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

For the Quarterly Period Ended
September 30, 2017

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

For the Transition Period From
(Not Applicable)
Commission File Number 001-36636
a5422139a7e5fcpreview620a15.jpg
(Exact name of the registrant as specified in its charter)
Delaware
 
05-0412693
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
One Citizens Plaza, Providence, RI 02903
(Address of principal executive offices, including zip code)
(401) 456-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
[ü] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ü] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
[ü]
Accelerated filer
[ ]
Non-accelerated filer (Do not check if a smaller reporting company)
[ ]
Smaller reporting company
[ ]
 
 
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ü] No
There were 491,991,403 shares of Registrant’s common stock ($0.01 par value) outstanding on November 1, 2017.




 
 
 
 
 
 
a5422139a7e5fcpreview620a15.jpg
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

CITIZENS FINANCIAL GROUP, INC.

 

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

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CITIZENS FINANCIAL GROUP, INC.

 

NM
 
Not meaningful
NSFR
 
Net Stable Funding Ratio
OCC
 
Office of the Comptroller of the Currency
OCI
 
Other Comprehensive Income (Loss)
Parent Company
 
Citizens Financial Group, Inc. (the Parent Company of Citizens Bank of Pennsylvania, Citizens Bank, National Association and other subsidiaries)
PD
 
Probability of Default
ROTCE
 
Return on Average Tangible Common Equity
RPA
 
Risk Participation Agreement
SBO
 
Serviced by Others loan portfolio
SEC
 
United States Securities and Exchange Commission
SVaR
 
Stressed Value at Risk
TDR
 
Troubled Debt Restructuring
TOP
 
Tapping Our Potential
VaR
 
Value at Risk
VIE
 
Variable Interest Entities




4

CITIZENS FINANCIAL GROUP, INC.

 

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

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


5

CITIZENS FINANCIAL GROUP, INC.
FORWARD-LOOKING STATEMENTS



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

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

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

6

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

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



7

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

FINANCIAL PERFORMANCE
Third Quarter 2017 compared with Third Quarter 2016 - Key Highlights
Third quarter 2017 net income of $348 million increased 17% from $297 million in third quarter 2016, with earnings per diluted common share of $0.68, up 21% from $0.56 per diluted common share. Third quarter 2017 ROTCE of 10.1% improved from 8.6%.*
On an Adjusted basis,* third quarter 2017 net income increased 25% and earnings per diluted common share increased 31% compared to third quarter 2016. Adjusted results exclude the impact of a third quarter 2016 net $19 million after-tax benefit from the sale of a troubled debt restructuring portfolio (“TDR Transaction”), partially offset by other notable items largely associated with our efficiency and balance sheet optimization initiatives.
Third quarter 2017 results reflect an 18% increase in net income available to common stockholders, led by revenue growth of 5%, with a 12% increase in net interest income given 5% average loan growth and a 21 basis point increase in net interest margin.
On an Adjusted basis,* net income available to common stockholders increased 26%.
Continued strong focus on top-line growth and expense management helped drive positive operating leverage of 6%, a 3.5% improvement in the efficiency ratio and a 1.6% improvement in ROTCE.*
On an Adjusted basis,* operating leverage was 7% with an efficiency ratio improvement of 3.9% and a ROTCE improvement of 2.1%.
Fully diluted average common shares outstanding decreased by 19 million shares.
Nine Months Ended 2017 compared with Nine Months Ended 2016 - Key Highlights
For the first nine months of 2017, net income of $986 million, increased 29% from $763 million in the first nine months of 2016, with earnings per diluted common share of $1.92, up 35% from $1.42 per diluted common share in the first nine months of 2016. Our first nine months of 2017 results include a $23 million benefit, or $0.05 per diluted common share, related to the settlement of certain state tax matters. For the first nine months of 2017, ROTCE of 9.8% improved from 7.5% in the first nine months of 2016.*
On an Underlying basis,* excluding a $23 million benefit related to the settlement of certain state tax matters, net income of $963 million was up 26%, earnings per diluted common share of $1.87 was up 32%, and ROTCE of 9.6% improved by 206 basis points.
On an Adjusted basis,* excluding the third quarter 2016 net $19 million after-tax benefit related to the TDR Transaction, partially offset by other notable items, net income of $986 million was up 33%, earnings per diluted common share of $1.92 was up 38%, and ROTCE of 9.8% improved by 248 basis points.
Results for the first nine months of 2017 reflected a 30% increase in net income available to common stockholders, led by revenue growth of 9%, as net interest income increased 12%, given a 6% average loan growth and a 15 basis point increase in net interest margin, as well as noninterest income growth of 1%.
Results for the first nine months of 2017 included a $26 million pre-tax impact related to impairments on aircraft lease assets, which largely related to a non-core runoff portfolio, and reduced noninterest income by $11 million and increased noninterest expense by $15 million. The lease impairments, in addition to provision expense of $238 million, resulted in total credit-related costs of $264 million.*
Continued strong focus on top-line growth and expense management helped drive positive operating leverage of 6%, a 3.4% improvement in the efficiency ratio from 64.4% to 61.0%, and a 2.3% improvement in ROTCE.* 
Before the impact of the lease impairments, Underlying* operating leverage was 7% and the efficiency ratio improved 3.9% from 64.4% to 60.5%.
On an Adjusted basis,* the efficiency ratio improved from 64.5% to 61.0%.
For the first nine months of 2017, the tax rate reflected a 1.8% benefit driven by the settlement of certain state tax matters and investments in historic tax credits.
On an Underlying basis,* the effective income tax rate decreased from 31.9% to 31.7%.
Fully diluted average common shares outstanding decreased by 20 million shares.

