatment in the PD model, thus affecting the reserve calculation.

In addition, the first lien exposure is combined with the second lien exposure to generate a CLTV. The CLTV is a more accurate reflection of the leverage of the borrower against the property value, as compared to the LTV from just the junior lien(s). The CLTV is used for modeling both the junior lien PD and LGD. This also impacts the ALLL rates for the junior lien HELOCs.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The above measures are all used to assess the PD and LGD for HELOC borrowers for whom we originated the loans.

For retail TDRs that are not collateral-dependent, allowances are developed using the present value of expected future cash flows, compared to the recorded investment in the loans. Expected re-default factors are considered in this analysis. Retail TDRs that are deemed collateral-dependent are written down to the fair market value of the collateral less costs to sell. The fair value of collateral is periodically monitored subsequent to the modification.

Changes in the levels of estimated losses can significantly affect management’s determination of an appropriate ALLL. For retail loans, losses are affected by such factors as loss severity, collateral values, economic conditions, and other factors. A one basis point and five basis point increase in the estimated loss rate for retail loans at December 31, 2018 would have increased the ALLL by $6 million and $30 million, respectively. The ALLL for our Commercial Banking segment is sensitive to assigned credit risk ratings and inherent loss rates. If 10% and 20% of the December 31, 2018 year end loan balances (including unfunded commitments) within each risk rating category of our Commercial Banking segment had experienced downgrades of two risk categories, the ALLL would have increased by $99 million and $194 million, respectively.

Commercial loans and leases are charged off to the ALLL when there is little prospect of collecting either principal or interest. Charge-offs of commercial loans and leases usually involve receipt of borrower-specific adverse information. For commercial collateral-dependent loans, an appraisal or other valuation is used to quantify a shortfall between the fair value of the collateral less costs to sell and the recorded investment in the commercial loan. Retail loan charge-offs are generally based on established delinquency thresholds rather than borrower-specific adverse information. When a loan is collateral-dependent, any shortfalls between the fair value of the collateral less costs to sell and the recorded investment is promptly charged off. Placing any loan or lease on nonaccrual status does not by itself require a partial or total charge-off; however, any identified losses are charged off at that time.

For additional information regarding the ALLL and reserve for unfunded lending commitments, see Note 1 “Basis of Presentation” and Note 5 “Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

Fair Value

We measure fair value using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon quoted market prices in an active market, where available. If quoted prices are not available, observable market-based inputs or independently sourced parameters are used to develop fair value, whenever possible. Such inputs may include prices of similar assets or liabilities, yield curves, interest rates, prepayment speeds and foreign exchange rates.

We classify our assets and liabilities that are carried at fair value in accordance with the three-level valuation hierarchy:


•	Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities;


•	Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar instruments; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by market data for substantially the full term of the asset or liability; and


•	Level 3. Unobservable inputs that are supported by little or no market information and that are significant to the fair value measurement.

Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Level 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data.

We review and update the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in fair value measurements may result in a reclassification between the fair value hierarchy levels and are recognized based on year-end balances. We also verify the accuracy of the pricing provided by our primary external pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for our securities portfolio for comparison purposes. Any securities with discrepancies beyond a certain threshold are researched and, if necessary, valued by an independent outside broker.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include mortgage servicing rights accounted for by the amortization method, loan impairments for certain loans and goodwill.

The fair value of assets under operating leases is determined using collateral specific pricing digests, external appraisals, broker opinions, recent sales data from industry equipment dealers, and the discounted cash flows derived from the underlying lease agreement. As market data for similar assets and lease agreements is available and used in the valuation, these assets are classified as Level 2.

MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. The fair value was calculated using a discounted cash flow model which used assumptions, including weighted-average life, prepayment assumptions and weighted-average option adjusted spread. It is important to note that changes in our assumptions may not be independent of each other. Changes in one assumption may result in changes to another (e.g., changes in interest rates, which are inversely correlated to changes in prepayment rates, may result in changes to discount rates), which could impact sensitivities. The underlying assumptions and estimated values are corroborated by values received from independent third parties based on their review of the servicing portfolio, and comparisons to market transactions. In addition, the MSR Policy is approved by the Asset Liability Committee.

For additional information regarding our fair value measurements, see Note 1 “Basis of Presentation,” Note 3 “Securities,” Note 8 “Mortgage Banking,” Note 13 “Derivatives,” and Note 19 “Fair Value Measurements” to our Consolidated Financial Statements in Part II, Item 8 — Financial Statements and Supplementary Data, of this Report.

RISK GOVERNANCE

We are committed to maintaining a strong, integrated and proactive approach to the management of all risks to which we are exposed in pursuit of our business objectives. A key aspect of our Board’s responsibility as the main decision making body is setting our risk appetite to ensure that the levels of risk that we are willing to accept in the attainment of our strategic business and financial objectives are clearly understood.

To enable our Board to carry out its objectives, it has delegated authority for risk management activities, as well as governance and oversight of those activities, to a number of Board and executive management level risk committees. The Executive Risk Committee (“ERC”), chaired by the Chief Risk Officer, is responsible for oversight of risk across the enterprise and actively considers our inherent material risks, analyzes our overall risk profile and seeks confirmation that the risks are being appropriately identified, assessed and mitigated. Reporting to the ERC are the following additional committees, covering specific areas of risk: Compliance and Operational Risk Committee, Model Risk Committee, Credit Policy Committee, Asset Liability Committee, Business Initiatives Review Committee, and the Ethics Oversight Committee.

Risk Framework

Our risk management framework is embedded in our business through a “Three Lines of Defense” model which defines responsibilities and accountabilities for risk management activities.

First Line of Defense

The business lines (including their associated support functions) are the first line of defense and are accountable for identifying, assessing, managing, and controlling the risks associated with the products and services they provide. The business lines are responsible for performing regular risk assessments to identify and assess the material risks that arise in their area of responsibility, complying with relevant risk policies, testing and certifying the adequacy and effectiveness of their operational and financial reporting controls on a regular basis, establishing and documenting operating procedures and establishing and owning a governance structure for identifying and managing risk.

