Edgar Filing: CITIZENS FINANCIAL GROUP INC/RI

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended

September 30, 2016

[ ] 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

CITIZENS FINANCIAL GROUP, INC.

(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, 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 (Do not check if a smaller reporting company) [ ] Smaller reporting company [ ]

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 511,877,853 shares of Registrant’s common stock ($0.01 par value) outstanding on November 1, 2016.





	Table of Contents


Glossary of Acronyms and Terms		3

Part I. Financial Information		5

Item 1. Financial Statements		5

Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015 (unaudited)		6
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015		7
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015		8
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2016 and 2015		9
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2016 and 2015		10
Notes to the Consolidated Financial Statements (unaudited)		11

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		58

Item 3. Quantitative and Qualitative Disclosures about Market Risk		121

Item 4. Controls and Procedures		121


Part II. Other Information		122

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


Signature		124

CITIZENS FINANCIAL GROUP, INC.

GLOSSARY OF ACRONYMS AND TERMS

The following listing provides a comprehensive reference of common acronyms and terms we regularly use in our financial reporting:



AFS		Available for Sale
ALLL		Allowance for Loan and Lease Losses
AOCI		Accumulated Other Comprehensive Income (Loss)
ASU		Accounting Standards Update
ATM		Automated Teller Machine
BHC		Bank Holding Company
bps		Basis Points
C&I		Commercial and Industrial
Capital Plan Rule		Federal Reserve’s Regulation Y Capital Plan Rule
CBNA		Citizens Bank, N.A.
CBPA		Citizens Bank of Pennsylvania
CCAR		Comprehensive Capital Analysis and Review
CCB		Capital Conservation Buffer
CCO		Chief Credit Officer
CET1		Common Equity Tier 1
CEO		Chief Executive Officer
CFPB		Consumer Financial Protection Bureau
Citizens or CFG or the Company		Citizens Financial Group, Inc. and its Subsidiaries
CLTV		Combined Loan to Value
CMO		Collateralized Mortgage Obligation
CRE		Commercial Real Estate
CRO		Chief Risk Officer
DFAST		Dodd-Frank Act Stress Test
Dodd-Frank Act		The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS		Earnings Per Share
ERISA		Employee Retirement Income Security Act of 1974
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 Bank
FRBG		Federal Reserve Board of Governors
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
Ginnie Mae (GNMA)		Government National Mortgage Association
HELOC		Home Equity Line of Credit
HTM		Held To Maturity
LCR		Liquidity Coverage Ratio

CITIZENS FINANCIAL GROUP, INC.



LGD		Loss Given Default
LIBOR		London Interbank Offered Rate
LIHTC		Low Income Housing Tax Credit
LTV		Loan to Value
MBS		Mortgage-Backed Securities
MSR		Mortgage Servicing Right
NSFR		Net Stable Funding Ratio
OCC		Office of the Comptroller of the Currency
OCI		Other Comprehensive Income
PD		Probability of Default
peers or peer banks or peer regional banks		BB&T, Comerica, Fifth Third, KeyCorp, M&T, PNC, Regions, SunTrust and U.S. Bancorp
RBS		The Royal Bank of Scotland Group plc or any of its subsidiaries
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

CITIZENS FINANCIAL GROUP, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



		Page
Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015 (unaudited)		6
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015		7
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015		8
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2016 and 2015		9
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2016 and 2015		10
Notes to Consolidated Financial Statements (unaudited)		11
Note 1 - Basis of Presentation		11
Note 2 - Securities		12
Note 3 - Loans and Leases		17
Note 4 - Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk		18
Note 5 - Variable Interest Entities		30
Note 6 - Mortgage Banking		31
Note 7 - Borrowed Funds		33
Note 8 - Stockholders' Equity		35
Note 9 - Employee Benefits		36
Note 10 - Income Taxes		36
Note 11 - Derivatives		36
Note 12 - Commitments and Contingencies		40
Note 13 - Related Party Transactions		42
Note 14 - Fair Value Measurements		42
Note 15 - Regulatory Matters		49
Note 16 - Exit Costs and Restructuring Reserves		51
Note 17 - Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		52
Note 18 - Business Segments		53
Note 19 - Earnings Per Share		56
Note 20 - Other Operating Expense		57
Note 21 - Subsequent Events		57

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in millions, except share data)	September 30, 2016			December 31, 2015
ASSETS:
Cash and due from banks		$915			$1,099
Interest-bearing cash and due from banks	2,000			1,986
Interest-bearing deposits in banks	720			356
Securities available for sale, at fair value (including $229 and $4,283 pledged to creditors, respectively) (a)	19,425			17,884
Securities held to maturity (including $0 and $135 pledged to creditors, respectively, and fair value of $5,431 and $5,297, respectively) (a)	5,289			5,258
Other investment securities, at fair value	113			70
Other investment securities, at cost	877			863
Loans held for sale, at fair value	526			325
Other loans held for sale	—			40
Loans and leases	105,467			99,042
Less: Allowance for loan and lease losses	1,240			1,216
Net loans and leases	104,227			97,826
Derivative assets	1,102			625
Premises and equipment, net	540			595
Bank-owned life insurance	1,600			1,564
Goodwill	6,876			6,876
Other assets	2,805			2,841
TOTAL ASSETS		$147,015			$138,208
LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
Deposits:
Noninterest-bearing		$27,292			$27,649
Interest-bearing	81,035			74,890
Total deposits	108,327			102,539
Federal funds purchased and securities sold under agreements to repurchase	900			802
Other short-term borrowed funds	2,512			2,630
Derivative liabilities	840			485
Deferred taxes, net	994			730
Long-term borrowed funds	11,902			9,886
Other liabilities	1,359			1,490
TOTAL LIABILITIES		$126,834			$118,562
Contingencies (refer to Note 12)
STOCKHOLDERS’ EQUITY:
Preferred stock, $25.00 par value, authorized 100,000,000 shares:
Series A, non-cumulative perpetual, $25.00 par value (liquidation preference $1,000), 250,000 shares authorized and issued net of issuance costs and related premium at September 30, 2016 and December 31, 2015		$247			$247
Common stock:
$0.01 par value, 1,000,000,000 shares authorized, 564,553,524 shares issued and 518,148,345 shares outstanding at September 30, 2016 and 1,000,000,000 shares authorized, 563,117,415 shares issued and 527,774,428 shares outstanding at December 31, 2015	6			6
Additional paid-in capital	18,740			18,725
Retained earnings	2,483			1,913
Treasury Stock, at cost, 46,405,179 and 35,342,987 shares at September 30, 2016 and December 31, 2015, respectively	(1,108		)	(858		)
Accumulated other comprehensive loss	(187		)	(387		)
TOTAL STOCKHOLDERS’ EQUITY		$20,181			$19,646
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$147,015			$138,208

(a) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions, except share and per-share data)	2016			2015			2016			2015
INTEREST INCOME:
Interest and fees on loans and leases		$926			$812			$2,690			$2,381
Interest and fees on loans held for sale, at fair value	4			3			10			8
Interest and fees on other loans held for sale	1			3			6			7
Investment securities	146			154			432			468
Interest-bearing deposits in banks	2			2			6			4
Total interest income	1,079			974			3,144			2,868
INTEREST EXPENSE:
Deposits	71			65			194			177
Federal funds purchased and securities sold under agreements to repurchase	1			4			2			13
Other short-term borrowed funds	10			17			33			51
Long-term borrowed funds	52			32			143			95
Total interest expense	134			118			372			336
Net interest income	945			856			2,772			2,532
Provision for credit losses	86			76			267			211
Net interest income after provision for credit losses	859			780			2,505			2,321
NONINTEREST INCOME:
Service charges and fees	152			145			446			419
Card fees	52			60			153			172
Trust and investment services fees	37			41			112			118
Capital markets fees	34			21			91			73
Foreign exchange and letter of credit fees	23			22			65			67
Mortgage banking fees	33			18			76			81
Bank-owned life insurance income	14			14			40			40
Securities gains, net	—			2			13			19
Net securities impairment losses recognized in earnings	(3		)	(2		)	(11		)	(5		)
Other income	93			32			135			76
Total noninterest income	435			353			1,120			1,060
NONINTEREST EXPENSE:
Salaries and employee benefits	432			404			1,289			1,234
Outside services	102			89			279			267
Occupancy	78			75			230			245
Equipment expense	65			62			194			190
Amortization of software	46			35			126			108
Other operating expense	144			133			387			405
Total noninterest expense	867			798			2,505			2,449
Income before income tax expense	427			335			1,120			932
Income tax expense	130			115			357			313
NET INCOME		$297			$220			$763			$619
Net income available to common stockholders	$290			$213			$749				$612
Weighted-average common shares outstanding:
Basic	519,458,976			530,985,255			525,477,273			538,279,222
Diluted	521,122,466			533,398,158			527,261,384			540,926,361
Per common share information:
Basic earnings		$0.56			$0.40			$1.43			$1.14
Diluted earnings	0.56			0.40			1.42			1.13
Dividends declared and paid	0.12			0.10			0.34			0.30

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Net income		$297			$220			$763			$619
Other comprehensive income (loss):
Net unrealized derivative instrument (losses) gains arising during the periods, net of income taxes of $0, $30, $29 and $66, respectively	(1		)	48			45			108
Reclassification adjustment for net derivative gains included in net income, net of income taxes of ($4), ($3), ($14) and ($5), respectively	(6		)	(4		)	(23		)	(8		)
Net unrealized securities available for sale (losses) gains arising during the periods, net of income taxes of ($17), $37, $114 and $25, respectively	(28		)	61			190			41
Other-than-temporary impairment not recognized in earnings on securities, net of income taxes of $2, ($4), ($11) and ($15), respectively	3			(8		)	(18		)	(26		)
Reclassification of net securities losses (gains) to net income, net of income taxes of $1, $0, ($1) and ($5), respectively	2			—			(1		)	(9		)
Defined benefit pension plans:
Amortization of actuarial loss, net of income taxes of $2, $0, $5 and $3, respectively	2			3			7			7
Total other comprehensive (loss) income, net of income taxes	(28		)	100			200			113
Total comprehensive income		$269			$320			$963			$732

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)



	Preferred Stock			Common Stock				Additional Paid-in Capital		Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Income (Loss)	Total
(in millions)	Shares	Amount		Shares		Amount		Additional Paid-in Capital		Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Income (Loss)	Total
Balance at January 1, 2015	—		$—	546			$6		$18,676		$1,294			($336	)	($372)		$19,268
Dividends to common stockholders	—	—		—		—		—		(161		)	—			—	(161		)
Dividends to preferred stockholders	—	—		—		—		—		(7		)	—			—	(7		)
Issuance of preferred stock	—	247		—		—		—		—			—			—	247
Treasury stock purchased	—	—		(20	)	—		—		—			(500		)	—	(500		)
Share-based compensation plans	—	—		2		—		35		—			(21		)	—	14
Employee stock purchase plan shares purchased	—	—		—		—		7		—			—			—	7
Total comprehensive income:
Net income	—	—		—		—		—		619			—			—	619
Other comprehensive income	—	—		—		—		—		—			—			113	113
Total comprehensive income	—	—		—		—		—		619			—			113	732
Balance at September 30, 2015	—		$247	528			$6		$18,718		$1,745			($857	)	($259)		$19,600

Balance at January 1, 2016	—		$247	528			$6		$18,725		$1,913			($858	)	($387)		$19,646
Dividends to common stockholders	—	—		—		—		—		(179		)	—			—	(179		)
Dividends to preferred stockholders	—	—		—		—		—		(14		)	—			—	(14		)
Treasury stock purchased	—	—		(11	)	—		—		—			(250		)	—	(250		)
Share-based compensation plans	—	—		1		—		8		—			—			—	8
Employee stock purchase plan shares purchased	—	—		—		—		7		—			—			—	7
Total comprehensive income:
Net income	—	—		—		—		—		763			—			—	763
Other comprehensive income	—	—		—		—		—		—						200	200
Total comprehensive income	—	—		—		—		—		763			—			200	963
Balance at September 30, 2016	—		$247	518			$6		$18,740		$2,483			($1,108	)	($187)		$20,181