8

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

Summary of Notable and Underlying Items(1) 
 
Three Months Ended September 30, 2016
(in millions)
Noninterest income
 
Noninterest expense
 
Credit-related costs
 
Income tax expense
 
Net Income
Reported results (GAAP)

$435

 

$867

 

$86

 

$130

 

$297

Less: notable items
 
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
72

 

 

 
27

 
45

Home equity operational items

 
8

 

 
(3
)
 
(5
)
Asset Finance repositioning
(5
)
 
11

 

 
(6
)
 
(10
)
TOP III efficiency initiatives

 
17

 

 
(6
)
 
(11
)
Total notable items

$67

 

$36

 

$—

 

$12

 

$19

Adjusted results (Non-GAAP)

$368

 

$831

 

$86

 

$118

 

$278

 
Nine Months Ended September 30, 2017
(in millions)
Noninterest income
 
Noninterest expense
 
Credit-related costs
 
Income tax expense
 
Net Income
Reported results (GAAP)

$1,130

 

$2,576

 

$238

 

$423

 

$986

Less: Underlying items
 
 
 
 
 
 
 
 
 
Lease impairment credit-related costs
(11
)
 
15

 
(26
)
 

 

Settlement of certain tax matters

 

 

 
(23
)
 
23

Total Underlying items

($11
)
 

$15

 

($26
)
 

($23
)
 

$23

Underlying results (Non-GAAP)

$1,141

 

$2,561

 

$264

 

$446

 

$963

 
Nine Months Ended September 30, 2016
(in millions)
Noninterest income
 
Noninterest expense
 
Credit-related costs
 
Income tax expense
 
Net Income
Reported results (GAAP)

$1,120

 

$2,505

 

$267

 

$357

 

$763

Less: notable items
 
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
72

 

 

 
27

 
45

Home equity operational items

 
8

 

 
(3
)
 
(5
)
Asset Finance repositioning
(5
)
 
11

 

 
(6
)
 
(10
)
TOP III efficiency initiatives

 
17

 

 
(6
)
 
(11
)
Total notable items

$67

 

$36

 

$—

 

$12

 

$19

Adjusted results (Non-GAAP)

$1,053

 

$2,469

 

$267

 

$345

 

$744

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

*
“Adjusted” results exclude restructuring charges, special items and/or notable items; “Underlying” results, as applicable, exclude a first quarter 2017 $23 million benefit related to the settlement of certain state tax matters and reclassify second quarter 2017 results for the pre-tax impact of $26 million of lease asset impairments to reflect their credit-related impact. Where there is a reference to “Adjusted” and/or “Underlying” results in a paragraph, all measures that follow these references are on the same basis when applicable. For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Principal Components of Operations and Key Performance Metrics Used by Management — Key Performance Metrics and Non-GAAP Financial Measures.”