Second Line of Defense

The second line of defense includes independent monitoring and control functions accountable for developing and ensuring implementation of risk and control frameworks and related policies. This centralized risk function is appropriately independent from the business and is accountable for overseeing and challenging our business lines on the effective management of their risks, including credit, market, operational, regulatory, reputational, interest rate, liquidity and strategic risks.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Third Line of Defense

Our Internal Audit function is the third line of defense providing independent assurance with a view of the effectiveness of Citizens’ internal controls, governance practices, and culture so that risk is managed appropriately for the size, complexity, and risk profile of the organization. Internal Audit has complete and unrestricted access to any and all Bank records, physical properties and personnel. Internal Audit issues a report following each internal review and provides an audit opinion to Citizens’ Audit Committee on a quarterly basis.

Credit Quality Assurance reports to the Chief Audit Executive and provides the legal-entity boards, senior management and other stakeholders with independent assurance on the quality of credit portfolios and adherence to agreed Credit Risk Appetite and Credit Policies and processes. In line with its procedures and regulatory expectations, the Credit Quality Assurance function undertakes a program of portfolio testing, assessing and reporting through four Risk Pillars of Asset Quality, Rating and Data Integrity, Risk Management and Credit Risk Appetite.

Risk Appetite

Risk appetite is a strategic business and risk management tool. We define our risk appetite as the maximum limit of acceptable risk beyond which we could be unable to achieve our strategic objectives and capital adequacy obligations.

Our principal non-market risks include credit, operational, regulatory, reputational, liquidity and strategic risks. We are also subject to certain market risks which include potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Market risk in our business arises from trading activities that serve customer needs, including hedging of interest rates, foreign exchange risk and non-trading activities within capital markets. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report on market risk. We actively manage both trading and non-trading market risks. See “—Market Risk” for further information. Our risk appetite is reviewed and approved annually by the Board Risk Committee.

Credit Risk

Overview

Credit risk represents the potential for loss arising from a customer, counterparty, or issuer failing to perform in accordance with the contractual terms of the obligation. While the majority of our credit risk is associated with lending activities, we do engage with other financial counterparties for a variety of purposes including investing, asset and liability management, and trading activities. Given the financial impact of credit risk on our earnings and balance sheet, the assessment, approval and management of credit risk represents a major part of our overall risk-management responsibility.

Objective

The independent Credit Risk Function is responsible for reviewing and approving credit risk appetite across all lines of business and credit products, approving larger and higher risk credit transactions, monitoring portfolio performance, identifying problem credit exposures, and ensuring remedial management.

Organizational Structure

Management and oversight of credit risk is the responsibility of both the business line and the second line of defense. The second line of defense, the independent Credit Risk Function, is led by the Chief Credit Officer who oversees all of our credit risk. The Chief Credit Officer reports to the Chief Risk Officer. The Chief Credit Officer, acting in a manner consistent with Board policies, has responsibility for, among other things, the governance process around policies, procedures, risk acceptance criteria, credit risk appetite, limits and authority delegation. The Chief Credit Officer and team also have responsibility for credit approvals for larger and higher risk transactions and oversight of line of business credit risk activities. Reporting to the Chief Credit Officer are the heads of the second line of defense credit functions specializing in: Consumer Banking, Commercial Banking, Citizens Restructuring Management, Portfolio and Corporate Reporting, ALLL Analytics, Current Expected Credit Loss, and Credit Policy and Administration. Each team under these leaders is composed of highly experienced credit professionals.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Governance

The primary mechanisms used to govern our credit risk function are our consumer and commercial credit policies. These policies outline the minimum acceptable lending standards that align with our desired risk appetite. Material changes in our business model and strategies that identify a need to change our risk appetite or highlight a risk not previously contemplated are identified by the individual committees and presented to the Credit Policy Committee, Executive Risk Committee and the Board Risk Committee for approval, as appropriate.

Key Management Processes

We employ a comprehensive and integrated risk control program to proactively (i) identify, (ii) measure, (iii) monitor, and (iv) mitigate existing and emerging credit risks across the credit lifecycle (origination, account management/portfolio management, and loss mitigation and recovery).

Consumer

On the consumer banking side of credit risk, our teams use models to evaluate consumer loans across the lifecycle of the loan. Starting at origination, credit scoring models are used to forecast the probability of default of an applicant. When approving customers for a new loan or extension of an existing credit line, credit scores are used in conjunction with other credit risk variables such as affordability, length of term, collateral value, collateral type, and lien subordination.

To ensure proper oversight of the underwriting teams, lending authority is granted by the second line of defense credit risk function to each underwriter. The amount of delegated authority depends on the experience of the individual. We periodically evaluate the performance of each underwriter and annually reauthorize their delegated authority. Only senior members of the second line of defense credit risk team are authorized to approve significant exceptions to credit policies. It is not uncommon to make exceptions to established policies when compensating factors are present. There are exception limits which, when reached, trigger a comprehensive analysis.

Once an account is established, credit scores and collateral values are refreshed at regular intervals to allow for proactive identification of increasing or decreasing levels of credit risk. Our approach to managing credit risk is highly analytical and, where appropriate, is automated, to ensure consistency and efficiency.

Commercial

On the commercial banking side of credit risk, the structure is broken into C&I loans and leases and CRE. Within C&I loans and leases there are separate verticals established for certain specialty products (e.g., asset-based lending, leasing, franchise finance, health care, and technology, mid-corporate). A “specialty vertical” is a stand-alone team of industry or product specialists. Substantially all activity that falls under the ambit of the defined industry or product is managed through a specialty vertical when one exists. CRE also operates as a specialty vertical.

Commercial credit risk management begins with defined credit products and policies.

Commercial transactions are subject to individual analysis and approval at origination and, with few exceptions, are subject to a formal annual review requirement. The underwriting process includes the establishment and approval of credit grades that confirm the PD and LGD. All material transactions then require the approval of both a business line approver and an independent credit approver with the requisite level of delegated authority. The approval level of a particular credit facility is determined by the size of the credit relationship as well as the PD. The checks and balances in the credit process and the independence of the credit approver function are designed to appropriately assess and sanction the level of credit risk being accepted, facilitate the early recognition of credit problems when they occur, and to provide for effective problem asset management and resolution. All authority to grant credit is delegated through the independent Credit Risk function and is closely monitored and regularly updated.

The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower’s management capabilities, cash flows from operations, industry sector trends, type and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. In addition to the credit analysis conducted during the approval process at origination and annual review, our Credit Quality Assurance group performs testing to provide an independent review and assessment of the quality of the portfolio and new originations. This group conducts portfolio reviews on a risk-based cycle to evaluate individual loans, and validate risk ratings, as well as test the consistency of the credit processes and the effectiveness of credit risk management.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk of each borrower or related group of borrowers. Concentration risk is managed through limits on industry asset class and loan quality factors. We focus predominantly on extending credit to commercial customers with existing or expandable relationships within our primary markets (for this purpose defined as our 11 state footprint plus contiguous states), although we do engage in lending opportunities outside our primary markets if we believe that the associated risks are acceptable and aligned with strategic initiatives.