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

CITIZENS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Nine Months Ended September 30,
(in millions)	2016			2015
OPERATING ACTIVITIES
Net income		$763			$619
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	267			211
Originations of mortgage loans held for sale	(1,904		)	(1,836		)
Proceeds from sales of mortgage loans held for sale	1,775			1,780
Purchases of commercial loans held for sale	(1,053		)	(887		)
Proceeds from sales of commercial loans held for sale	1,040			826
Amortization of terminated cash flow hedges	6			13
Depreciation, amortization and accretion	387			350
Mortgage servicing rights valuation charge-off (recovery)	6			(6		)
Securities impairment	11			5
Deferred income taxes	143			76
Share-based compensation	15			22
Net gain on sales of:
Debt securities	(13		)	(19		)
Marketable equity securities available for sale	—			(3		)
Premises and equipment	(2		)	(9		)
Increase in other assets	(305		)	(306		)
Increase (decrease) in other liabilities	62			(5		)
Net cash provided by operating activities	1,198			831
INVESTING ACTIVITIES
Investment securities:
Purchases of securities available for sale	(4,774		)	(5,418		)
Proceeds from maturities and paydowns of securities available for sale	2,658			2,660
Proceeds from sales of securities available for sale	785			3,180
Purchases of securities held to maturity	(523		)	(811		)
Proceeds from maturities and paydowns of securities held to maturity	503			610
Proceeds from sales of securities held to maturity	—			73
Purchases of other investment securities, at fair value	(204		)	(109		)
Proceeds from sales of other investment securities, at fair value	161			92
Purchases of other investment securities, at cost	(84		)	(33		)
Proceeds from sales of other investment securities, at cost	70			78
Net (increase) decrease in interest-bearing deposits in banks	(364		)	7
Net increase in loans and leases	(6,724		)	(4,315		)
Net increase in bank-owned life insurance	(36		)	(26		)
Premises and equipment:
Purchases	(44		)	(54		)
Proceeds from sales	3			12
Capitalization of software	(126		)	(142		)
Net cash used in investing activities	(8,699		)	(4,196		)
FINANCING ACTIVITIES
Net increase in deposits	5,788			6,159
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	98			(2,983		)
Net decrease in other short-term borrowed funds	(1,635		)	(1,152		)
Proceeds from issuance of long-term borrowed funds	9,644			250
Repayments of long-term borrowed funds	(6,128		)	(8		)
Treasury stock purchased	(250		)	(500		)
Net proceeds from issuance of preferred stock	—			247
Dividends declared and paid to common stockholders	(179		)	(161		)
Dividends declared and paid to preferred stockholders	(7		)	(7		)
Net cash provided by financing activities	7,331			1,845
Decrease in cash and cash equivalents	(170		)	(1,520		)
Cash and cash equivalents at beginning of period	3,085			3,276
Cash and cash equivalents at end of period		$2,915			$1,756

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

Basis of Presentation

The unaudited interim Consolidated Financial Statements, including the Notes thereto of Citizens Financial Group, Inc., have been prepared in accordance with GAAP interim reporting requirements, and therefore do not include all information and Notes included in the audited Consolidated Financial Statements in conformity with GAAP. These unaudited interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying Notes included in the Company’s Form 10-K for the year ended December 31, 2015. The Company’s principal business activity is banking, conducted through its subsidiaries, Citizens Bank, N.A. and Citizens Bank of Pennsylvania.

The unaudited interim Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on net income, total comprehensive income, total assets or total stockholders’ equity as previously reported.

Recent Accounting Pronouncements

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” The ASU provides guidance on classifying specific cash flows in the Statement of Cash Flows, including cash flows resulting from debt prepayment or debt extinguishment costs, the settlement of zero-coupon debt instruments (and other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing), payments on a transferor’s beneficial interests in securitized trade receivables, and other specified sources. The ASU is effective for the Company beginning on January 1, 2018. Adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” Under current GAAP, the Company reflects credit losses on financial assets measured on an amortized cost basis only when the losses are probable or have been incurred. The ASU replaces this approach with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when the assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. The ASU also revises the approach to recognizing credit losses on securities available for sale by allowing entities to record reversals of credit losses in current-period earnings. The ASU is effective for the Company beginning on January 1, 2020. The Company is currently assessing the impact of this guidance on the Company’s Consolidated Financial Statements.

In May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients.” The ASU supplements the new revenue recognition standard issued in 2014 by addressing certain issues in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s Consolidated Financial Statements.

In April 2016, the FASB issued ASU No. 2016-10 “Identifying Performance Obligations and Licensing.” The ASU supplements the new revenue recognition standard issued in 2014 by clarifying the guidance related to licensing and the identification of performance obligations. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting.” The ASU modifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for the Company beginning on January 1, 2017. Adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The ASU supplements the new revenue recognition standard issued in 2014 by clarifying the implementation guidance on principal versus agent considerations. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-05 “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The ASU clarifies that a change in a counterparty to a derivative instrument that has been designated as a hedging instrument, in and of itself, does not result in a hedge de-designation under ASC 815. The ASU is effective for the

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Company beginning on January 1, 2017. Adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The ASU generally requires lessees to recognize a right-of use asset and corresponding lease liability for all leases with a lease term of greater than one year. The ASU is effective for the Company beginning on January 1, 2019. The Company is currently assessing the impact of this guidance on the Company’s Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities.” The ASU requires equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in the fair value recognized through net income. The ASU also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements. In addition, the ASU makes several other targeted amendments to the existing accounting and disclosure requirements for financial instruments, including revised guidance related to valuation allowance assessments when recognizing deferred tax assets on unrealized losses on debt securities available for sale. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s Consolidated Financial Statements.

NOTE 2 - SECURITIES

The following table presents the major components of securities at amortized cost and fair value:



	September 30, 2016									December 31, 2015
(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Treasury and other		$15		$—		$—			$15		$16		$—		$—			$16
State and political subdivisions	8		—		—			8		9		—		—			9
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	18,606		362		(12		)	18,956		17,234		153		(67		)	17,320
Other/non-agency	456		2		(29		)	429		555		4		(37		)	522
Total mortgage-backed securities	19,062		364		(41		)	19,385		17,789		157		(104		)	17,842
Total debt securities available for sale	19,085		364		(41		)	19,408		17,814		157		(104		)	17,867
Marketable equity securities	5		—		—			5		5		—		—			5
Other equity securities	12		—		—			12		12		—		—			12
Total equity securities available for sale	17		—		—			17		17		—		—			17
Total securities available for sale		$19,102		$364		($41	)		$19,425		$17,831		$157		($104	)		$17,884
Securities Held to Maturity
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities		$4,279		$102		($1	)		$4,380		$4,105		$27		($11	)		$4,121
Other/non-agency	1,010		41		—			1,051		1,153		23		—			1,176
Total securities held to maturity		$5,289		$143		($1	)		$5,431		$5,258		$50		($11	)		$5,297
Other Investment Securities, at Fair Value
Money market mutual fund		$108		$—		$—			$108		$65		$—		$—			$65
Other investments	5		—		—			5		5		—		—			5
Total other investment securities, at fair value		$113		$—		$—			$113		$70		$—		$—			$70
Other Investment Securities, at Cost
Federal Reserve Bank stock		$463		$—		$—			$463		$468		$—		$—			$468
Federal Home Loan Bank stock	414		—		—			414		395		—		—			395
Total other investment securities, at cost		$877		$—		$—			$877		$863		$—		$—			$863

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company has reviewed its securities portfolio for other-than-temporary impairments. The following table presents the net securities impairment losses recognized in earnings:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Other-than-temporary impairment:
Total other-than-temporary impairment losses		$2			($14	)		($40	)		($46	)
Portions of loss recognized in other comprehensive income (before taxes)	(5		)	12			29			41
Net securities impairment losses recognized in earnings		($3	)		($2	)		($11	)		($5	)

The following tables present securities whose fair values are below carrying values, segregated by those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer:



	September 30, 2016
	Less than 12 Months						12 Months or Longer						Total
(dollars in millions)	Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	17		$645		($2	)	29		$704		($11	)	46		$1,349		($13	)
Other/non-agency	4	9		—			20	317		(29		)	24	326		(29		)
Total mortgage-backed securities	21	654		(2		)	49	1,021		(40		)	70	1,675		(42		)
Total	21		$654		($2	)	49		$1,021		($40	)	70		$1,675		($42	)



	December 31, 2015
	Less than 12 Months						12 Months or Longer						Total
(dollars in millions)	Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses			Number of Issues	Fair Value		Gross Unrealized Losses
State and political subdivisions	1		$9		$—		—		$—		$—		1		$9		$—
U.S. Treasury and other	1	15		—			—	—		—			1	15		—
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	162	7,423		(51		)	36	819		(27		)	198	8,242		(78		)
Other/non-agency	2	9		—			20	361		(37		)	22	370		(37		)
Total mortgage-backed securities	164	7,432		(51		)	56	1,180		(64		)	220	8,612		(115		)
Total	166		$7,456		($51	)	56		$1,180		($64	)	222		$8,636		($115	)

For each debt security identified with an unrealized loss, the Company reviews the expected cash flows to determine if the impairment in value is temporary or other-than-temporary. If the Company determines that the present value of the debt security’s expected cash flows is less than its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. The amount of impairment loss recognized in current period earnings is dependent on the Company’s intent to sell (or not sell) the debt security.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

If the Company intends to sell the impaired debt security, the impairment loss recognized in current period earnings equals the difference between the debt security’s fair value and its amortized cost. If the Company does not intend to sell the impaired debt security, and it is not more likely than not that the Company will be required to sell the impaired security, the credit-related impairment loss is recognized in current period earnings and equals the difference between the amortized cost of the debt security and the present value of the expected future cash flows.

In addition to these cash flow projections, several other characteristics of each debt security are reviewed when determining whether a credit loss exists and the period over which the debt security is expected to recover. These characteristics include: (1) the type of investment, (2) various market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), (3) the length and severity of impairment, and (4) the public credit rating of the instrument.

The Company estimates the portion of loss attributable to credit using a collateral loss model and an integrated cash flow engine. The model calculates prepayment, default, and loss severity assumptions using collateral performance data. These assumptions are used to produce cash flows that generate loss projections. These loss projections are reviewed on a quarterly basis by a cross-functional governance committee to determine whether security impairments are other-than-temporary.

The following table presents the cumulative credit-related losses recognized in earnings on debt securities held by the Company:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Cumulative balance at beginning of period		$73			$62			$66			$62
Credit impairments recognized in earnings on securities that have been previously impaired	3			2			11			5
Reductions due to increases in cash flow expectations on impaired securities	(1		)	(1		)	(2		)	(4		)
Cumulative balance at end of period		$75			$63			$75			$63

Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of September 30, 2016 and 2015 were $75 million and $63 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of September 30, 2016 and 2015.

For the three months ended September 30, 2016 and 2015, the Company recognized credit related other-than-temporary-impairment losses in earnings of $3 million and $2 million respectively, related to non-agency MBS in the AFS portfolio.

For the nine months ended September 30, 2016 and 2015, the Company recognized credit related other-than-temporary impairment losses in earnings of $11 million and $5 million, respectively. Other-than-temporary impairment losses for the nine months ended September 30, 2016 reflect a $5 million increase from September 30, 2015 related to a one-time adjustment tied to a new model implementation. This adjustment was the result of the Company migrating in June 2016 from a proprietary internal process to a vendor-based model to estimate other-than-temporary impairment. There were no credit impaired debt securities sold during the three and nine months ended September 30, 2016 and 2015. Reductions in credit losses due to increases in cash flow expectations were $1 million for the three months ended September 30, 2016 and 2015, and $2 million and $4 million for the nine months ended September 30, 2016 and 2015, respectively, and were presented in interest income from investment securities on the Consolidated Statements of Operations. The Company does not currently have the intent to sell these debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases.

The Company has determined that credit losses are not expected to be incurred on the remaining agency and non-agency MBS identified with unrealized losses as of the current reporting date. The unrealized losses on these debt securities reflect the reduced liquidity in the MBS market and increased risk spreads due to the uncertainty of the U.S. macroeconomic environment. Therefore, the Company has determined that these debt securities are not other-than-temporarily impaired because the Company does not currently have the intent to sell these debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases. Any subsequent increases in the valuation of impaired debt securities do not impact their recorded cost bases. Additionally, $29 million and $41 million of pre-tax non-credit related losses were deferred in OCI for the nine months ended September 30, 2016 and 2015, respectively.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The amortized cost and fair value of debt securities by contractual maturity are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.