9

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

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

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

 
  2016

 
  2017
 
2016
OPERATING DATA:
 
 
 
 
 
 
 
Net interest income

$1,062

 

$945

 

$3,093

 

$2,772

Noninterest income
381

 
435

 
1,130

 
1,120

Total revenue
1,443

 
1,380

 
4,223

 
3,892

Provision for credit losses
72

 
86

 
238

 
267

Noninterest expense
858

 
867

 
2,576

 
2,505

Income before income tax expense
513

 
427

 
1,409

 
1,120

Income tax expense
165

 
130

 
423

 
357

Net income

$348

 

$297

 

$986

 

$763

Net income available to common stockholders

$341

 

$290

 

$972

 

$749

Net income per common share - basic

$0.68

 

$0.56

 

$1.92

 

$1.43

Net income per common share - diluted

$0.68

 

$0.56

 

$1.92

 

$1.42

OTHER OPERATING DATA:
 
 
 
 
 
 
 
Return on average common equity (1)
6.87
%
 
5.82
%
 
6.63
%
 
5.08
%
Return on average tangible common equity (1)
10.13

 
8.58

 
9.80

 
7.51

Return on average total assets (1)
0.92

 
0.82

 
0.88

 
0.72

Return on average total tangible assets (1)
0.96

 
0.86

 
0.92

 
0.75

Efficiency ratio (1)
59.41

 
62.88

 
60.99

 
64.36

Operating leverage (1) (2)
5.61

 
5.49

 
5.67

 
6.06

Net interest margin (1)
3.05

 
2.84

 
3.00

 
2.85

Effective income tax rate
32.18

 
30.46

 
30.04

 
31.87

(1) See “—Principal Components of Operations and Key Performance Metrics Used By Management” for definitions of our key performance metrics.
(2) “Operating leverage” represents the period-over-period percent change in total revenue, less the period-over-period percent change in noninterest expense. For the purpose of the 2016 calculation, total revenue was $1.2 billion and $3.6 billion for the three and nine months ended September 30, 2015, respectively, and noninterest expense was $798 million and $2.4 billion for the three and nine months ended September 30, 2015, respectively.


10

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

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

$151,356

 

$149,520

Loans held for sale, at fair value
500

 
583

Other loans held for sale
724

 
42

Loans and leases
110,151

 
107,669

Allowance for loan and lease losses
(1,224
)
 
(1,236
)
Total securities
25,742

 
25,610

Goodwill
6,887

 
6,876

Total liabilities
131,247

 
129,773

Total deposits
113,235

 
109,804

Federal funds purchased and securities sold under agreements to repurchase
453

 
1,148

Other short-term borrowed funds
1,505

 
3,211

Long-term borrowed funds
13,400

 
12,790

Total stockholders’ equity
20,109

 
19,747

OTHER BALANCE SHEET DATA:
 
 
 
Asset Quality Ratios:
 
 
 
Allowance for loan and lease losses as a percentage of total loans and leases
1.11
%
 
1.15
%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases
131.35

 
118.32

Nonperforming loans and leases as a percentage of total loans and leases
0.85

 
0.97

Capital Ratios:(3)
 
 
 
CET1 capital ratio (4)
11.1
%
 
11.2
%
Tier 1 capital ratio (5)
11.3

 
11.4

Total capital ratio (6)
13.8

 
14.0

Tier 1 leverage ratio (7)
9.9

 
9.9

(3) U.S. Basel III transitional rules for institutions applying the Standardized approach to calculating risk-weighted assets became effective January 1, 2015. The capital ratios and associated components as of September 30, 2017 and December 31, 2016 are prepared using the U.S. Basel III Standardized transitional approach.
(4) “Common equity tier 1 capital ratio” represents CET1 capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(5) “Tier 1 capital ratio” is tier 1 capital, which includes CET1 capital plus non-cumulative perpetual preferred equity that qualifies as additional tier 1 capital,
divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(6) “Total capital ratio” is total capital divided by total risk-weighted assets as defined under U.S. Basel III Standardized approach.
(7) “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under U.S. Basel III Standardized approach.