Substantially all loans categorized as Classified are managed by a specialized group of credit professionals.

MARKET RISK

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Modest market risk arises from trading activities that serve customer needs, including hedging of interest rate and foreign exchange risk. As described below, more material market risk arises from our non-trading banking activities, such as loan origination and deposit-gathering. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. We actively manage both trading and non-trading market risks.

Non-Trading Risk

We are exposed to market risk as a result of non-trading banking activities. This market risk is substantially composed of interest rate risk, as we have no direct currency or commodity risk and de minimis equity risk. We also have market risk related to capital markets loan originations, as well as the valuation of our mortgage servicing rights.

Interest Rate Risk

Interest rate risk emerges from the balance sheet after the aggregation of our assets, liabilities and equity. We refer to this non-trading risk embedded in the balance sheet as “structural interest rate risk” or “interest rate risk in the banking book.”

A major source of structural interest rate risk is a difference in the repricing of assets, on the one hand, and liabilities and equity, on the other. First, there are differences in the timing and drivers of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a commercial loan may reprice monthly with changes in LIBOR while the rate paid on debt or certificates of deposit may be fixed for a longer period. There are differences in the drivers of rate changes as well. Loans may be tied to a specific index rate such as LIBOR or Prime, while deposits may be only loosely correlated with LIBOR and depend on competitive demand. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.

Another important source of structural interest rate risk relates to the potential exercise of explicit or embedded options. For example, most consumer loans can be prepaid without penalty; and most consumer deposits can be withdrawn without penalty. The exercise of such options by customers can exacerbate the timing differences discussed above.

A primary source of our structural interest rate risk relates to faster repricing of floating rate loans relative to the retail deposit funding. This source of asset sensitivity is more biased to the short end of the yield curve. For the past few years, the FRB has been slowly raising short-term rates to a more neutral stance, and during that time the risk of rising rates seemed biased to the upside and thus we maintained an asset sensitive risk position. As interest rates rose, the risk position became more symmetrical given the possibility of falling rates in the future.

The secondary source of our interest rate risk is driven by longer term rates comprising the rollover or reinvestment risk on fixed rate loans as well as the prepayment risk on mortgage related loans and securities funded by non-rate sensitive deposits and equity.

The primary goal of interest rate risk management is to control exposure to interest rate risk within policy limits approved by the Board. These limits and guidelines reflect our tolerance for interest rate risk over both short-term and long-term horizons. To ensure that exposure to interest rate risk is managed within this risk appetite, we must both measure the exposure and, as necessary, hedge it. The Treasury Asset and Liability Management team is responsible for measuring, monitoring and reporting on the structural interest rate risk position. These exposures are reported on a monthly basis to the Asset Liability Committee and at Board meetings.

We measure structural interest rate risk through a variety of metrics intended to quantify both short-term and long-term exposures. The primary method that we use to quantify interest rate risk is simulation analysis in

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

which we model net interest income from assets, liabilities and hedge derivative positions under various interest rate scenarios over a three-year horizon. Exposure to interest rate risk is reflected in the variation of forecasted net interest income across scenarios.

Key assumptions in this simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances and the behavior of loan and deposit clients in different rate environments. The most material of these behavioral assumptions relate to the repricing characteristics and balance fluctuations of deposits with indeterminate (i.e., non-contractual) maturities as well as the pace of mortgage prepayments. Assessments are periodically made by running sensitivity analysis of the impact of key assumptions. The results of these analyses are reported to the Asset Liability Committee.

As the future path of interest rates cannot be known in advance, we use simulation analysis to project net interest income under various interest rate scenarios including a “most likely” (implied forward) scenario as well as a variety of deliberately extreme and perhaps unlikely scenarios. These scenarios may assume gradual ramping of the overall level of interest rates, immediate shocks to the level of rates and various yield curve twists in which movements in short- or long-term rates predominate. Generally, projected net interest income in any interest rate scenario is compared to net interest income in a base case where market forward rates are realized.

The table below reports net interest income exposures against a variety of interest rate scenarios. Our policies involve measuring exposures as a percentage change in net interest income over the next year due to either instantaneous or gradual parallel changes in rates relative to the market implied forward yield curve. With rates rising from historically low levels due to Federal Open Market Committee rate increases, exposure to falling rates has increased. As the following table illustrates, our balance sheet is asset-sensitive: net interest income would benefit from an increase in interest rates. Exposure to a decline in interest rates is within limit. While an instantaneous and severe shift in interest rates was used in this analysis, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact as demonstrated in the following table.

The table below presents the sensitivity of net interest income to various parallel yield curve shifts from the market implied forward yield curve:



	Estimated % Change in Net Interest Income over 12 Months
	December 31,
Basis points	2018		2017
Instantaneous Change in Interest Rates
+200	9.5	%	9.6	%
+100	4.8		4.9
-100	(4.5	)	(5.9	)
Gradual Change in Interest Rates
+200	4.9		5.1
+100	2.5		2.7
-100	(1.1	)	(1.8	)

Asset sensitivity against a 200 basis point gradual increase in rates was 4.9% at December 31, 2018 , a slight decrease from 5.1% at December 31, 2017 . As the FRB continues to normalize rates, given improved economic growth and data, the upward trend in rates has benefited our net interest income and net interest margin as a result of this asset sensitivity. The risk position can be affected by changes in interest rates which impact the repricing sensitivity or beta of the deposit base as well as the cash flows on prepayable assets. The risk position is managed within our risk limits, and long term view of interest rates, through occasional adjustments to securities investments, interest rate swaps and mix of funding.

We use a valuation measure of exposure to structural interest rate risk, Economic Value of Equity (“EVE”), as a supplement to net interest income simulations. EVE complements net interest income simulation analysis as it estimates risk exposure over a long-term horizon. EVE measures the extent to which the economic value of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. The change in value is expressed as a percentage of regulatory capital.