	September 30, 2016
	Distribution of Maturities
(in millions)	1 Year or Less		1-5 Years		5-10 Years		After 10 Years		Total
Amortized Cost:
Debt securities available for sale
U.S. Treasury and other		$15		$—		$—		$—		$15
State and political subdivisions	—		—		—		8		8
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	10		32		1,546		17,018		18,606
Other/non-agency	—		40		3		413		456
Total debt securities available for sale	25		72		1,549		17,439		19,085
Debt securities held to maturity
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		4,279		4,279
Other/non-agency	—		—		—		1,010		1,010
Total debt securities held to maturity	—		—		—		5,289		5,289
Total amortized cost of debt securities		$25		$72		$1,549		$22,728		$24,374

Fair Value:
Debt securities available for sale
U.S. Treasury and other		$15		$—		$—		$—		$15
State and political subdivisions	—		—		—		8		8
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	10		33		1,585		17,328		18,956
Other/non-agency	—		41		3		385		429
Total debt securities available for sale	25		74		1,588		17,721		19,408
Debt securities held to maturity
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		4,380		4,380
Other/non-agency	—		—		—		1,051		1,051
Total debt securities held to maturity	—		—		—		5,431		5,431
Total fair value of debt securities		$25		$74		$1,588		$23,152		$24,839

Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $146 million and $154 million for the three months ended September 30, 2016 and 2015, respectively, and was $432 million and $468 million for the nine months ended September 30, 2016 and 2015, respectively.

Realized gains and losses on securities are presented below:



	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions)	2016		2015			2016		2015
Gains on sale of debt securities		$—		$7			$13		$29
Losses on sale of debt securities	—		(7		)	—		(12		)
Debt securities gains, net		$—		$—			$13		$17
Equity securities gains		$—		$—			$—		$3

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In advance of the Volcker Rule effective date, during the three months ended September 30, 2015, the Company sold a $73 million mortgage-backed security that was classified as HTM that would have been prohibited under the Volcker Rule beginning in July 2017. Upon completion of the sale, the Company recognized a $2 million gain.

The amortized cost and fair value of securities pledged are presented below:



	September 30, 2016				December 31, 2015
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Pledged against repurchase agreements		$795		$808		$805		$808
Pledged against FHLB borrowed funds	1,018		1,060		1,163		1,186
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law	3,247		3,329		3,579		3,610

The Company regularly enters into security repurchase agreements with unrelated counterparties. Repurchase agreements are financial transactions that involve the transfer of a security from one party to another and a subsequent transfer of the same (or “substantially the same”) security back to the original party. The Company’s repurchase agreements are typically short-term transactions, but they may be extended to longer terms to maturity. Such transactions are accounted for as secured borrowed funds on the Company’s Consolidated Balance Sheets. When permitted by GAAP, the Company offsets short-term receivables associated with its reverse repurchase agreements against short-term payables associated with its repurchase agreements.

The impact of this offsetting on the Consolidated Balance Sheets is presented in the following table:



	September 30, 2016						December 31, 2015
(in millions)	Gross Assets (Liabilities)		Gross Assets (Liabilities) Offset		Net Amounts of Assets (Liabilities)		Gross Assets (Liabilities)			Gross Assets (Liabilities) Offset			Net Amounts of Assets (Liabilities)
Securities purchased under agreements to resell		$—		$—		$—		$500			($500	)		$—
Securities sold under agreements to repurchase	—		—		—		(500		)	500			—

Note: The Company also offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 11 “Derivatives.”

There were $16 million and $21 million in securitizations of mortgage loans retained in the investment portfolio for the three and nine months ended September 30, 2016 and none in 2015. These securitizations included a substantive guarantee by a third party. In 2016, the guarantors were Fannie Mae and Ginnie Mae. These securitizations were accounted for as a sale of the transferred loans and as a purchase of securities. The securities received from the guarantors are classified as AFS.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 - LOANS AND LEASES

The Company’s loans and leases are disclosed in portfolio segments and classes. The Company’s 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, student, credit cards and other retail. The Company’s SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others, which the Company now services a portion of internally. A summary of the loans and leases portfolio follows:



(in millions)	September 30, 2016		December 31, 2015
Commercial		$36,449		$33,264
Commercial real estate	10,152		8,971
Leases	3,788		3,979
Total commercial	50,389		46,214
Residential mortgages	14,602		13,318
Home equity loans	2,027		2,557
Home equity lines of credit	14,271		14,674
Home equity loans serviced by others	796		986
Home equity lines of credit serviced by others	238		389
Automobile	14,063		13,828
Student	5,997		4,359
Credit cards	1,644		1,634
Other retail	1,440		1,083
Total retail	55,078		52,828
Total loans and leases ^{(1) (2)}		$105,467		$99,042

⁽¹⁾ Excluded from the table above are loans held for sale totaling $526 million and $365 million as of September 30, 2016 and December 31, 2015, respectively.

⁽²⁾Mortgage loans serviced for others by the Company’s subsidiaries are not included above and amounted to $17.4 billion and $17.6 billion at September 30, 2016 and December 31, 2015, respectively.

During the three months ended September 30, 2016, the Company purchased $222 million of residential mortgages, $200 million of automobile loans and $126 million of student loans. During the three months ended September 30, 2015, the Company purchased $252 million of residential mortgages, $326 million of automobile loans and $152 million of student loans.

During the nine months ended September 30, 2016, the Company purchased $405 million of residential mortgages, $534 million of automobile loans and $843 million of student loans. During the nine months ended September 30, 2015, the Company purchased $887 million of residential mortgages, $1.1 billion of automobile loans and $615 million of student loans.

During the three and nine months ended September 30, 2016, the Company sold $310 million of TDRs, including $255 million of residential mortgages and $55 million of home equity loans, which resulted in a pre-tax gain of $72 million reported in other income on the Consolidated Statements of Operations.

Additionally, during the three months ended September 30, 2016, the Company sold $163 million of residential mortgage loans and $14 million of commercial loans. During the three months ended September 30, 2015, the Company sold $41 million of credit card balances associated with a terminated agent servicing agreement and $100 million of commercial loans.

During the nine months ended September 30, 2016, the Company also sold $444 million of residential mortgage loans and $132 million of commercial loans. During the nine months ended September 30, 2015, the Company sold $273 million of residential mortgage loans, $41 million of credit card balances and $325 million of commercial loans.

Loans held for sale at fair value totaled $526 million and $325 million at September 30, 2016 and December 31, 2015, respectively, and consisted of residential mortgages originated for sale of $456 million and loans in commercial trading portfolio of $70 million as of September 30, 2016. As of December 31, 2015, residential mortgages originated for sale were $268 million and loans in commercial trading portfolio totaled $57 million. Following the TDR sale described above, there were no other loans held for sale, at lower of cost or market value, as of September 30, 2016. As of December 31, 2015, there were $40 million of other loans held for sale, which consisted of commercial loan syndications.

Loans pledged as collateral for FHLB borrowed funds totaled $23.2 billion at September 30, 2016 and December 31, 2015. This collateral consists primarily of residential mortgages and home equity loans. Loans pledged as collateral to support

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

the contingent ability to borrow at the FRB discount window, if necessary, totaled $16.9 billion and $15.9 billion at September 30, 2016 and December 31, 2015, respectively.

NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK

The allowance for credit losses consists of the ALLL and the reserve for unfunded commitments. It is increased through a provision for credit losses that is charged to earnings, based on the Company’s quarterly evaluation of the loan portfolio, and is reduced by net charge-offs and the ALLL associated with sold loans. See Note 1 “Significant Accounting Policies” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015, for a detailed discussion of ALLL reserve methodologies and estimation techniques.

On a quarterly basis, the Company reviews and refines its estimate of the allowance for credit losses, taking into consideration changes in portfolio size and composition, historical loss experience, internal risk ratings, current economic conditions, industry performance trends and other pertinent information.

There were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and the reserve for unfunded lending commitments. However, as part of the annual review of loss emergence periods, the incurred loss periods for retail property secured loans were extended.

A summary of changes in the allowance for credit losses is presented below:



	Three Months Ended September 30, 2016									Nine Months Ended September 30, 2016
(in millions)	Commercial			Retail			Total			Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$676			$570			$1,246			$596			$620			$1,216
Charge-offs	(33		)	(112		)	(145		)	(53		)	(331		)	(384		)
Recoveries	14			48			62			23			130			153
Net charge-offs	(19		)	(64		)	(83		)	(30		)	(201		)	(231		)
Provision charged to income	(2		)	79			77			89			166			255
Allowance for loan and lease losses, end of period	655			585			1,240			655			585			1,240
Reserve for unfunded lending commitments, beginning of period	61			—			61			58			—			58
Credit for unfunded lending commitments	9			—			9			12			—			12
Reserve for unfunded lending commitments as of period end	70			—			70			70			—			70
Total allowance for credit losses as of period end		$725			$585			$1,310			$725			$585			$1,310



	Three Months Ended September 30, 2015									Nine Months Ended September 30, 2015
(in millions)	Commercial			Retail			Total			Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$565			$636			$1,201			$544			$651			$1,195
Charge-offs	(11		)	(109		)	(120		)	(32		)	(324		)	(356		)
Recoveries	6			39			45			42			107			149
Net (charge-offs) recoveries	(5		)	(70		)	(75		)	10			(217		)	(207		)
Sales/Other	—			2			2			—			—			—
Provision charged to income	15			58			73			21			192			213
Allowance for loan and lease losses, end of period	575			626			1,201			575			626			1,201
Reserve for unfunded lending commitments, beginning of period	56			—			56			61			—			61
Provision for unfunded lending commitments	3			—			3			(2		)	—			(2		)
Reserve for unfunded lending commitments as of period end	59			—			59			59			—			59
Total allowance for credit losses as of period end		$634			$626			$1,260			$634			$626			$1,260

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The recorded investment in loans and leases based on the Company’s evaluation methodology is presented below:



	September 30, 2016						December 31, 2015
(in millions)	Commercial		Retail		Total		Commercial		Retail		Total
Individually evaluated		$438		$812		$1,250		$218		$1,165		$1,383
Formula-based evaluation	49,951		54,266		104,217		45,996		51,663		97,659
Total		$50,389		$55,078		$105,467		$46,214		$52,828		$99,042

A summary of the allowance for credit losses by evaluation method is presented below:



	September 30, 2016						December 31, 2015
(in millions)	Commercial		Retail		Total		Commercial		Retail		Total
Individually evaluated		$55		$78		$133		$36		$101		$137
Formula-based evaluation	670		507		1,177		618		519		1,137
Allowance for credit losses		$725		$585		$1,310		$654		$620		$1,274

For commercial loans and leases, the Company utilizes regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that the Company believes 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 indicates 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 the Company’s 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. For retail loans, the Company primarily uses the loan’s payment and delinquency status to monitor credit quality. The further a loan is past due, the greater the likelihood of future credit loss. These credit quality indicators for both commercial and retail loans are continually updated and monitored.

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



	September 30, 2016
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$34,245		$883		$1,138		$183		$36,449
Commercial real estate	9,646		355		89		62		10,152
Leases	3,608		53		122		5		3,788
Total		$47,499		$1,291		$1,349		$250		$50,389



	December 31, 2015
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$31,276		$911		$1,002		$75		$33,264
Commercial real estate	8,450		272		171		78		8,971
Leases	3,880		55		44		—		3,979
Total		$43,606		$1,238		$1,217		$153		$46,214

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The recorded investment in classes of retail loans, categorized by delinquency status is presented below:



	September 30, 2016
			Days Past Due
(in millions)	Current		1-29		30-59		60-89		90 or More		Total
Residential mortgages		$14,314		$102		$32		$17		$137		$14,602
Home equity loans	1,803		119		17		8		80		2,027
Home equity lines of credit	13,638		367		44		22		200		14,271
Home equity loans serviced by others	718		45		11		5		17		796
Home equity lines of credit serviced by others	168		25		3		3		39		238
Automobile	12,911		945		129		31		47		14,063
Student	5,804		115		22		11		45		5,997
Credit cards	1,563		46		11		8		16		1,644
Other retail	1,385		40		7		3		5		1,440
Total		$52,304		$1,804		$276		$108		$586		$55,078



	December 31, 2015
			Days Past Due
(in millions)	Current		1-29		30-59		60-89		90 or More		Total
Residential mortgages		$12,905		$97		$54		$16		$246		$13,318
Home equity loans	2,245		164		32		12		104		2,557
Home equity lines of credit	13,982		407		60		20		205		14,674
Home equity loans serviced by others	886		60		14		6		20		986
Home equity lines of credit serviced by others	296		48		10		6		29		389
Automobile	12,670		964		127		32		35		13,828
Student	4,175		113		19		11		41		4,359
Credit cards	1,554		44		11		9		16		1,634
Other retail	1,013		53		8		4		5		1,083
Total		$49,726		$1,950		$335		$116		$701		$52,828

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Nonperforming Assets

The following table presents nonperforming loans and leases and loans accruing and 90 days or more past due:



	Nonperforming ⁽¹⁾				Accruing and 90 days or more past due
(in millions)	September 30, 2016		December 31, 2015		September 30, 2016		December 31, 2015
Commercial		$334		$71		$1		$1
Commercial real estate	62		77		—		—
Leases	—		—		—		—
Total commercial	396		148		1		1
Residential mortgages^{(2) (3)}	170		331		16		—
Home equity loans	105		135		—		—
Home equity lines of credit	249		272		—		—
Home equity loans serviced by others	32		38		—		—
Home equity lines of credit serviced by others	42		32		—		—
Automobile	55		42		—		—
Student	38		41		6		6
Credit card	16		16		—		—
Other retail	4		5		1		2
Total retail	711		912		23		8
Total		$1,107		$1,060		$24		$9

⁽¹⁾ Effective March 31, 2016, the Company began excluding loans 90 days or more past due and still accruing from nonperforming loans and leases. Nonperforming loans and leases as of December 31, 2015 included loans and leases on nonaccrual of $1.051 billion and loans and leases accruing and 90 days or more past due of $9 million.