11

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

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

12

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

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

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

 
2016

 
2017

 
2016

Total revenue (GAAP)
A

$1,443

 

$1,380

 

$4,223

 

$3,892

Noninterest expense (GAAP)
B
858

 
867

 
2,576

 
2,505

Net income (GAAP)
C
348

 
297

 
986

 
763

Net income available to common stockholders (GAAP)
D
341

 
290

 
972

 
749

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

$19,728

 

$19,810

 

$19,617

 

$19,715

Return on average common equity
D/E
6.87
 %
 
5.82
%
 
6.63
%
 
5.08
%
Return on average tangible common equity:
 
 
 
 
 
 
 
 
Average common equity (GAAP)
E

$19,728

 

$19,810

 

$19,617

 

$19,715

Less: Average goodwill (GAAP)
 
6,887

 
6,876

 
6,882

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
1

 
2

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
537

 
509

 
535

 
495

Average tangible common equity
F

$13,376

 

$13,442

 

$13,268

 

$13,332

Return on average tangible common equity
D/F
10.13
 %
 
8.58
%
 
9.80
%
 
7.51
%
Return on average total assets:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$150,012

 

$144,399

 

$149,563

 

$141,795

Return on average total assets
C/G
0.92
 %
 
0.82
%
 
0.88
%
 
0.72
%
Return on average total tangible assets:
 
 
 
 
 
 
 
 
Average total assets (GAAP)
G

$150,012

 

$144,399

 

$149,563

 

$141,795

Less: Average goodwill (GAAP)
 
6,887

 
6,876

 
6,882

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
1

 
2

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
537

 
509

 
535

 
495

Average tangible assets
H

$143,660

 

$138,031

 

$143,214

 

$135,412

Return on average total tangible assets
C/H
0.96
 %
 
0.86
%
 
0.92
%
 
0.75
%
Efficiency ratio:
 
 
 
 
 
 
 
 
Efficiency ratio
B/A
59.41
 %
 
62.88
%
 
60.99
%
 
64.36
%
Operating leverage:
 
 
 
 
 
 
 
 
Increase in total revenue
 
4.57
 %
 
14.14
%
 
8.50
%
 
8.35
%
(Decrease) increase in noninterest expense
 
(1.04
)
 
8.65

 
2.83

 
2.29

Operating leverage
 
5.61
 %
 
5.49
%
 
5.67
%
 
6.06
%

13

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

 
 
As of and for the Three Months Ended September 30,
 
 
2017
 
2016
(in millions, except ratio data)
Ref. 
Consumer
Banking
Commercial
Banking
Other
Consolidated
 
Consumer
Banking
Commercial
Banking
Other
Consolidated
Net income available to common stockholders:
 
 
 
 
 
 
 
 
 
 
Net income (GAAP)
I

$122


$201


$25


$348

 

$92


$162


$43


$297

Less: Preferred stock dividends
 


7

7

 


7

7

Net income available to common stockholders
J

$122


$201


$18


$341

 

$92


$162


$36


$290

Efficiency ratio:
 

 
 
 

 

 

 

Total revenue (GAAP)
K

$901


$490


$52


$1,443

 

$850


$450


$80


$1,380

Noninterest expense (GAAP)
L
648

195

15

858

 
650

181

36

867

Efficiency ratio
L/K
71.88
%
39.39
%
NM

59.41
%
 
76.46
%
40.21
%
NM

62.88
%
Return on average total tangible assets:
 
 
 
 
 
 
 