Capital Markets

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

A key component of our capital markets activities is the underwriting and distribution of corporate credit facilities to partially finance mergers and acquisitions transactions for our clients. We have a rigorous risk management process around these activities, including a limit structure capping our underwriting risk, our potential loss, and sub limits for specific asset classes. Further, the ability to approve underwriting exposure is delegated only to senior level individuals in the credit risk management and capital markets organizations with each transaction adjudicated in a formal committee meeting.

Mortgage Servicing Rights

We have market risk associated with the value of residential mortgage servicing right assets (“MSRs”), which are impacted by various types of inherent risks, including risks related to duration, basis, convexity, volatility and yield curve. We have elected to account for the MSRs acquired from FAMC at fair value while maintaining a lower of cost or market approach on our MSRs held before the FAMC acquisition because the MSRs acquired from FAMC are a separate class of MSRs.

As part of our overall risk management strategy relative to the fair market value of the MSRs acquired from FAMC, we enter into various free-standing derivatives, such as interest rate swaps, interest rate swaptions, interest rate futures, and forward contracts to purchase mortgage-backed securities to economically hedge the changes in fair value. As of December 31, 2018 , the fair value of the MSRs acquired from FAMC was $600 million and the total notional amount of related derivative contracts was $4.6 billion. Gains and losses on MSRs and the related derivatives used for hedging are included in mortgage banking fees on the Consolidated Statements of Operations.

As of December 31, 2018 and 2017 , our MSRs held before the FAMC acquisition had a book value of $221 million and $198 million , respectively, and were carried at the lower of cost or market. As of December 31, 2018 and 2017 , these MSRs had a fair value of $243 million and $218 million , respectively, which exceeded the carrying value at those dates. Depending on the interest rate environment, hedges may be used to protect the market value of these MSRs.

As with our traded market risk based activities, earnings at risk excludes the impact of MSRs. MSRs are captured under our single price risk management framework that is used for calculating a management value at risk that is consistent with the definition used by banking regulators, as defined below.

Trading Risk

We are exposed to market risk primarily through client facilitation activities including derivatives and foreign exchange products as well as underwriting and market making activities. Exposure is created as a result of changes in interest rates and related basis spreads and volatility, foreign exchange rates, and credit spreads on a select range of interest rates, foreign exchange, commodities and secondary loan instruments. These trading activities are conducted through our two banking subsidiaries, CBNA and CBPA.

Client facilitation activities consist primarily of interest rate derivatives, financially settled commodity derivatives and foreign exchange contracts where we enter into offsetting trades with a separate counterparty or exchange to manage our market risk exposure. In addition to the aforementioned activities, we operate a secondary loan trading desk with the objective to meet secondary liquidity needs of our issuing clients’ transactions and investor clients. We do not engage in any trading activities with the intent to benefit from short term price differences.

We record said rate derivatives and foreign exchange contracts as derivative assets and liabilities on our Consolidated Balance Sheets. Trading assets and liabilities are carried at fair value with income earned related to these activities included in net interest income. Changes in fair value of trading assets and liabilities are reflected in other income, a component of noninterest income on the Consolidated Statements of Operations.

Market Risk Governance

The market risk limit setting process is established in line with the formal enterprise risk appetite process and policy. This appetite reflects the strategic and enterprise level articulation of opportunities for creating franchise value set to the boundaries of how much market risk to take. Dealing authorities represent the key control tool in the management of market risk that allows the cascading of the risk appetite throughout the enterprise. A dealing authority sets the operational scope and tolerances within which a business and/or trading desk is permitted to operate and this is reviewed at least annually. Dealing authorities are structured to accommodate the client facing trades and hedges needed to manage the risk profile. Primary responsibility for keeping within established tolerances resides with the business. Key risk indicators, including VaR, open foreign currency positions and single name risk, are monitored on a daily basis and reported against tolerances consistent with our risk appetite and business strategy to relevant business line management and risk counterparts.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Market Risk Measurement

We use VaR as a statistical measure for estimating potential exposure of our traded market risk in normal market conditions. Our VaR framework for risk management and regulatory reporting is the same. Risk management VaR is based on a one day holding period to a 99% confidence level, whereas regulatory VaR is based on a ten day holding period to the same confidence level. Additional to VaR, non-statistical measurements for measuring risk are employed, such as sensitivity analysis, market value and stress testing.

Our market risk platform and associated market risk and valuation models for our foreign exchange, interest rate products, and traded loans capture correlation effects and allow for aggregation of market risk across risk types, business lines and legal entities. We measure, monitor and report market risk for both management and regulatory capital purposes.

VaR Overview

The market risk measurement model is based on historical simulation. The VaR measure estimates the extent of any fair value losses on trading positions that may occur due to broad market movements (General VaR) such as changes in the level of interest rates, foreign exchange rates, equity prices and commodity prices. It is calculated on the basis that current positions remain broadly unaltered over the course of a given holding period. It is assumed that markets are sufficiently liquid to allow the business to close its positions, if required, within this holding period. VaR’s benefit is that it captures the historic correlations of a portfolio. Based on the composition of our “covered positions,” we also use a standardized add-on approach for the loan trading desk’s Specific Risk capital which estimates the extent of any losses that may occur from factors other than broad market movements. The General VaR approach is expressed in terms of a confidence level over the past 500 trading days. The internal VaR measure (used as the basis of the main VaR trading limits) is a 99% confidence level with a one day holding period, meaning that a loss greater than the VaR is expected to occur, on average, on only one day in 100 trading days (i.e., 1% of the time). Theoretically, there should be a loss event greater than VaR two to three times per year. The regulatory measure of VaR is done at a 99% confidence level with a ten-day holding period. The historical market data applied to calculate the VaR is updated on a two business day lag. Refer to “Market Risk Regulatory Capital” below for details of our ten-day VaR metrics for the quarters ended December 31, 2018 and 2017 , respectively, including high, low, average and period end VaR for interest rate and foreign exchange rate risks, as well as total VaR.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Market Risk Regulatory Capital

The U.S. banking regulators’ “Market Risk Rule” covers the calculation of market risk capital and substantially modified the determination of market risk-weighted assets and implemented a more risk sensitive methodology for the risk inherent in certain trading positions categorized as “covered positions.” For the purposes of the Market Risk Rule, all of our client facing trades and associated hedges need to maintain a low risk profile to qualify, and do qualify, as “covered positions.” For the three months ended December 31, 2018 and 2017, we were not subject to the reporting threshold under the Market Risk Rule. As a result, the $785 million and $555 million of calculated market risk-weighted assets as of December 31, 2018 and 2017, respectively, were not included in our risk-weighted assets. As such, our covered trading activities were risk-weighted under U.S. Basel III Standardized credit risk rules. While not subject to the determination requirements of market risk-weighted assets, we nevertheless comply with the Market Risk Rule’s other requirements. The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR. The following table presents the results of our modeled and non-modeled measures for regulatory capital calculations:



(in millions)	For the Three Months Ended December 31, 2018								For the Three Months Ended December 31, 2017
Market Risk Category	Period End		Average		High		Low		Period End		Average		High		Low
Interest Rate		$—		$1		$2		$—		$2		$1		$2		$1
Foreign Exchange Currency Rate	—		—		—		—		—		—		—		—
Credit Spread	5		2		5		2		2		2		2		1
Commodity	—		—		—		—		N/A		N/A		N/A		N/A
General VaR	5		3		5		1		3		2		3		1
Specific Risk VaR	—		—		—		—		—		—		—		—
Total VaR		$5		$3		$5		$1		$3		$2		$3		$1
Stressed General VaR		$13		$13		$15		$10		$11		$9		$12		$7
Stressed Specific Risk VaR	—		—		—		—		—		—		—		—
Total Stressed VaR		$13		$13		$15		$10		$11		$9		$12		$7
Market Risk Regulatory Capital		$47								$34
Specific Risk Not Modeled Add-on	16								10
de Minimis Exposure Add-on	—								—
Total Market Risk Regulatory Capital		$63								$44
Market Risk-Weighted Assets (calculated)		$785								$555
Market Risk-Weighted Assets (included in our FR Y-9C regulatory filing) ⁽¹⁾		$—								$—

⁽¹⁾ For the three months ended December 31, 2018 and 2017, we did not meet the reporting threshold prescribed by Market Risk Capital Guidelines.

Stressed VaR

SVaR is an extension of VaR, but uses a longer historical look-back horizon that is fixed from January 3, 2005. This is done not only to identify headline risks from more volatile periods, but also to provide a counter-balance to VaR which may be low during periods of low volatility. The holding period for profit and loss determination is ten days. In addition to risk management purposes, SVaR is also a component of market risk regulatory capital. We calculate SVaR daily under its own dynamic window regime. In a dynamic window regime, values of the ten-day, 99% VaR are calculated over all possible 260-day periods that can be obtained from the complete historical data set. Refer to “Market Risk Regulatory Capital” above for details of SVaR metrics, including high, low, average and period end SVaR for the combined portfolio.

Sensitivity Analysis

Sensitivity analysis is the measure of exposure to a single risk factor, such as a one basis point change in rates or credit spread. We conduct and monitor sensitivity on interest rates, basis spreads, foreign exchange exposures, option prices and credit spreads. Whereas VaR is based on previous moves in market risk factors over recent periods, it may not be an accurate predictor of future market moves. Sensitivity analysis complements VaR as it provides an indication of risk relative to each factor irrespective of historical market moves and is an effective tool in evaluating the appropriateness of hedging strategies and concentrations.

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Stress Testing

Conducting a stress test of a portfolio consists of running risk models with the inclusion of key variables that simulate various historical or hypothetical scenarios. For historical stress tests, profit and loss results are simulated for selected time periods corresponding to the most volatile underlying returns while hypothetical stress tests aim to consider concentration risk, illiquidity under stressed market conditions and risk arising from our trading activities that may not be fully captured by our other models. Hypothetical scenarios also assume that market moves happen simultaneously and no repositioning or hedging activity takes place to mitigate losses as events unfold. We generate stress tests of our trading positions on a daily basis. For example, we currently include a stress test that simulates a “Lehman-type” crisis scenario by taking the worst 20-trading day peak to trough moves for the various risk factors that go into VaR from that period, and assumes they occurred simultaneously.

VaR Model Review and Validation

Market risk measurement models used are independently reviewed and subject to ongoing performance analysis by the model owner. The independent review and validation focuses on the model methodology, market data, and performance. Independent review of market risk measurement models is the responsibility of Citizens’ Model Risk Management and Validation team. Aspects covered include challenging the assumptions used, the quantitative techniques employed and the theoretical justification underpinning them and an assessment of the soundness of the required data over time. Where possible, the quantitative impact of the major underlying modeling assumptions will be estimated (e.g., through developing alternative models). Results of such reviews are shared with the U.S. banking regulators. The market risk models may be periodically enhanced due to changes in market price levels and price action regime behavior. The Market Risk Management and Validation team will conduct internal validation before a new or changed model element is implemented and before a change is made to a market data mapping.

VaR Backtesting

Backtesting is one form of validation of the VaR model and is run daily. The Market Risk Rule requires a comparison of our internal VaR measure to the actual net trading revenue (excluding fees, commissions, reserves, intra-day trading and net interest income) for each day over the preceding year (the most recent 250 business days). Any observed loss in excess of the VaR number is taken as an exception. The level of exceptions determines the multiplication factor used to derive the VaR and SVaR-based capital requirement for regulatory reporting purposes, when applicable. We perform sub-portfolio backtesting as required under the Market Risk Rule, and as approved by our banking regulators, for interest rate, credit spread, and foreign exchange positions. The following graph shows our daily net trading revenue and total internal, modeled VaR for the twelve months ended December 31, 2018.

Daily VaR Backtesting

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KEY PERFORMANCE METRICS, NON-GAAP FINANCIAL MEASURES AND RECONCILATIONS