⁽²⁾ Effective March 31, 2016, the Company began excluding first lien residential mortgage loans that are 100% guaranteed by the Federal Housing Administration from nonperforming balances. As of September 30, 2016, $16 million of these loans were accruing and 90 days or more past due.

⁽³⁾Effective March 31, 2016, the Company began excluding guaranteed residential mortgage loans sold to GNMA for which the Company had the right, but not the obligation, to repurchase from nonperforming balances. As of September 30, 2016 these loans totaled $32 million. These loans are consolidated on the Company’s Consolidated Balance Sheets.

Other nonperforming assets consist primarily of other real estate owned and are presented in other assets on the Consolidated Balance Sheets. A summary of other nonperforming assets is presented below:



(in millions)	September 30, 2016		December 31, 2015
Other nonperforming assets, net of valuation allowance:
Commercial		$—		$1
Retail	49		45
Other nonperforming assets, net of valuation allowance		$49		$46

A summary of key performance indicators is presented below:



	September 30, 2016		December 31, 2015
Nonperforming commercial loans and leases as a percentage of total loans and leases ⁽¹⁾	0.38	%	0.15	%
Nonperforming retail loans as a percentage of total loans and leases ⁽¹⁾	0.67		0.92
Total nonperforming loans and leases as a percentage of total loans and leases ⁽¹⁾	1.05	%	1.07	%

Nonperforming commercial assets as a percentage of total assets ⁽¹⁾	0.27	%	0.11	%
Nonperforming retail assets as a percentage of total assets ⁽¹⁾	0.52		0.69
Total nonperforming assets as a percentage of total assets ⁽¹⁾	0.79	%	0.80	%

⁽¹⁾December 31, 2015 ratios included loans accruing and 90 days or more past due of $1 million and $8 million for commercial and retail, respectively.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The recorded investment in mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings are in process was $198 million and $257 million as of September 30, 2016 and December 31, 2015, respectively.

An analysis of the age of both accruing and nonaccruing loan and lease past due amounts is presented below:



	September 30, 2016								December 31, 2015
	Days Past Due								Days Past Due
(in millions)	30-59		60-89		90 or More		Total		30-59		60-89		90 or More		Total
Commercial		$24		$9		$335		$368		$9		$4		$71		$84
Commercial real estate	1		1		62		64		30		3		77		110
Leases	14		—		—		14		9		1		—		10
Total commercial	39		10		397		446		48		8		148		204
Residential mortgages	32		17		137		186		54		16		246		316
Home equity loans	17		8		80		105		32		12		104		148
Home equity lines of credit	44		22		200		266		60		20		205		285
Home equity loans serviced by others	11		5		17		33		14		6		20		40
Home equity lines of credit serviced by others	3		3		39		45		10		6		29		45
Automobile	129		31		47		207		127		32		35		194
Student	22		11		45		78		19		11		41		71
Credit cards	11		8		16		35		11		9		16		36
Other retail	7		3		5		15		8		4		5		17
Total retail	276		108		586		970		335		116		701		1,152
Total		$315		$118		$983		$1,416		$383		$124		$849		$1,356

Impaired loans include nonaccruing larger balance commercial loans (greater than $3 million carrying value) and commercial and retail TDRs (excluding loans held for sale). A summary of impaired loans by class is presented below:



	September 30, 2016
(in millions)	Impaired Loans With a Related Allowance		Allowance on Impaired Loans		Impaired Loans Without a Related Allowance		Unpaid Contractual Balance		Total Recorded Investment in Impaired Loans
Commercial		$256		$46		$137		$439		$393
Commercial real estate	45		9		—		45		45
Total commercial	301		55		137		484		438
Residential mortgages	43		4		132		229		175
Home equity loans	53		6		99		193		152
Home equity lines of credit	26		3		171		241		197
Home equity loans serviced by others	43		7		21		74		64
Home equity lines of credit serviced by others	2		—		7		13		9
Automobile	4		1		14		23		18
Student	158		44		1		159		159
Credit cards	26		10		—		26		26
Other retail	10		3		2		13		12
Total retail	365		78		447		971		812
Total		$666		$133		$584		$1,455		$1,250

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	December 31, 2015
(in millions)	Impaired Loans With a Related Allowance		Allowance on Impaired Loans		Impaired Loans Without a Related Allowance		Unpaid Contractual Balance		Total Recorded Investment in Impaired Loans
Commercial		$92		$23		$58		$144		$150
Commercial real estate	56		13		12		70		68
Total commercial	148		36		70		214		218
Residential mortgages	121		16		320		608		441
Home equity loans	85		11		139		283		224
Home equity lines of credit	27		2		167		234		194
Home equity loans serviced by others	50		8		24		88		74
Home equity lines of credit serviced by others	3		1		7		14		10
Automobile	3		—		11		19		14
Student	163		48		2		165		165
Credit cards	28		11		—		28		28
Other retail	13		4		2		18		15
Total retail	493		101		672		1,457		1,165
Total		$641		$137		$742		$1,671		$1,383

Additional information on impaired loans is presented below:



	Three Months Ended September 30,
	2016				2015
(in millions)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Commercial		$1		$340		$1		$126
Commercial real estate	—		40		—		35
Total commercial	1		380		1		161
Residential mortgages	1		169		4		428
Home equity loans	2		153		2		277
Home equity lines of credit	2		192		1		142
Home equity loans serviced by others	1		64		1		79
Home equity lines of credit serviced by others	—		9		—		10
Automobile	—		17		—		12
Student	1		159		1		165
Credit cards	—		25		—		29
Other retail	1		12		1		17
Total retail	8		800		10		1,159
Total		$9		$1,180		$11		$1,320

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Nine Months Ended September 30,
	2016				2015
(in millions)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Commercial		$4		$277		$2		$133
Commercial real estate	—		53		1		45
Total commercial	4		330		3		178
Residential mortgages	3		161		12		423
Home equity loans	5		151		7		263
Home equity lines of credit	5		182		3		140
Home equity loans serviced by others	3		64		3		80
Home equity lines of credit serviced by others	—		9		—		9
Automobile	—		14		—		11
Student	5		157		5		160
Credit cards	1		25		1		28
Other retail	1		13		1		18
Total retail	23		776		32		1,132
Total		$27		$1,106		$35		$1,310

Troubled Debt Restructurings

A loan modification is identified as a TDR when the Company or a bankruptcy court grants the borrower a concession the Company would not otherwise make in response to the borrower’s financial difficulties. TDRs typically result from the Company’s loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. The Company’s loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower’s financial needs. Concessions granted in TDRs for all classes of loans may include lowering the interest rate, forgiving a portion of principal, extending the loan term, lowering scheduled payments for a specified period of time, principal forgiveness, or capitalizing past due amounts. A rate increase can be a concession if the increased rate is lower than a market rate for debt with risk similar to that of the restructured loan. TDRs for commercial loans and leases may also involve creating a multiple note structure, accepting non-cash assets, accepting an equity interest, or receiving a performance-based fee. In some cases, a TDR may involve multiple concessions. The financial effects of TDRs for all loan classes may include lower income (either due to a lower interest rate or a delay in the timing of cash flows), larger loan loss provisions, and accelerated charge-offs if the modification renders the loan collateral-dependent. In some cases, interest income throughout the term of the loan may increase if, for example, the loan is extended or the interest rate is increased as a result of the restructuring.

Because TDRs are impaired loans, the Company measures impairment by comparing the present value of expected future cash flows, or when appropriate, the fair value of collateral less costs to sell, to the loan’s recorded investment. Any excess of recorded investment over the present value of expected future cash flows or collateral value is in the ALLL. Any portion of the loan’s recorded investment the Company does not expect to collect as a result of the modification is charged off at the time of modification. For Retail TDR accounts where the expected value of cash flows is utilized, any recorded investment in excess of the present value of expected cash flows is recognized by creating or increasing the ALLL. For Retail TDR accounts assessed based on the fair value of collateral, any portion of the loan’s recorded investment in excess of the collateral value is charged off at the time of modification or at the time of subsequent and regularly recurring valuations.

Commercial TDRs were $135 million at September 30, 2016 and $155 million at December 31, 2015. Retail TDRs totaled $812 million at September 30, 2016 and $1.2 billion at December 31, 2015, down primarily due to the previously mentioned TDR sale. Commitments to lend additional funds to debtors owing receivables which were TDRs were $49 million and $15 million at September 30, 2016 and December 31, 2015, respectively.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below summarizes how loans were modified during the three months ended September 30, 2016, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances can include loans that became TDRs during 2016 and were paid off in full, charged off, or sold prior to September 30, 2016.



	Primary Modification Types
	Interest Rate Reduction ⁽¹⁾					Maturity Extension ⁽²⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial	3		$—		$—	8		$1		$1
Commercial real estate	—	—		—		—	—		—
Total commercial	3	—		—		8	1		1
Residential mortgages	28	3		3		33	6		5
Home equity loans	36	2		2		2	—		1
Home equity lines of credit	20	1		2		56	6		6
Home equity loans serviced by others	7	1		1		—	—		—
Home equity lines of credit serviced by others	2	—		—		1	—		—
Automobile	26	1		1		6	—		—
Student	—	—		—		—	—		—
Credit cards	544	3		3		—	—		—
Other retail	2	—		—		—	—		—
Total retail	665	11		12		98	12		12
Total	668		$11		$12	106		$13		$13



	Primary Modification Types
	Other ⁽³⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Net Change to ALLL Resulting from Modification		Charge-offs Resulting from Modification
Commercial	4		$6		$5		$4		$—
Commercial real estate	—	—		—		—		—
Total commercial	4	6		5		4		—
Residential mortgages	55	5		5		—		—
Home equity loans	52	3		3		—		—
Home equity lines of credit	94	8		7		—		1
Home equity loans serviced by others	17	1		1		—		—
Home equity lines of credit serviced by others	6	—		1		—		—
Automobile	264	5		5		—		—
Student	108	2		2		1		—
Credit cards	—	—		—		1		—
Other retail	3	—		—		—		—
Total retail	599	24		24		2		1
Total	603		$30		$29		$6		$1

⁽¹⁾ Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.

⁽²⁾ Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).

⁽³⁾ Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forgiveness, capitalizing arrearages, and principal forgiveness. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below summarizes how loans were modified during the three months ended September 30, 2015, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances can include loans that became TDRs during 2015 and were paid off in full, charged off, or sold prior to September 30, 2015.



	Primary Modification Types
	Interest Rate Reduction ⁽¹⁾					Maturity Extension ⁽²⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial	4		$—		$—	50		$7		$7
Commercial real estate	—	—		—		—	—		—
Total commercial	4	—		—		50	7		7
Residential mortgages	24	4		4		8	1		1
Home equity loans	30	2		2		72	14		14
Home equity lines of credit	1	—		—		2	—		—
Home equity loans serviced by others	2	—		—		—	—		—
Home equity lines of credit serviced by others	—	—		—		—	—		—
Automobile	33	—		1		3	—		—
Student	—	—		—		—	—		—
Credit cards	547	3		3		—	—		—
Other retail	2	—		—		—	—		—
Total retail	639	9		10		85	15		15
Total	643		$9		$10	135		$22		$22



	Primary Modification Types
	Other ⁽³⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Net Change to ALLL Resulting from Modification		Charge-offs Resulting from Modification
Commercial	8		$28		$28		$—		$1
Commercial real estate	—	—		—		—		—
Total commercial	8	28		28		—		1
Residential mortgages	78	9		9		—		—
Home equity loans	85	8		7		—		—
Home equity lines of credit	58	4		3		—		—
Home equity loans serviced by others	26	2		1		—		—
Home equity lines of credit serviced by others	12	1		1		—		—
Automobile	182	2		3		—		1
Student	151	2		3		1		—
Credit cards	—	—		—		—		—
Other retail	4	—		—		—		—
Total retail	596	28		27		1		1
Total	604		$56		$55		$1		$2

⁽¹⁾ Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.