 
 
 
Average total assets (GAAP)
 

$60,012


$49,833


$40,167


$150,012

 

$56,689


$47,902


$39,808


$144,399

Less: Average goodwill (GAAP)
 


6,887

6,887

 


6,876

6,876

Less: Average other intangibles (GAAP)
 


2

2

 


1

1

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


537

537

 


509

509

Average total tangible assets
M

$60,012


$49,833


$33,815


$143,660

 

$56,689


$47,902


$33,440


$138,031

Return on average total tangible assets
I/M
0.81
%
1.60
%
NM

0.96
%
 
0.64
%
1.35
%
NM

0.86
%
Return on average tangible common equity:
 
 
 
 

 

 
 

 

 

 

Average common equity (GAAP)(1)
 

$5,565


$5,685


$8,478


$19,728

 

$5,190


$5,172


$9,448


$19,810

Less: Average goodwill (GAAP)
 


6,887

6,887

 


6,876

6,876

Less: Average other intangibles (GAAP)
 


2

2

 


1

1

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


537

537

 


509

509

Average tangible common equity (1)
N

$5,565


$5,685


$2,126


$13,376

 

$5,190


$5,172


$3,080


$13,442

Return on average tangible common equity (1)
J/N
8.72
%
14.06
%
NM

10.13
%
 
7.04
%
12.50
%
NM

8.58
%
(1) Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory
capital is equivalent to a sustainable target level for common equity tier 1 and then allocate that approximation to the segments based on economic capital.

14

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


 
 
As of and for the Nine Months Ended September 30,
 
 
2017
 
2016
(in millions, except ratio data)
Ref.
Consumer
Banking
Commercial
Banking
Other
Consolidated
 
Consumer
Banking
Commercial
Banking
Other
Consolidated
Net income available to common stockholders:
 
 
 
 
 
 
 
 
 
 
Net income (GAAP)
I

$335


$568


$83


$986

 

$253


$459


$51


$763

Less: Preferred stock dividends
 


14

14

 


14

14

Net income available to common stockholders
J

$335


$568


$69


$972

 

$253


$459


$37


$749

Efficiency ratio:
 

 
 
 

 

 

 

Total revenue (GAAP)
K

$2,645


$1,444


$134


$4,223

 

$2,460


$1,285


$147


$3,892

Noninterest expense (GAAP)
L
1,939

577

60

2,576

 
1,898

554

53

2,505

Efficiency ratio
L/K
73.28
%
39.89
%
NM

60.99
%
 
77.15
%
43.15
%
NM

64.36
%
Return on average total tangible assets:
 
 
 
 
 
 
 
 
 
 
Average total assets (GAAP)
 

$59,310


$49,604


$40,649


$149,563

 

$55,825


$46,869


$39,101


$141,795

Less: Average goodwill (GAAP)
 


6,882

6,882

 


6,876

6,876

Less: Average other intangibles (GAAP)
 


2

2

 


2

2

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


535

535

 


495

495

Average total tangible assets
M

$59,310


$49,604


$34,300


$143,214

 

$55,825


$46,869


$32,718


$135,412

Return on average total tangible assets
I/M
0.76
%
1.53
%
NM

0.92
%
 
0.60
%
1.31
%
NM

0.75
%
Return on average tangible common equity:
 
 
 
 

 

 
 

 

 

 

Average common equity (GAAP)(1)
 

$5,515


$5,611


$8,491


$19,617

 

$5,130


$5,001


$9,584


$19,715

Less: Average goodwill (GAAP)
 


6,882

6,882

 


6,876

6,876

Less: Average other intangibles (GAAP)
 


2

2

 


2

2

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


535

535

 


495

495

Average tangible common equity (1)
N

$5,515


$5,611


$2,142


$13,268

 

$5,130


$5,001


$3,201


$13,332

Return on average tangible common equity (1)
J/N
8.13
%
13.54
%
NM

9.80
%
 
6.58
%
12.27
%
NM

7.51
%
(1) Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory
capital is equivalent to a sustainable target level for common equity tier 1 and then allocate that approximation to the segments based on economic capital.