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,” included in this Report. The following table presents computations of key performance metrics used throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2018			2017			2016
Total revenue (GAAP)	A		$6,128			$5,707			$5,255
Noninterest expense (GAAP)	B	3,619			3,474			3,352
Net income (GAAP)	C	1,721			1,652			1,045
Net income available to common stockholders (GAAP)	D	1,692			1,638			1,031
Return on average common equity:
Average common equity (GAAP)	E		$19,645			$19,618			$19,698
Return on average common equity	D/E	8.62		%	8.35		%	5.23		%
Return on average tangible common equity:
Average common equity (GAAP)	E		$19,645			$19,618			$19,698
Less: Average goodwill (GAAP)		6,912			6,883			6,876
Less: Average other intangibles (GAAP)		14			2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		359			534			502
Average tangible common equity	F		$13,078			$13,267			$13,322
Return on average tangible common equity	D/F	12.94		%	12.35		%	7.74		%
Return on average total assets:
Average total assets (GAAP)	G		$154,553			$149,953			$143,183
Return on average total assets	C/G	1.11		%	1.10		%	0.73		%
Return on average total tangible assets:
Average total assets (GAAP)	G		$154,553			$149,953			$143,183
Less: Average goodwill (GAAP)		6,912			6,883			6,876
Less: Average other intangibles (GAAP)		14			2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		359			534			502
Average tangible assets	H		$147,986			$143,602			$136,807
Return on average total tangible assets	C/H	1.16		%	1.15		%	0.76		%
Efficiency ratio:
Efficiency ratio	B/A	59.06		%	60.87		%	63.80		%
Operating leverage:
Increase in total revenue		7.37		%	8.61		%	8.93		%
Increase in noninterest expense		4.18			3.63			2.85
Operating leverage		3.19		%	4.98		%	6.08		%
Effective income tax rate:
Income before income tax expense	I		$2,183			$1,912			$1,534
Income tax expense	J	462			260			489
Effective income tax rate	J/I	21.16		%	13.62		%	31.88		%
Net income per average common share - basic and diluted:
Average common shares outstanding - basic (GAAP)	K	478,822,072			502,157,440			522,093,545
Average common shares outstanding - diluted (GAAP)	L	480,430,741			503,685,091			523,930,718
Net income per average common share - basic (GAAP)	D/K		$3.54			$3.26			$1.97
Net income per average common share - diluted (GAAP)	D/L	3.52			3.25			1.97
Dividend payout ratio:
Cash dividends declared and paid per common share	M		$0.98			$0.64			$0.46
Dividend payout ratio	M/(D/K)	28		%	20		%	23		%

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		As of and for the Year Ended December 31,
		2018												2017											2016
(in millions, except ratio data)	Ref.	Consumer Banking			Commercial Banking			Other			Consolidated			Consumer Banking			Commercial Banking			Other		Consolidated			Consumer Banking			Commercial Banking ⁽¹⁾			Other		Consolidated
Net income (loss) available to common stockholders:
Net income	N		$767			$927			$27			$1,721			$452			$774			$426		$1,652			$345			$631			$69		$1,045
Less: Preferred stock dividends		—			—			29			29			—			—			14		14			—			—			14		14
Net income (loss) available to common stockholders	O		$767			$927			($2	)		$1,692			$452			$774			$412		$1,638			$345			$631			$55		$1,031
Efficiency ratio:
Total revenue (GAAP)	P		$4,037			$2,042			$49			$6,128			$3,556			$1,949			$202		$5,707			$3,326			$1,754			$175		$5,255
Noninterest expense (GAAP)	Q	2,723			813			83			3,619			2,593			772			109		3,474			2,547			741			64		3,352
Efficiency ratio	Q/P	67.47		%	39.80		%	NM			59.06		%	72.93		%	39.62		%	NM		60.87		%	76.57		%	42.26		%	NM		63.80		%
Return on average total tangible assets:
Average total assets (GAAP)			$62,444			$52,362			$39,747			$154,553			$59,714			$49,747			$40,492		$149,953			$56,388			$47,159			$39,636		$143,183
Less: Average goodwill (GAAP)		—			—			6,912			6,912			—			—			6,883		6,883			—			—			6,876		6,876
Less: Average other intangibles (GAAP)		—			—			14			14			—			—			2		2			—			—			2		2
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			359			359			—			—			534		534			—			—			502		502
Average total tangible assets	R		$62,444			$52,362			$33,180			$147,986			$59,714			$49,747			$34,141		$143,602			$56,388			$47,159			$33,260		$136,807
Return on average total tangible assets	N/R	1.23		%	1.77		%	NM			1.16		%	0.76		%	1.56		%	NM		1.15		%	0.61		%	1.34		%	NM		0.76		%

103

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2018			2017
Noninterest income, Underlying:
Noninterest income (GAAP)			$1,596			$1,534
Less: Notable items
FAMC integration costs		(4		)	—
Gain on mortgage/home equity TDR Transaction		—			17
TOP efficiency initiatives and other actions		(1		)	—
Lease impairment credit-related costs		—			(11		)
Noninterest income, Underlying (non-GAAP)			$1,601			$1,528
Total revenue, Underlying:
Total revenue (GAAP)	A		$6,128			$5,707
Less: Notable items
FAMC integration costs		(4		)	—
Gain on mortgage/home equity TDR Transaction		—			17
TOP efficiency initiatives and other actions		(1		)	—
Lease impairment credit-related costs		—			(11		)
Total revenue, Underlying (non-GAAP)	S		$6,133			$5,701
Noninterest expense, Underlying:
Noninterest expense (GAAP)	B		$3,619			$3,474
Less: Notable items
FAMC integration costs		21			—
Tax and tax-related notable items:
Colleague and community reinvestment		—			22
Home equity operational items		—			3
TOP efficiency initiatives and other actions		33			15
Lease impairment credit-related costs		—			15
Noninterest expense, Underlying (non-GAAP)	T		$3,565			$3,419
Pre-provision profit:
Total revenue (GAAP)	A	6,128				$5,707
Less: Noninterest expense (GAAP)	B	3,619			3,474
Pre-provision profit (GAAP)		2,509				$2,233
Pre-provision profit, Underlying:
Total revenue, Underlying (non-GAAP)	S		$6,133			$5,701
Less: Noninterest expense, Underlying (non-GAAP)	T	3,565			3,419
Pre-provision profit, Underlying (non-GAAP)			$2,568			$2,282
Total credit-related costs, Underlying:
Provision for credit losses (GAAP)			$326			$321
Add: Lease impairment credit-related costs		—			26
Total credit-related costs, Underlying (non-GAAP)			$326			$347