⁽²⁾ Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below summarizes how loans were modified during the nine months ended September 30, 2016, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances can include loans that became TDRs during 2016 and were paid off in full, charged off, or sold prior to September 30, 2016.



	Primary Modification Types
	Interest Rate Reduction ⁽¹⁾					Maturity Extension ⁽²⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial	11		$1		$1	62		$9		$9
Commercial real estate	—	—		—		—	—		—
Total commercial	11	1		1		62	9		9
Residential mortgages	53	7		7		49	9		8
Home equity loans	65	4		4		39	4		5
Home equity lines of credit	33	2		3		83	9		9
Home equity loans serviced by others	13	1		1		—	—		—
Home equity lines of credit serviced by others	4	—		—		5	1		1
Automobile	77	2		2		14	—		—
Student	—	—		—		—	—		—
Credit cards	1,625	9		9		—	—		—
Other retail	3	—		—		—	—		—
Total retail	1,873	25		26		190	23		23
Total	1,884		$26		$27	252		$32		$32



	Primary Modification Types
	Other ⁽³⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Net Change to ALLL Resulting from Modification			Charge-offs Resulting from Modification
Commercial	13		$47		$46		$3			$—
Commercial real estate	—	—		—		—			—
Total commercial	13	47		46		3			—
Residential mortgages	186	20		20		—			—
Home equity loans	233	14		14		(1		)	—
Home equity lines of credit	218	16		15		—			1
Home equity loans serviced by others	51	2		2		—			—
Home equity lines of credit serviced by others	19	1		1		—			—
Automobile	803	15		14		—			1
Student	405	8		8		3			—
Credit cards	—	—		—		2			—
Other retail	11	—		—		—			—
Total retail	1,926	76		74		4			2
Total	1,939		$123		$120		$7			$2

⁽¹⁾ Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.

⁽²⁾ Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below summarizes how loans were modified during the nine months ended September 30, 2015, the charge-offs related to the modifications, and the impact on the ALLL. The reported balances can include loans that became TDRs during 2015 and were paid off in full, charged off, or sold prior to September 30, 2015.



	Primary Modification Types
	Interest Rate Reduction ⁽¹⁾					Maturity Extension ⁽²⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial	18		$3		$3	114		$19		$19
Commercial real estate	1	—		—		—	—		—
Total commercial	19	3		3		114	19		19
Residential mortgages	77	13		13		27	5		5
Home equity loans	77	4		4		158	30		30
Home equity lines of credit	1	—		—		5	—		—
Home equity loans serviced by others	24	1		1		—	—		—
Home equity lines of credit serviced by others	—	—		—		—	—		—
Automobile	71	1		2		5	—		—
Student	—	—		—		—	—		—
Credit cards	1,781	10		10		—	—		—
Other retail	2	—		—		—	—		—
Total retail	2,033	29		30		195	35		35
Total	2,052		$32		$33	309		$54		$54



	Primary Modification Types
	Other ⁽³⁾
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Net Change to ALLL Resulting from Modification			Charge-offs Resulting from Modification
Commercial	12		$30		$30		($1	)		$1
Commercial real estate	1	4		4		—			—
Total commercial	13	34		34		(1		)	1
Residential mortgages	184	19		19		(1		)	—
Home equity loans	379	25		24		—			—
Home equity lines of credit	271	18		15		—			2
Home equity loans serviced by others	97	5		4		—			1
Home equity lines of credit serviced by others	34	2		2		—			—
Automobile	651	10		9		—			2
Student	901	16		17		4			—
Credit cards	—	—		—		1			—
Other retail	19	—		—		—			—
Total retail	2,536	95		90		4			5
Total	2,549		$129		$124		$3			$6

⁽¹⁾ Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.

⁽²⁾ Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The table below summarizes TDRs that defaulted during the three and nine months ended September 30, 2016 and 2015 within 12 months of their modification date. For purposes of this table, a payment default is defined as being 90 days or more past due under the modified terms. Amounts represent the loan’s recorded investment at the time of payment default. Loan data includes loans meeting the criteria that were paid off in full, charged off, or sold prior to September 30, 2016 and 2015. If a TDR of any loan type becomes 90 days past due after being modified, the loan is written down to the fair value of collateral less cost to sell. The amount written off is charged to the ALLL.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
(dollars in millions)	Number of Contracts	Balance Defaulted		Number of Contracts	Balance Defaulted		Number of Contracts	Balance Defaulted		Number of Contracts	Balance Defaulted
Commercial	5		$1	7		$1	16		$4	21		$2
Commercial real estate	—	—		—	—		1	—		—	—
Total commercial	5	1		7	1		17	4		21	2
Residential mortgages	57	7		37	7		146	19		120	18
Home equity loans	14	—		47	6		39	3		130	12
Home equity lines of credit	48	4		26	3		93	8		98	6
Home equity loans serviced by others	7	—		11	1		28	1		34	2
Home equity lines of credit serviced by others	3	—		10	1		14	—		17	1
Automobile	43	—		24	—		80	1		66	1
Student	15	—		33	1		46	1		142	3
Credit cards	117	1		102	1		323	2		304	2
Other retail	2	—		1	—		2	—		4	—
Total retail	306	12		291	20		771	35		915	45
Total	311		$13	298		$21	788		$39	936		$47

Concentrations of Credit Risk

Most of the Company’s business activity is with customers located in the New England, Mid-Atlantic and Midwest regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of September 30, 2016 and December 31, 2015, the Company had a significant amount of loans collateralized by residential and commercial real estate. There are no significant concentrations within the commercial loan or retail loan portfolios. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which may not perform according to contractual agreements. The Company’s policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.

Certain loan products, including residential mortgages, home equity loans and lines of credit, and credit cards, have contractual features that may increase credit exposure to the Company in the event of an increase in interest rates or a decline in housing values. These products include loans that exceed 90% of the value of the underlying collateral (high LTV loans), interest-only and negative amortization residential mortgages, and loans with low introductory rates. Certain loans have more than one of these characteristics.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents balances of loans with these characteristics:



	September 30, 2016
(in millions)	Residential Mortgages		Home Equity Loans and Lines of Credit		Home Equity Products Serviced by Others		Credit Cards		Student		Total
High loan-to-value		$640		$728		$569		$—		$—		$1,937
Interest only/negative amortization	1,494		—		—		—		1		1,495
Low introductory rate	—		—		—		99		—		99
Multiple characteristics and other	4		—		—		—		—		4
Total		$2,138		$728		$569		$99		$1		$3,535



	December 31, 2015
(in millions)	Residential Mortgages		Home Equity Loans and Lines of Credit		Home Equity Products Serviced by Others		Credit Cards		Student		Total
High loan-to-value		$649		$1,038		$785		$—		$—		$2,472
Interest only/negative amortization	1,110		—		—		—		—		1,110
Low introductory rate	—		3		—		96		—		99
Multiple characteristics and other	14		—		—		—		—		14
Total		$1,773		$1,041		$785		$96		$—		$3,695

NOTE 5 - VARIABLE INTEREST ENTITIES

The Company makes equity investments in various entities that are considered VIEs, as defined by GAAP. These investments primarily include ownership interests in limited partnerships that sponsor affordable housing projects and ownership interests in limited liability companies that sponsor renewable energy projects. A summary of these investments is presented below:



(in millions)	September 30, 2016		December 31, 2015
LIHTC investment included in other assets		$687		$598
LIHTC unfunded commitments included in other liabilities	367		365
Renewable energy investments included in other assets	117		118

Low Income Housing Tax Credit Partnerships

The purpose of the Company’s equity investments is to assist in achieving goals of the Community Reinvestment Act and to earn an adequate return of capital. LIHTC partnerships are managed by unrelated general partners that have the power to direct the activities which most significantly affect the performance of the partnerships. The Company is therefore not the primary beneficiary of any LIHTC partnerships. Accordingly, the Company does not consolidate these VIEs and accounts for these investments in other assets on the Consolidated Balance Sheets.

The Company applies the proportional amortization method to account for its LIHTC investments. Under the proportional amortization method, the Company applies a practical expedient and amortizes the initial cost of the investment in proportion to the tax credits received in the current period as compared to the total tax credits expected to be received over the life of the investment. The amortization and tax benefits are included as a component of income tax expense. The Company reports its equity share of LIHTC partnership gains and losses as an adjustment to noninterest income. The Company reports its commitments to make future investments in other liabilities on the Consolidated Balance Sheets. The tax credits received are reported as a reduction of income tax expense (or increase to income tax benefit) related to these transactions.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the other information related to the Company’s affordable housing tax credit investments for the three and nine month periods ended September 30, 2016, and 2015.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2016		2015		2016		2015
Tax credits included in income tax expense		$17		$12		$46		$35
Amortization expense included in income tax expense	14		11		45		35
Other tax benefits included in income tax expense	2		4		15		13

The Company recognized no LIHTC investment impairment losses during the three and nine months ended September 30, 2016 and 2015, respectively.

Renewable Energy Entities

The Company’s investments in renewable energy entities provide benefits from a return generated by government incentives plus other tax attributes that are associated with tax ownership (e.g., tax depreciation). As a tax equity investor, the Company does not have the power to direct the activities which most significantly affect the performance of these entities and therefore is not the primary beneficiary of any renewable energy entities. Accordingly, the Company does not consolidate these VIEs.

NOTE 6 - MORTGAGE BANKING

In its mortgage banking business, the Company sells residential mortgages to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. The Company is obligated to subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility requirements, customer fraud, or servicing violations. This primarily occurs during a loan file review.

The Company received proceeds from the sale of residential mortgages held for sale of $753 million and $725 million for the three months ended September 30, 2016 and 2015, respectively, and $1.8 billion and $1.5 billion for the nine months ended September 30, 2016 and 2015, respectively.

The Company recognized gains on sales of residential mortgages held for sale of $26 million and $11 million for the three months ended September 30, 2016 and 2015, respectively, and $56 million and $43 million for the nine months ended September 30, 2016 and 2015, respectively.

Pursuant to the standard representations and warranties obligations discussed above, the Company repurchased residential mortgages totaling $2 million for the three months ended September 30, 2016 and 2015 and $6 million and $9 million for the nine months ended September 30, 2016 and 2015, respectively.

Mortgage servicing fees, a component of mortgage banking fees, were $12 million and $13 million for the three months ended September 30, 2016 and 2015, respectively, and $38 million and $41 million for the nine months ended September 30, 2016 and 2015, respectively.

The Company recorded valuation charge-offs of $2 million and $1 million for its MSRs for the three months ended September 30, 2016 and 2015, respectively, and valuation charge-offs of $6 million and recoveries of $6 million for its MSRs for the nine months ended September 30, 2016 and 2015, respectively.