15

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

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

 
2016

 
2017

 
2016

Noninterest income, Adjusted:
 
 
 
 
 
 
 
 
Noninterest income (GAAP)
 

$381

 

$435

 

$1,130

 

$1,120

Less: notable items
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
 

 
72

 

 
72

Home equity operational items
 

 

 

 

Asset Finance repositioning
 

 
(5
)
 

 
(5
)
TOP III efficiency initiatives
 

 

 

 

Noninterest income, Adjusted (non-GAAP)
 

$381

 

$368

 

$1,130

 

$1,053

Total revenue, Adjusted:
 
 
 
 
 
 
 
 
Total revenue (GAAP)
A

$1,443

 

$1,380

 

$4,223

 

$3,892

Less: notable items
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
 

 
72

 

 
72

Home equity operational items
 

 

 

 

Asset Finance repositioning
 

 
(5
)
 

 
(5
)
TOP III efficiency initiatives
 

 

 

 

Total revenue, Adjusted (non-GAAP)
O

$1,443

 

$1,313

 

$4,223

 

$3,825

Noninterest expense, Adjusted:
 
 
 
 
 
 
 
 
Noninterest expense (GAAP)
B

$858

 

$867

 

$2,576

 

$2,505

Less: notable items
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
 

 

 

 

Home equity operational items
 

 
8

 

 
8

Asset Finance repositioning
 

 
11

 

 
11

TOP III efficiency initiatives
 

 
17

 

 
17

Noninterest expense, Adjusted (non-GAAP)
P

$858

 

$831

 

$2,576

 

$2,469

Pre-provision profit, Adjusted
 
 
 
 
 
 
 
 
Total revenue, Adjusted (non-GAAP)
O

$1,443

 

$1,313

 

$4,223

 

$3,825

Noninterest expense, Adjusted (non-GAAP)
P
858

 
831

 
2,576

 
2,469

Pre-provision profit, Adjusted (non-GAAP)
 

$585

 

$482

 

$1,647

 

$1,356

Income before income tax expense, Adjusted:
 
 
 
 
 
 
 
 
Income before income tax expense (GAAP)
Q

$513

 

$427

 

$1,409

 

$1,120

Less: notable items
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
 

 
72

 

 
72

Home equity operational items
 

 
(8
)
 

 
(8
)
Asset Finance repositioning
 

 
(16
)
 

 
(16
)
TOP III efficiency initiatives
 

 
(17
)
 

 
(17
)
Income before income tax expense, Adjusted (non-GAAP)
R

$513

 

$396

 

$1,409

 

$1,089

 
 
 
 
 
 
 
 
 

16

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

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

 
2016

 
2017

 
2016

Income tax expense and effective income tax rate, Adjusted:
 
 
 
 
 
 
 
 
Income tax expense (GAAP)
S

$165

 

$130

 

$423

 

$357

Less: Notable items
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
 

 
27

 

 
27

Home equity operational items
 

 
(3
)
 

 
(3
)
Asset Finance repositioning
 

 
(6
)
 

 
(6
)
TOP III efficiency initiatives
 

 
(6
)
 

 
(6
)
Income tax expense, Adjusted (non-GAAP)
T

$165

 

$118

 

$423

 

$345

Effective income tax rate (GAAP)
S/Q
32.18
 %
 
30.46
%
 
30.04
%
 
31.87
%
Effective income tax rate, Adjusted (non-GAAP)
T/R
32.18

 
29.83

 
30.04

 
31.68

Net income, Adjusted:
 
 
 
 
 
 
 
 
Net income (GAAP)
C

$348

 

$297

 

$986

 

$763

Add: Notable items, net of tax expense
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
 

 
(45
)
 

 
(45
)
Home equity operational items
 

 
5

 

 
5

Asset Finance repositioning
 

 
10

 

 
10

TOP III efficiency initiatives
 

 
11

 

 
11

Net income, Adjusted (non-GAAP)
U

$348

 

$278

 