104

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2018			2017
Income before income tax expense, Underlying:
Income before income tax expense (GAAP)	I		$2,183			$1,912
Less: Notable items
FAMC integration costs		(25		)	—
Tax and tax-related notable items:
Colleague and community reinvestment		—			(22		)
Gain on mortgage/home equity TDR Transaction		—			17
Home equity operational items		—			(3		)
TOP efficiency initiatives and other actions		(34		)	(15		)
Income before income tax expense, Underlying (non-GAAP)	U		$2,242			$1,935
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP)	J		$462			$260
Less: Notable items
FAMC integration costs		(6		)	—
Tax and tax-related notable items:
Tax Legislation DTL adjustment		(29		)	(331		)
Colleague and community reinvestment		—			(9		)
Settlement of certain tax matters		—			(23		)
Gain on mortgage/home equity TDR Transaction		—			7
Home equity operational items		—			(1		)
TOP efficiency initiatives and other actions		(8		)	(6		)
Income tax expense, Underlying (non-GAAP)	V		$505			$623
Effective income tax rate (GAAP)	J/I	21.16		%	13.62		%
Effective income tax rate, Underlying (non-GAAP)	V/U	22.55			32.20
Net income, Underlying:
Net income (GAAP)	C		$1,721			$1,652
Add: Notable items, net of tax expense
FAMC integration costs		19			—
Tax and tax-related notable items:
Tax Legislation DTL adjustment		(29		)	(331		)
Colleague and community reinvestment		—			13
Settlement of certain tax matters		—			(23		)
Gain on mortgage/home equity TDR Transaction		—			(10		)
Home equity operational items		—			2
TOP efficiency initiatives and other actions		26			9
Net income, Underlying (non-GAAP)	W		$1,737			$1,312

105

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2018			2017
Net income available to common stockholders, Underlying:
Net income available to common stockholders (GAAP)	D		$1,692			$1,638
Add: Notable items, net of tax expense
FAMC integration costs		19			—
Tax and tax-related notable items:
Tax Legislation DTL adjustment		(29		)	(331		)
Colleague and community reinvestment		—			13
Settlement of certain tax matters		—			(23		)
Gain on mortgage/home equity TDR Transaction		—			(10		)
Home equity operational items		—			2
TOP efficiency initiatives and other actions		26			9
Net income available to common stockholders, Underlying (non-GAAP)	X		$1,708			$1,298
Return on average common equity and return on average common equity, Underlying:
Average common equity (GAAP)	E		$19,645			$19,618
Return on average common equity	D/E	8.62		%	8.35		%
Return on average common equity, Underlying (non-GAAP)	X/E	8.69			6.62
Return on average tangible common equity and return on average tangible common equity, Underlying:
Average common equity (GAAP)	E		$19,645			$19,618
Less: Average goodwill (GAAP)		6,912			6,883
Less: Average other intangibles (GAAP)		14			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		359			534
Average tangible common equity	F		$13,078			$13,267
Return on average tangible common equity	D/F	12.94		%	12.35		%
Return on average tangible common equity, Underlying (non-GAAP)	X/F	13.06			9.79
Return on average total assets and return on average total assets, Underlying:
Average total assets (GAAP)	G		$154,553			$149,953
Return on average total assets	C/G	1.11		%	1.10		%
Return on average total assets, Underlying (non-GAAP)	W/G	1.12			0.88
Return on average total tangible assets and return on average total tangible assets, Underlying:
Average total assets (GAAP)	G		$154,553			$149,953
Less: Average goodwill (GAAP)		6,912			6,883
Less: Average other intangibles (GAAP)		14			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		359			534
Average tangible assets	H		$147,986			$143,602
Return on average total tangible assets	C/H	1.16		%	1.15		%
Return on average total tangible assets, Underlying (non-GAAP)	W/H	1.17			0.91
Efficiency ratio and efficiency ratio, Underlying:
Efficiency ratio	B/A	59.06		%	60.87		%
Efficiency ratio, Underlying (non-GAAP)	T/S	58.13			59.96
Operating leverage and operating leverage, Underlying:
Increase in total revenue		7.37		%	8.61		%
Increase in noninterest expense		4.18			3.63
Operating Leverage		3.19		%	4.98		%
Increase in total revenue, Underlying (non-GAAP)		7.58		%	9.90		%
Increase in noninterest expense, Underlying (non-GAAP)		4.30			3.10
Operating Leverage, Underlying (non-GAAP)		3.28		%	6.80		%

106

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2018			2017
Net income per average common share - basic and diluted, Underlying:
Average common shares outstanding - basic (GAAP)	K	478,822,072			502,157,440
Average common shares outstanding - diluted (GAAP)	L	480,430,741			503,685,091
Net income per average common share - basic (GAAP)	D/K		$3.54			$3.26
Net income per average common share - diluted (GAAP)	D/L	3.52			3.25
Net income per average common share-basic, Underlying (non-GAAP)	X/K	3.57			2.59
Net income per average common share-diluted, Underlying (non-GAAP)	X/L	3.56			2.58
Dividend payout ratio and dividend payout ratio, Underlying:
Cash dividends declared and paid per common share	M		$0.98			$0.64
Dividend payout ratio	M/(D/K)	28		%	20		%
Dividend payout ratio, Underlying (non-GAAP)	M/(X/K)	27			25
Impact of Underlying items on net income per average common share - basic:
Notable items:
FAMC integration costs			($0.04	)		$—
Tax and tax-related notable items:
Tax Legislation DTL adjustment		0.06			0.66
Colleague and community reinvestment		—			(0.03		)
Settlement of certain tax matters		—			0.04
Gain on mortgage/home equity TDR Transaction		—			0.02
Home equity operational items		—			—
TOP efficiency initiatives and other actions		(0.05		)	(0.02		)
Impact of Underlying items on net income per average common share - basic			($0.03	)		$0.67
Impact of Underlying items on net income per average common share - diluted:
Notable items:
FAMC integration costs			($0.05	)		$—
Tax and tax-related notable items:
Tax Legislation DTL adjustment		0.06			0.66
Colleague and community reinvestment		—			(0.03		)
Settlement of certain tax matters		—			0.04
Gain on mortgage/home equity TDR Transaction		—			0.02
Home equity operational items		—			—
TOP efficiency initiatives and other actions		(0.05		)	(0.02		)
Impact of Underlying items on net income per average common share - diluted			($0.04	)		$0.67