The fair value of MSRs is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, contractual servicing fee income, servicing costs, default rates, ancillary income, and other economic factors, which are determined based on current market conditions. The valuation model uses a static discounted cash flow methodology incorporating current market interest rates. A static model does not attempt to forecast or predict the future direction of interest rates; rather it estimates the amount and timing of future servicing cash flows using current market interest rates. The current mortgage interest rate influences the expected prepayment rate and therefore, the length of the cash flows associated with the servicing asset, while the discount rate determines the present value of those cash flows. Expected mortgage loan prepayment assumptions are obtained using the QRM Multi Component prepayment model. The Company periodically obtains third-party valuations of its MSRs to assess the reasonableness of the fair value calculated by the valuation model.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSRs are presented in other assets on the Consolidated Balance Sheets. Changes related to MSRs are presented below:



	As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
MSRs:
Balance as of beginning of period		$166			$177			$173			$184
Amount capitalized	10			7			20			20
Amortization	(9		)	(8		)	(26		)	(28		)
Carrying amount before valuation allowance	167			176			167			176
Valuation allowance for servicing assets:
Balance as of beginning of period	13			11			9			18
Valuation charge-offs (recoveries)	2			1			6			(6		)
Balance at end of period	15			12			15			12
Net carrying value of MSRs		$152			$164			$152			$164

The key economic assumptions used to estimate the value of MSRs are presented in the following table:



	September 30, 2016					December 31, 2015
(dollars in millions)	Weighted Average	Range				Weighted Average	Range
Fair value	$163	Min		Max		$178	Min		Max
Weighted average life (in years)	4.8	2.5		5.2		5.4	2.8		6.2
Weighted average constant prepayment rate	14.0%	13.6	%	24.8	%	11.6%	10.7	%	22.2	%
Weighted average discount rate	9.7%	9.1	%	12.1	%	9.7%	9.1	%	12.1	%

The key economic assumptions used in estimating the fair value of MSRs capitalized during the period are presented below:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Weighted average life (in years)	5.7	6.4	5.9	5.7
Weighted average constant prepayment rate	12.3%	10.1%	11.7%	10.8%
Weighted average discount rate	9.8%	9.7%	9.8%	9.7%

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The sensitivity analysis below presents the impact to current fair value of an immediate 50 basis points and 100 basis points adverse change in the key economic assumptions and presents the decline in fair value that would occur if the adverse change were realized. These sensitivities are hypothetical, with the effect of a variation in a particular assumption on the fair value of the mortgage servicing rights calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in interest rates, which drive changes in prepayment rates, could result in changes in the discount rates), which may amplify or counteract the sensitivities. The primary risk inherent in the Company’s MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is dependent upon market movements of interest rates.



(in millions)	September 30, 2016		December 31, 2015
Prepayment rate:
Decline in fair value from a 50 basis point decrease in interest rates		$5		$5
Decline in fair value from a 100 basis point decrease in interest rates		$15		$11
Weighted average discount rate:
Decline in fair value from a 50 basis point increase in weighted average discount rate		$3		$3
Decline in fair value from a 100 basis point increase in weighted average discount rate		$5		$6

NOTE 7 - BORROWED FUNDS

A summary of the Company’s short-term borrowed funds is presented below:



(in millions)	September 30, 2016		December 31, 2015
Federal funds purchased		$95		$—
Securities sold under agreements to repurchase	805		802
Other short-term borrowed funds (primarily current portion of FHLB advances)	2,512		2,630
Total short-term borrowed funds		$3,412		$3,432

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



	As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,
(dollars in millions)	2016			2015			2016			2015			2015
Weighted-average interest rate at period-end:
Federal funds purchased and securities sold under agreements to repurchase	0.03		%	0.25		%	0.03		%	0.25		%	0.15		%
Other short-term borrowed funds (primarily current portion of FHLB advances)	0.63			0.29			0.63			0.29			0.44
Maximum amount outstanding at month-end during the period:
Federal funds purchased and securities sold under agreements to repurchase		$1,032			$3,356			$1,274			$5,375			$5,375
Other short-term borrowed funds (primarily current portion of FHLB advances)	2,515			5,861			4,764			7,004			7,004
Average amount outstanding during the period:
Federal funds purchased and securities sold under agreements to repurchase		$910			$2,880			$922			$3,947			$3,364
Other short-term borrowed funds (primarily current portion of FHLB advances)	2,564			5,062			3,133			6,169			5,865
Weighted-average interest rate during the period:
Federal funds purchased and securities sold under agreements to repurchase	0.10		%	0.32		%	0.09		%	0.22		%	0.22		%
Other short-term borrowed funds (primarily current portion of FHLB advances)	0.63			0.29			0.62			0.27			0.28

Note: Balances are net of certain short-term receivables associated with reverse repurchase agreements. Interest expense includes the full cost of the repurchase agreements, but excludes certain hedging costs and broker fees.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A summary of the Company’s long-term borrowed funds is presented below:



(in millions)	September 30, 2016		December 31, 2015
Citizens Financial Group, Inc.:
4.150% fixed rate subordinated debt, due 2022 ⁽¹⁾		$347		$350
5.158% fixed-to-floating rate subordinated debt, (LIBOR + 3.56%) callable, due 2023	333		333
3.750% fixed rate subordinated debt, due 2024⁽²⁾	250		250
4.023% fixed rate subordinated debt, due 2024⁽³⁾	42		331
4.082% fixed rate subordinated debt, due 2025⁽⁴⁾	—		331
4.350% fixed rate subordinated debt, due 2025 ⁽⁵⁾	249		250
4.300% fixed rate subordinated debt, due 2025 ⁽⁶⁾	749		750
2.375% fixed rate senior unsecured debt, due 2021 ⁽⁷⁾	348		—
Banking Subsidiaries:
1.600% senior unsecured notes, due 2017 ^{(8) (9)}	750		749
2.300% senior unsecured notes, due 2018 ^{(8) (10)}	752		747
2.450% senior unsecured notes, due 2019 ^{(8) (11)}	761		752
2.500% senior unsecured notes, due 2019 ^(8)(12)	749		—
2.550% senior unsecured notes, due 2021^(8)(13)	998		—
Federal Home Loan advances due through 2033	5,564		5,018
Other	10		25
Total long-term borrowed funds		$11,902		$9,886

⁽¹⁾These balances are comprised of: principal balances of $350 million at September 30, 2016 and December 31, 2015, as well as the impact of ($3) million of unamortized deferred issuance costs and discount at September 30, 2016.

⁽²⁾Prior to January 1, 2016, interest was payable at a fixed rate per annum of 4.153%.

⁽³⁾These balances are comprised of: principal balance of $42 million and $333 million at September 30, 2016 and December 31, 2015, respectively, as well as the impact from interest rate swaps of zero and ($2) million at September 30, 2016 and December 31, 2015, respectively. See Note 11 “Derivatives” for further information. In addition, the Company repurchased $125 million and $166 million of these securities on March 7, 2016 and July 28, 2016, respectively.

⁽⁴⁾These balances are comprised of: principal balance of zero and $334 million at September 30, 2016 and December 31, 2015, respectively; impact from interest rate swaps of zero and ($3) million at September 30, 2016 and December 31, 2015, respectively. See Note 11 “Derivatives” for further information. On July 28, 2016, the Company repurchased $334 million of these securities.

⁽⁵⁾These balances are comprised of: principal balances of $250 million at September 30, 2016 and December 31, 2015, as well as the impact of ($1) million of unamortized deferred issuance costs and discount at September 30, 2016.

⁽⁶⁾These balances are comprised of: principal balances of $750 million at September 30, 2016 and December 31, 2015, as well as the impact of ($1) million of unamortized deferred issuance costs and discount at September 30, 2016.

⁽⁷⁾This balance is comprised of: principal balance of $350 million at September 30, 2016, as well as the impact of ($2) million of unamortized deferred issuance costs and discount at September 30, 2016.

⁽⁸⁾These securities were offered under CBNA’s Global Bank Note Program dated December 1, 2014.

⁽⁹⁾ These balances are comprised of: principal balances of $750 million at September 30, 2016 and December 31, 2015; impact from interest rate swaps of $1 million and ($1) million at September 30, 2016 and December 31, 2015, respectively; and ($1) million of unamortized deferred issuance costs and discount at September 30, 2016. See Note 11 “Derivatives” for further information.

⁽¹⁰⁾These balances are comprised of: principal balances of $750 million at September 30, 2016 and December 31, 2015; impact from interest rate swaps of $4 million and ($3) million at September 30, 2016 and December 31, 2015, respectively; and ($2) million of unamortized deferred issuance costs and discount at September 30, 2016. See Note 11 “Derivatives” for further information.

⁽¹¹⁾ These balances are comprised of: principal balances of $750 million at September 30, 2016 and December 31, 2015; impact from interest rate swaps of $14 million and $2 million at September 30, 2016 and December 31, 2015, respectively; and ($3) million of unamortized deferred issuance costs and discount at September 30, 2016. See Note 11 “Derivatives” for further information.

⁽¹²⁾This balance is comprised of: principal balance of $750 million at September 30, 2016; impact from interest rate swaps of $1 million and ($2) million of unamortized deferred issuance costs and discount at September 30, 2016. See Note 11 “Derivatives” for further information.

⁽¹³⁾This balance is comprised of: principal balance of $1.0 billion at September 30, 2016; impact from interest rate swaps of $2 million and ($4) million of unamortized deferred issuance costs and discount at September 30, 2016. See Note 11 “Derivatives” for further information.

On July 28, 2016, the Company issued $350 million of 2.375% fixed-rate senior notes due 2021, and used the net proceeds and available cash to repurchase $500 million of its subordinated debt. Specifically, the Company retired $334 million of 4.082% subordinated notes due 2025 and $166 million of 4.023% subordinated notes due 2024.

Advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and pledged 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 $12.4 billion and $11.3 billion at September 30, 2016 and December 31, 2015, respectively. The Company’s available FHLB borrowing capacity was $3.1 billion and $4.1 billion at September 30, 2016 and

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2015, respectively. The Company can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, such as investment securities and loans, was pledged to provide borrowing capacity at the FRB. At September 30, 2016, the Company’s unused secured borrowing capacity was approximately $34.3 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

A summary of maturities for the Company’s long-term borrowed funds at September 30, 2016 is presented below:



Year (in millions)	CFG Parent Company		Banking Subsidiaries		Consolidated
2017 or on demand		$—		$4,251		$4,251
2018	—		2,807		2,807
2019	—		1,511		1,511
2020	—		2		2
2021	348		1,002		1,350
2022 and thereafter	1,970		11		1,981
Total		$2,318		$9,584		$11,902

NOTE 8 - STOCKHOLDERS’ EQUITY

Preferred Stock

The Company had 100,000,000 shares authorized and 250,000 shares outstanding of $25.00 par value undesignated preferred stock as of September 30, 2016 and December 31, 2015, respectively. The Board of Directors or any authorized committee thereof are authorized to provide for the issuance of these shares in one or more series, and by filing a certificate pursuant to applicable law of the State of Delaware, to establish or change from time to time the number of shares of each such series, and to fix the designations, powers, including voting powers, full or limited, or no voting powers, preferences and the relative, participating, optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof.

On April 6, 2015, the Company issued $250 million, or 250,000 shares, of 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock, par value of $25.00 per share with a liquidation preference $1,000 per share (the “Series A Preferred Stock”) to the initial purchasers in reliance on the exemption from registration provided by Section (4)(a)(2) of the Securities Act of 1933, as amended, for resale pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. As a result of this issuance, the Company received net proceeds of $247 million after underwriting discount.

The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or other obligation of the Company. Holders of the Series A Preferred Stock will be entitled to receive dividend payments when, and if, declared by the Company’s Board of Directors or a duly authorized committee thereof. Any such dividends will be payable on a semi-annual basis at an annual rate equal to 5.500%. On April 6, 2020, the Series A Preferred Stock converts to a quarterly floating-rate basis equal to three-month U.S. dollar LIBOR on the related dividend determination date plus 3.960%.

Citizens may redeem the Series A Preferred Stock, in whole or in part on any dividend payment date, on or after April 6, 2020 or, in whole but not in part, at any time within 90 days following a regulatory capital treatment event at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Citizens may not redeem shares of the Series A Preferred Stock without obtaining the prior approval of the FRBG if then required under applicable capital guidelines.

Shares of the Series A Preferred Stock have priority over the Company's common stock with regard to the payment of dividends and as such, the Company may not pay dividends on or repurchase, redeem, or otherwise acquire for consideration shares of its common stock unless dividends for the latest completed dividend period for the Series A Preferred Stock have been declared and paid (or declared and sufficient funds have been set aside to make payment).

Except in certain limited circumstances, the Series A Preferred Stock does not have any voting rights.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Treasury Stock

During the three months ended September 30, 2016, as part of its 2016 CCAR plan, the Company repurchased $250 million, or 11,062,192 common shares at an average price of $22.60. The repurchased shares are held in treasury stock. During the year ended December 31, 2015, the Company recorded an additional 876,087 shares of treasury stock associated with share-based compensation plan activity for a total cost of $22 million at a weighted-average price per share of $25.50.

On August 3, 2015, the Company used the net proceeds of its public offering of $250 million aggregate principal amount 4.350% Subordinated Notes due 2025 issued on July 31, 2015, to repurchase 9,615,384 shares of its outstanding common stock at a public offering price of $26.00 per share. The repurchased shares are held in treasury.

On April 7, 2015, the Company used the net proceeds of the Series A Preferred Stock offering to repurchase 10,473,397 shares of its common stock at a total cost of approximately $250 million and a price per share of $23.87, which equaled the volume-weighted average price of the Company’s common stock for all traded volume over the five trading days preceding the repurchase agreement date of April 1, 2015. The repurchased shares are held in treasury.