$986

 

$744

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

$341

 

$290

 

$972

 

$749

Add: Notable items, net of tax expense
 
 
 
 
 
 
 
 
Gain on mortgage/home equity TDR transaction
 

 
(45
)
 

 
(45
)
Home equity operational items
 

 
5

 

 
5

Asset Finance repositioning
 

 
10

 

 
10

TOP III efficiency initiatives
 

 
11

 

 
11

Net income available to common stockholders, Adjusted (non-GAAP)
V

$341

 

$271

 

$972

 

$730

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

$19,728

 

$19,810

 

$19,617

 

$19,715

Return on average common equity
D/E
6.87
 %
 
5.82
%
 
6.63
%
 
5.08
%
Return on average common equity, Adjusted (non-GAAP)
V/E
6.87

 
5.44

 
6.63

 
4.95

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

$19,728

 

$19,810

 

$19,617

 

$19,715

Less: Average goodwill (GAAP)
 
6,887

 
6,876

 
6,882

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
1

 
2

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
537

 
509

 
535

 
495

Average tangible common equity
F

$13,376

 

$13,442

 

$13,268

 

$13,332

Return on average tangible common equity
D/F
10.13
 %
 
8.58
%
 
9.80
%
 
7.51
%
Return on average tangible common equity, Adjusted (non-GAAP)
V/F
10.13

 
8.02

 
9.80

 
7.32

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

$150,012

 

$144,399

 

$149,563

 

$141,795

Return on average total assets
C/G
0.92
 %
 
0.82
%
 
0.88
%
 
0.72
%
Return on average total assets, Adjusted (non-GAAP)
U/G
0.92

 
0.77

 
0.88

 
0.70


17

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

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

 
2016

 
2017

 
2016

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

$150,012

 

$144,399

 

$149,563

 

$141,795

Less: Average goodwill (GAAP)
 
6,887

 
6,876

 
6,882

 
6,876

Less: Average other intangibles (GAAP)
 
2

 
1

 
2

 
2

Add: Average deferred tax liabilities related to goodwill (GAAP)
 
537

 
509

 
535

 
495

Average tangible assets
H

$143,660

 

$138,031

 

$143,214

 

$135,412

Return on average total tangible assets
C/H
0.96
 %
 
0.86
%
 
0.92
%
 
0.75
%
Return on average total tangible assets, Adjusted (non-GAAP)
U/H
0.96

 
0.80

 
0.92

 
0.73

Efficiency ratio and efficiency ratio, Adjusted:
 
 
 
 
 
 
 
 
Efficiency ratio
B/A
59.41
 %
 
62.88
%
 
60.99
%
 
64.36
%
Efficiency ratio, Adjusted (non-GAAP)
P/O
59.41

 
63.31

 
60.99

 
64.54

Operating leverage and operating leverage, Adjusted:
 
 
 
 
 
 
 
 
Increase in total revenue
 
4.57
 %
 
14.14
%
 
8.50
%
 
8.35
%
(Decrease) increase in noninterest expense
 
(1.04
)
 
8.65

 
2.83

 
2.29

Operating leverage
 
5.61
 %
 
5.49
%
 
5.67
%
 
6.06
%
Increase in total revenue, Adjusted (non-GAAP)
 
9.90
 %
 
8.60
%
 
10.41
%
 
6.49
%
Increase in noninterest expense, Adjusted (non-GAAP)
 
3.25

 
4.14

 
4.33

 
2.92

Operating leverage, Adjusted (non-GAAP)
 
6.65
 %
 
4.46
%
 
6.08
%
 
3.57
%
Net income per average common share - basic and diluted, Adjusted:
 
 
 
 
 
 
 
 
Average common shares outstanding - basic (GAAP)
W
500,861,076

 
519,458,976

 
505,529,991

 
525,477,273

Average common shares outstanding - diluted (GAAP)
X
502,157,384

 
521,122,466

 
507,062,805

 
527,261,384

Net income available to common stockholders (GAAP)
D

$341

 

$290

 

$972

 </