107

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2017			2016
Noninterest income, Adjusted/Underlying:
Noninterest income (GAAP)			$1,534			$1,497
Less: Notable items
Gain on mortgage/home equity TDR Transaction		17			72
Lease impairment credit-related costs		(11		)	—
Asset Finance repositioning		—			(5		)
Noninterest income, Adjusted/Underlying (non-GAAP)			$1,528			$1,430
Total revenue, Adjusted/Underlying:
Total revenue (GAAP)	A		$5,707			$5,255
Less: Notable items
Gain on mortgage/home equity TDR Transaction		17			72
Lease impairment credit-related costs		(11		)	—
Asset Finance repositioning		—			(5		)
Total revenue, Adjusted/Underlying (non-GAAP)	S		$5,701			$5,188
Noninterest expense, Adjusted/Underlying:
Noninterest expense (GAAP)	B		$3,474			$3,352
Less: Notable items
Tax and tax-related notable items:
Colleague and community reinvestment		22			—
Home equity operational items		3			8
TOP efficiency initiatives		15			17
Lease impairment credit-related costs		15			—
Asset Finance repositioning		—			11
Noninterest expense, Adjusted/Underlying (non-GAAP)	T		$3,419			$3,316
Pre-provision profit:
Total revenue (GAAP)	A		$5,707			$5,255
Less: Noninterest expense (GAAP)	B	3,474			3,352
Pre-provision profit (GAAP)			$2,233			$1,903
Pre-provision profit, Adjusted/Underlying:
Total revenue, Adjusted/Underlying (non-GAAP)	S		$5,701			$5,188
Less: Noninterest expense, Adjusted/Underlying (non-GAAP)	T	3,419			3,316
Pre-provision profit, Adjusted/Underlying (non-GAAP)			$2,282			$1,872
Total credit-related costs, Adjusted/Underlying:
Provision for credit losses (GAAP)			$321			$369
Add: Lease impairment credit-related costs		26			—
Total credit-related costs, Adjusted/Underlying (non-GAAP)			$347			$369
Income before income tax expense, Adjusted/Underlying:
Income before income tax expense (GAAP)	I		$1,912			$1,534
Less: Notable items
Tax and tax-related notable items:
Colleague and community reinvestment		(22		)	—
Gain on mortgage/home equity TDR Transaction		17			72
Home equity operational items		(3		)	(8		)
TOP efficiency initiatives		(15		)	(17		)
Asset Finance repositioning		—			(16		)
Income before income tax expense, Adjusted/Underlying (non-GAAP)	U		$1,935			$1,503

108

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2017			2016
Income tax expense and effective income tax rate, Adjusted/Underlying:
Income tax expense (GAAP)	J		$260			$489
Less: Notable items
Tax and tax-related notable items:
Tax Legislation DTL adjustment		(331		)	—
Colleague and community reinvestment		(9		)	—
Settlement of certain tax matters		(23		)	—
Gain on mortgage/home equity TDR Transaction		7			27
Home equity operational items		(1		)	(3		)
TOP efficiency initiatives		(6		)	(6		)
Asset Finance repositioning		—			(6		)
Income tax expense, Adjusted/Underlying (non-GAAP)	V		$623			$477
Effective income tax rate (GAAP)	J/I	13.62		%	31.88		%
Effective income tax rate, Adjusted/Underlying (non-GAAP)	V/U	32.20			31.74
Net income, Adjusted/Underlying:
Net income (GAAP)	C		$1,652			$1,045
Add: Notable items, net of tax expense
Tax and tax-related notable items:
Tax Legislation DTL adjustment		(331		)	—
Colleague and community reinvestment		13			—
Settlement of certain tax matters		(23		)	—
Gain on mortgage/home equity TDR Transaction		(10		)	(45		)
Home equity operational items		2			5
TOP efficiency initiatives		9			11
Asset Finance repositioning		—			10
Net income, Adjusted/Underlying (non-GAAP)	W		$1,312			$1,026
Net income available to common stockholders, Adjusted/Underlying:
Net income available to common stockholders (GAAP)	D		$1,638			$1,031
Add: Notable items, net of tax expense
Tax and tax-related notable items:
Tax Legislation DTL adjustment		(331		)	—
Colleague and community reinvestment		13			—
Settlement of certain tax matters		(23		)	—
Gain on mortgage/home equity TDR Transaction		(10		)	(45		)
Home equity operational items		2			5
TOP efficiency initiatives		9			11
Asset Finance repositioning		—			10
Net income available to common stockholders, Adjusted/Underlying (non-GAAP)	X		$1,298			$1,012
Return on average common equity and return on average common equity, Adjusted/Underlying:
Average common equity (GAAP)	E		$19,618			$19,698
Return on average common equity	D/E	8.35		%	5.23		%
Return on average common equity, Adjusted/Underlying (non-GAAP)	X/E	6.62			5.14
Return on average tangible common equity and return on average tangible common equity, Adjusted/Underlying:
Average common equity (GAAP)	E		$19,618			$19,698
Less: Average goodwill (GAAP)		6,883			6,876
Less: Average other intangibles (GAAP)		2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		534			502
Average tangible common equity	F		$13,267			$13,322
Return on average tangible common equity	D/F	12.35		%	7.74		%
Return on average tangible common equity, Adjusted/Underlying (non-GAAP)	X/F	9.79			7.60
Return on average total assets and return on average total assets, Adjusted/Underlying:
Average total assets (GAAP)	G		$149,953			$143,183
Return on average total assets	C/G	1.10		%	0.73		%
Return on average total assets, Adjusted/Underlying (non-GAAP)	W/G	0.88			0.72

109

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2017			2016
Return on average total tangible assets and return on average total tangible assets, Adjusted/Underlying:
Average total assets (GAAP)	G		$149,953			$143,183
Less: Average goodwill (GAAP)		6,883			6,876
Less: Average other intangibles (GAAP)		2			2
Add: Average deferred tax liabilities related to goodwill (GAAP)		534			502
Average tangible assets	H		$143,602			$136,807
Return on average total tangible assets	C/H	1.15		%	0.76		%
Return on average total tangible assets, Adjusted/Underlying (non-GAAP)	W/H	0.91			0.75
Efficiency ratio and efficiency ratio, Adjusted/Underlying:
Efficiency ratio	B/A	60.87		%	63.80		%
Efficiency ratio, Adjusted/Underlying (non-GAAP)	T/S	59.96			63.92
Operating leverage and operating leverage, Adjusted/Underlying:
Increase in total revenue		8.61		%	8.93		%
Increase in noninterest expense		3.63			2.85
Operating Leverage		4.98		%	6.08		%
Increase in total revenue, Adjusted/Underlying (non-GAAP)		9.90		%	7.55		%
Increase in noninterest expense, Adjusted/Underlying (non-GAAP)		3.10			3.33
Operating Leverage, Underlying (non-GAAP)		6.80		%	4.22		%
Net income per average common share - basic and diluted, Adjusted/Underlying:
Average common shares outstanding - basic (GAAP)	K	502,157,440			522,093,545
Average common shares outstanding - diluted (GAAP)	L	503,685,091			523,930,718
Net income per average common share - basic (GAAP)	D/K		$3.26			$1.97
Net income per av