NOTE 9 - EMPLOYEE BENEFITS

The Company maintains a non-contributory pension plan (the “Plan” or “qualified plan”) that was closed to new hires and re-hires effective January 1, 2009, and frozen to all participants effective December 31, 2012. Benefits under the Plan are based on employees’ years of service and highest five-year average of eligible compensation. The Plan is funded on a current basis, in compliance with the requirements of ERISA. On September 7, 2016, the Company made a contribution of $75 million to the qualified plan. The Company also provides an unfunded, non-qualified supplemental retirement plan (the “non-qualified plan”), which was closed and frozen effective December 12, 2012.

The following table presents the components of net periodic (income) cost for the Company’s qualified and non-qualified plans:



	Nine Months Ended September 30,
	Qualified Plan						Non-Qualified Plan				Total
(in millions)	2016			2015			2016		2015		2016			2015
Service cost		$2			$2			$—		$—		$2			$2
Interest cost	33			33			3		3		36			36
Expected return on plan assets	(50		)	(55		)	—		—		(50		)	(55		)
Amortization of actuarial loss	11			10			1		2		12			12
Net periodic pension (income) cost		($4	)		($10	)		$4		$5		$—			($5	)

NOTE 10 - INCOME TAXES

Income Tax Expense

Income tax expense was $130 million and $115 million for the three months ended September 30, 2016 and 2015, respectively, resulting in effective tax rates of 30.5% and 34.1%, respectively. Income tax expense was $357 million and $313 million for the nine months ended September 30, 2016 and 2015, respectively, resulting in effective tax rates of 31.9% and 33.5%, respectively. For the nine months ended September 30, 2016 and 2015, the effective tax rate compared favorably to the statutory rate of 35% primarily as a result of the permanent benefits from tax credits and tax-exempt income.

Deferred Tax Liability

At September 30, 2016, the Company reported a net deferred tax liability of $994 million, compared to $730 million as of December 31, 2015. The increase in the net deferred tax liability is primarily attributable to the tax effect of net unrealized gains on securities and derivatives arising during the period and the tax effect of current year timing adjustments.

NOTE 11 - DERIVATIVES

In the normal course of business, the Company enters into a variety of derivative transactions in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. The Company does not use derivatives for speculative purposes.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company’s derivative instruments are recognized on the Consolidated Balance Sheets at fair value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 14 “Fair Value Measurements.”

The following table presents derivative instruments included on the Consolidated Balance Sheets in derivative assets and derivative liabilities:



	September 30, 2016								December 31, 2015
(in millions)	Notional Amount ⁽¹⁾		Derivative Assets			Derivative Liabilities			Notional Amount ⁽¹⁾		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate contracts		$17,350		$347			$233			$16,750		$96			$50
Derivatives not designated as hedging instruments:
Interest rate contracts	51,847		709			621			33,719		540			455
Foreign exchange contracts	8,296		118			113			8,366		163			156
Other contracts	1,845		18			9			981		8			5
Total derivatives not designated as hedging instruments			845			743					711			616
Gross derivative fair values			1,192			976					807			666
Less: Gross amounts offset in the Consolidated Balance Sheets ⁽²⁾			(89		)	(89		)			(178		)	(178		)
Less: Cash collateral applied ⁽²⁾			(1		)	(47		)			(4		)	(3		)
Total net derivative fair values presented in the Consolidated Balance Sheets ⁽³⁾				$1,102			$840					$625			$485

⁽¹⁾The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. Notional amounts are typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk, as they do not measure the true economic risk of these contracts.

⁽²⁾Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions.

⁽³⁾The Company also offsets assets and liabilities associated with repurchase agreements on the Consolidated Balance Sheets. See Note 2 “Securities” for further information.

The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan.

Institutional derivatives

The institutional derivatives portfolio primarily consists of interest rate swap agreements that are used to hedge the interest rate risk associated with the Company’s loans and financing liabilities (i.e., borrowed funds, deposits, etc.). The goal of the Company’s interest rate hedging activities is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect net interest income.

The Company enters into certain interest rate swap agreements to hedge the risk associated with floating rate loans. By entering into pay-floating/receive-fixed interest rate swaps, the Company is able to minimize the variability in the cash flows of these assets due to changes in interest rates. The Company has outstanding interest rate swap agreements designed to hedge a portion of the Company’s borrowed funds and deposit liabilities. By entering into a pay-fixed/receive-floating interest rate swap, a portion of these liabilities has been effectively converted to a fixed-rate liability for the term of the interest rate swap agreement.

The Company also uses receive-fixed/pay-floating interest rate swaps to manage the interest rate exposure on its medium term borrowings.

Customer derivatives

The customer derivatives portfolio consists of interest rate swap agreements and option contracts that are transacted to meet the financing needs of the Company’s customers. Swap agreements and interest rate option agreements are transacted to effectively minimize the Company’s market risk associated with the customer derivative products. The customer derivatives portfolio also includes foreign exchange contracts that are entered into on behalf of customers for the purpose of hedging exposure related to cash orders and loans and deposits denominated in foreign currencies. The primary risks associated with these transactions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contract. To manage this market risk, the Company simultaneously enters into offsetting foreign exchange contracts.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Residential loan derivatives

The Company enters into residential loan commitments that allow residential mortgage customers to lock in the interest rate on a residential mortgage while the loan undergoes the underwriting process. The Company also uses forward sales contracts to protect the value of residential mortgage loans and loan commitments that are being underwritten for future sale to investors in the secondary market.

The Company has certain derivative transactions that are designated as hedging instruments described as follows:

Derivatives designated as hedging instruments

The Company’s institutional derivatives portfolio qualifies for hedge accounting treatment. This includes interest rate swaps that are designated in highly effective fair value and cash flow hedging relationships. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception, and monthly thereafter to assess whether the derivatives are expected to be, or have been, highly effective in offsetting changes in the hedged item’s expected cash flows. The Company discontinues hedge accounting treatment when it is determined that a derivative is not expected to be or has ceased to be effective as a hedge, and then reflects changes in fair value in earnings after termination of the hedge relationship.

Fair value hedges

The Company entered into interest rate swap agreements to manage the interest rate exposure on its medium term borrowings. The change in the value of fair value hedges, to the extent that the hedging relationship is effective, is recorded through earnings and offset against the changes in the fair value of the hedged item.

The following tables present the effect of fair value hedges on net income:



	Amounts Recognized in Other Income for the
	Three Months Ended September 30, 2016								Three Months Ended September 30, 2015
(in millions)	Derivative			Hedged Item		Hedge Ineffectiveness			Derivative		Hedged Item			Hedge Ineffectiveness
Hedges of interest rate risk on borrowings using interest rate swaps		($27	)		$25		($2	)		$16		($16	)		$—



	Amounts Recognized in Other Income for the
	Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2015
(in millions)	Derivative		Hedged Item			Hedge Ineffectiveness			Derivative		Hedged Item			Hedge Ineffectiveness
Hedges of interest rate risk on borrowings using interest rate swaps		$57		($58	)		($1	)		$22		($22	)		$—

Cash flow hedges

The Company has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets, and financing liabilities (including its borrowed funds). All of these swaps have been deemed as highly effective cash flow hedges. The effective portion of the hedging gains and losses associated with these hedges are recorded in OCI; the ineffective portion of the hedging gains and losses is recorded in earnings (other income). Hedging gains and losses on derivative contracts reclassified from OCI to current period earnings are included in the line item in the accompanying Consolidated Statements of Operations in which the hedged item is recorded and in the same period that the hedged item affects earnings. During the next 12 months, approximately $4 million of net gain (pre-tax) on derivative instruments included in OCI is expected to be reclassified to net interest income in the Consolidated Statements of Operations.

Hedging gains and losses associated with the Company’s cash flow hedges are immediately reclassified from OCI to current period earnings (other income) if it becomes probable that the hedged forecasted transactions will not occur during the originally specified time period.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the effect of cash flow hedges on net income and stockholders' equity:



	Amounts Recognized for the
	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Effective portion of (loss) gain recognized in OCI ⁽¹⁾		($1	)		$78			$74			$174
Amounts reclassified from OCI to interest income ⁽²⁾	23			22			66			57
Amounts reclassified from OCI to interest expense ⁽²⁾	(8		)	(15		)	(24		)	(44		)
Amounts reclassified from OCI to other income ⁽³⁾	(5		)	—			(5		)	—

⁽¹⁾The cumulative effective gains and losses on the Company’s cash flow hedging activities are included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets.

⁽²⁾This includes both (a) the amortization of effective gains and losses associated with the Company’s terminated cash flow hedges and (b) the current reporting period’s interest settlements realized on the Company’s active cash flow hedges. Both (a) and (b) were previously included on the accumulated other comprehensive loss line item on the Consolidated Balance Sheets and were subsequently recorded as adjustments to the interest expense of the underlying hedged item.

⁽³⁾ This includes gains and losses attributable to previously hedged cash flow where the likelihood of occurrence is no longer ‘probable’.

Economic hedges

The Company’s customer derivatives are recorded on the Consolidated Balance Sheets at fair value. These include interest rate and foreign exchange derivative contracts that are transacted to meet the hedging and financing needs of the Company’s customers. Mark-to-market adjustments to the fair value of customer related interest rate contracts are included in other income in the accompanying Consolidated Statements of Operations. Mark-to-market adjustments to the fair value of foreign exchange contracts relating to foreign currency loans are included in interest and fees on loans and leases in the accompanying Consolidated Statements of Operations, while all other foreign currency contract fair value changes are included in foreign exchange and letter of credit fees. In both cases, the mark-to-market gains and losses associated with the customer derivatives are mitigated by the mark-to-market gains and losses on the offsetting interest rate and foreign exchange derivative contracts transacted.

The Company’s residential loan derivatives (including residential loan commitments and forward sales contracts) are recorded on the Consolidated Balance Sheets at fair value. Mark-to-market adjustments to the fair value of residential loan commitments and forward sale contracts are included in noninterest income under mortgage banking fees.

The following table presents the effect of customer derivatives and economic hedges on net income:



	Amounts Recognized in Noninterest Income for the
	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Customer derivative contracts
Customer interest rate contracts ⁽¹⁾		($32	)		$85			$63			$149
Customer foreign exchange contracts ⁽¹⁾	17			(4		)	45			(21		)
Residential loan commitments ⁽²⁾	1			9			8			2
Economic hedges
Offsetting derivatives transactions to hedge interest rate risk on customer interest rate contracts ⁽¹⁾	45			(75		)	(31		)	(126		)
Offsetting derivatives transactions to hedge foreign exchange risk on customer foreign exchange contracts ⁽³⁾	(19		)	5			(46		)	21
Forward sale contracts ⁽²⁾	4			(4		)	(6		)	(2		)
Total		$16			$16			$33			$23

⁽¹⁾Reported in other income on the Consolidated Statements of Operations.

⁽²⁾Reported in mortgage banking fees on the Consolidated Statements of Operations.

⁽³⁾Reported in foreign exchange and letter of credit fees on the Consolidated Statements of Operations.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12 - COMMITMENTS AND CONTINGENCIES

A summary of outstanding off-balance sheet arrangements is presented below:



(in millions)	September 30, 2016		December 31, 2015
Commitment amount:
Undrawn commitments to extend credit		$60,125		$56,524
Financial standby letters of credit	1,980		2,010
Performance letters of credit	40		42
Commercial letters of credit	55		87
Marketing rights	44		47
Risk participation agreements	51		26
Residential mortgage loans sold with recourse	9		10
Total		$62,304		$58,746

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to customers in accordance with conditions contractually agreed upon in advance. Generally, the commitments have fixed expiration dates or termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.

Letters of Credit

Standby letters of credit, both financial and performance, are issued by the Company for its customers. They are used as conditional guarantees of payment to a third party in the event the customer either fails to make specific payments (financial) or fails to complete a specific project (performance). Commercial letters of credit are used to facilitate the import of goods. The commercial letter of credit is used as the method of payment to the Company’s customers’ suppliers. The Company’s exposure to credit loss in the event of counterparty nonperformance in connection with the above instruments is represented by the contractual amount of those instruments, net of the value of collateral held. Standby letters of credit and commercial letters of credit are issued for terms of up to ten years and one year, respectively.

Generally, letters of credit are collateralized by cash, accounts receivable, inventory or investment securities. Credit risk associated with letters of credit is considered in determining the appropriate amounts of reserves for unfunded commitments.

The Company recognizes a liability on the Consolidated Balance Sheets representing its obligation to stand ready to perform over the term of the standby letters of credit in the event that the specified triggering events occur. The liability for these guarantees was $2 million and $3 million at September 30, 2016 and December 31, 2015.

Marketing Rights

During 2003, the Company entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania. The Company paid $3 million for the nine months ended September 30, 2016 and $3 million for the year ended December 31, 2015, and is obligated to pay $44 million over the remainder of the contract.

Risk Participation Agreements

RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. Under the terms of these agreements, the “participating bank” receives a fee from the “lead bank” in exchange for the guarantee of reimbursement if the customer defaults on an interest rate swap. The interest rate swap is transacted such that any and all exchanges of interest payments (favorable and unfavorable) are made between the lead bank and the customer. In the event that an early termination of the swap occurs and the customer is unable to make a required close out payment, the participating bank assumes that obligation and is required to make this payment.

RPAs where the Company acts as the lead bank are referred to as “participations-out,” in reference to the credit risk associated with the customer derivatives being transferred out of the Company. Participations-out generally occur concurrently with the sale of new customer derivatives. RPAs where the Company acts as the participating bank are referred to as “participations-in,” in reference to the credit risk associated with the counterparty’s derivatives being assumed by the Company. The Company’s maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivables from the customer. The Company’s estimate of the credit exposure associated with its risk participations-in as was $51 million at September 30, 2016

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

and $26 million at December 31, 2015. The current amount of credit exposure is spread out over 90 counterparties. RPAs generally have terms ranging from 1-5 years; however, certain outstanding agreements have terms as long as 10 years.

Other Commitments

On January 7, 2016, the Company entered into an agreement to purchase student loans on a quarterly basis beginning with the first calendar quarter in 2016 and ending with the fourth calendar quarter in 2016. Under the terms of the agreement, the Company committed to purchase a minimum of $125 million of loans per quarter. The minimum and maximum amount of the aggregate purchase principal balance of loans under the terms of the agreement are $500 million and $1 billion, respectively. The agreement will terminate immediately if at any time during its term the aggregate purchase principal balance of loans equals the maximum amount. The agreement may be extended by written agreement of the parties for an additional four quarters. The Company may terminate the agreement at will with payment of a termination fee equal to the product of $1 million times the number of calendar quarters remaining in the term.

The Company’s agreement to purchase automobile loans, originally entered into in May 2014, was most recently amended on February 18, 2016. For quarterly periods on or after August 1, 2015, the minimum and maximum purchases are $50 million and $200 million, respectively. The agreement automatically renews until terminated by either party. The Company may cancel the agreement at will with payment of a variable termination fee. There is no termination fee after May 2017.

The Company’s commercial loan trading desk provides ongoing secondary market support and liquidity to its clients. Unsettled loan trades (i.e., loan purchase contracts) represent firm commitments to purchase loans from a third party at an agreed-upon price. Principal amounts associated with unsettled commercial loan trades are off-balance sheet commitments until delivery of the loans has taken place. Fair value adjustments associated with each unsettled loan trade are recognized on the Consolidated Balance Sheets and classified within other assets or other liabilities, depending on whether the fair value of the unsettled trade represents an unrealized gain or unrealized loss. The principal balances of unsettled commercial loan trade purchases and sales were $117 million and $129 million, respectively, at September 30, 2016 and $69 million and $75 million at December 31, 2015, respectively. Settled loans purchased by the trading desk are classified as loans held for sale, at fair value on the Consolidated Balance Sheets. Refer to Note 14 “Fair Value Measurements” for further information.

Contingencies

The Company operates in a legal and regulatory environment that exposes it to potentially significant risks. A certain amount of litigation ordinarily results from the nature of the Company’s banking and other businesses. The Company is a party to legal proceedings, including class actions. The Company is also the subject of investigations, reviews, subpoenas, and regulatory matters arising out of its normal business operations, which, in some instances, relate to concerns about fair lending, unfair and/or deceptive practices, mortgage-related issues, and mis-selling of certain products. In addition, the Company engages in discussions with relevant governmental and regulatory authorities on a regular and ongoing basis regarding various issues, and any issues discussed or identified may result in investigatory or other action being taken. Litigation and regulatory matters may result in settlements, damages, fines, penalties, public or private censure, increased costs, required remediation, restrictions on business activities, or other impacts on the Company.

In these disputes and proceedings, the Company contests liability and the amount of damages as appropriate. Given their complex nature, it may be years before some of these matters are finally resolved. Moreover, before liability can be reasonably estimated for a claim, numerous legal and factual issues may need to be examined, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal issues relevant to the proceedings in question.

The Company cannot predict with certainty if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages. The Company recognizes a provision for a claim when, in the opinion of management after seeking legal advice, it is probable that a liability exists and the amount of loss can be reasonably estimated. In many proceedings, however, it is not possible to determine whether any loss is probable or to estimate the amount of any loss. In each of the matters described below, the Company is unable to estimate the liability in excess of any provision accrued, if any, that might arise or its effects on the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows in any particular period.

Set out below is a description of significant legal matters involving the Company and its banking subsidiaries. Based on information currently available, the advice of legal counsel and other advisers, and established reserves, management believes that the aggregate liabilities, if any, potentially arising from these proceedings will not have a materially adverse effect on the Company’s unaudited interim Consolidated Financial Statements.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consumer Products Matters

The activities of the Company’s banking subsidiaries are subject to extensive laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of the banking subsidiaries’ past practices have not met applicable standards, and they have implemented and are continuing to implement changes to improve and bring their practices in accordance with regulatory guidance. The Company and its banking subsidiaries have actively pursued resolution of the legacy regulatory enforcement matters set forth below.

As previously reported, CBNA is currently subject to a consent order issued in 2013 by the OCC in connection with its findings of deceptive marketing and implementation of some of our checking account and funds transfer products and services. Among other things, the consent order requires us to remedy deficiencies and develop stronger compliance controls, policies and procedures. The Company and its banking subsidiaries are also currently subject to consent orders issued in August 2015 by the CFPB, the OCC and the FDIC in connection with past deposit reconciliation practices, and CBNA is subject to a consent order issued in November 2015 by the OCC in connection with past billing and sales practices pertaining to identity theft and debt cancellation products, under which the applicable regulators have provided non-objections to, among other things, restitution plans for affected customers.

All financial penalties associated with these legacy regulatory enforcement matters have been paid, and substantially all remediation related to such legacy matters is expected to be resolved by the end of 2016.

NOTE 13 - RELATED PARTY TRANSACTIONS

The Company, during the ordinary course of business with underwriting terms similar to those offered to the public, has entered into credit facilities with directors and executive officers and their immediate families, as well as their affiliated companies. Extensions of credit amounted to $141 million and $136 million at September 30, 2016 and December 31, 2015, respectively.

NOTE 14 - FAIR VALUE MEASUREMENTS

As discussed in Note 1 “Significant Accounting Policies,” to the Company’s audited Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015, the Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. The Company also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this Note for assets and liabilities not required to be reported at fair value in the financial statements.

The Company elected to account for residential mortgage loans held for sale and certain commercial and commercial real estate loans held for sale at fair value. Applying fair value accounting to the residential mortgage loans held for sale better aligns the reported results of the economic changes in the value of these loans and their related hedge instruments. Certain commercial and commercial real estate held for sale loans are managed by a commercial secondary loan desk that provides liquidity to banks, finance companies and institutional investors. Applying fair value accounting to this portfolio is appropriate because the Company holds these loans with the intent to sell within short term periods.

Fair Value Option

Residential Mortgage Loans Held for Sale

The fair value of residential mortgage loans held for sale is derived from observable mortgage security prices and includes adjustments for loan servicing value, agency guarantee fees, and other loan level attributes which are mostly observable in the marketplace. Credit risk does not significantly impact the valuation since these loans are sold shortly after origination. Therefore, the Company classifies the residential mortgage loans held for sale in Level 2 of the fair value hierarchy.

The election of the fair value option for financial assets and financial liabilities is optional and irrevocable. The loans accounted for under the fair value option are initially measured at fair value (i.e., acquisition cost) when the financial asset is acquired. Subsequent changes in fair value are recognized in mortgage banking fees on the Consolidated Statements of Operations. The Company recognized changes in fair value in mortgage banking income of $1 million and $4 million for the three months ended September 30, 2016 and 2015, respectively. The Company recognized changes in fair value in mortgage banking income of $13 million and $2 million for the nine months ended September 30, 2016 and 2015, respectively.

Interest income on residential mortgage loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Commercial and Commercial Real Estate Loans Held for Sale

The fair value of commercial and commercial real estate loans held for sale is estimated using observable prices of identical or similar loans that transact in the marketplace. In addition, the Company uses external pricing services that provide estimates of fair values based on quotes from various dealers transacting in the market, sector curves or benchmarking techniques. Therefore, the Company classifies the commercial and commercial real estate loans managed by the commercial secondary loan desk in Level 2 of the fair value hierarchy given the observable market inputs.

There were no loans in this portfolio that were 90 days or more past due or nonaccruing as of September 30, 2016 and December 31, 2015. The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in current earnings. Since all loans in the Company’s commercial trading portfolio consist of floating rate obligations, all changes in fair value are due to changes in credit risk. Such credit-related fair value changes may include observed changes in overall credit spreads and/or changes to the creditworthiness of an individual borrower. Unsettled trades within the commercial trading portfolio are not recognized on the Consolidated Balance Sheets and represent off-balance sheet commitments. Refer to Note 12 “Commitments and Contingencies” for further information.

Interest income on commercial and commercial real estate loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income. The Company recognized $1 million in other noninterest income related to its commercial trading portfolio for the three months ended September 30, 2016 and 2015. The Company recognized $3 million in other noninterest income related to its commercial trading portfolio for the nine months ended September 30, 2016 and 2015.

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale measured at fair value:



	September 30, 2016						December 31, 2015
(in millions)	Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal		Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal
Residential mortgage loans held for sale, at fair value		$456		$441		$15		$268		$263		$5
Commercial and commercial real estate loans held for sale, at fair value	70		70		—		57		57		—

Recurring Fair Value Measurements

The Company utilizes a variety of valuation techniques to measure its assets and liabilities at fair value. The valuation methodologies used for significant assets and liabilities carried on the balance sheet at fair value on a recurring basis are presented below:

Securities available for sale

The fair value of securities classified as AFS is based upon quoted prices, if available. Where observable quoted prices are available in an active market, securities are classified as Level 1 in the fair value hierarchy. Classes of instruments that are valued using this market approach include debt securities issued by the U.S. Treasury. If quoted market prices are not available, the fair value for the security is estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. These instruments are classified as Level 2 because they currently trade in active markets and the inputs to the valuations are observable. The pricing models used to value securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the unique characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each security’s value to changes in interest rates and prepayment speeds. Classes of instruments that are valued using this market approach include residential and commercial CMOs, specified pool mortgage “pass-through” securities and other debt securities issued by U.S. government-sponsored entities and state and political subdivisions.

A significant majority of the Company’s Level 1 and 2 securities are priced using an external pricing service. The Company verifies the accuracy of the pricing provided by its primary outside pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for the Company’s 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In certain cases where there is limited activity or less transparency around inputs to the valuation model, securities are classified as Level 3.

Residential loans held for sale

See the “Fair Value Option, Residential Mortgage Loans Held for Sale” discussion above.

Commercial loans held for sale

See the “Fair Value Option, Commercial and Commercial Real Estate Loans Held for Sale” discussion above.

Derivatives

The vast majority of the Company’s derivatives portfolio is composed of “plain vanilla” interest rate swaps, which are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined utilizing models that primarily use market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instrument’s fixed and variable cash flows, which are then discounted using an appropriate yield curve (i.e., LIBOR or Overnight Index Swap curve) to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity as the methodologies used do not require significant judgment. The Company also considers certain adjustments to the modeled price that market participants would make when pricing each instrument, including a credit valuation adjustment that reflects the credit quality of the swap counterparty. The Company incorporates the effect of exposure to a particular counterparty’s credit by netting its derivative contracts with the collateral available and calculating a credit valuation adjustment on the basis of the net position with the counterparty where permitted. The determination of this adjustment requires judgment on behalf of Company management; however, the total amount of this portfolio-level adjustment is not material to the total fair value of the interest rate swaps in their entirety. Therefore, interest rate swaps are classified as Level 2 in the valuation hierarchy.

The Company’s other derivatives include foreign exchange contracts. Fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy.

Money Market Mutual Fund

Fair value is determined based upon unadjusted quoted market prices and is considered a Level 1 fair value measurement.

Other investments

The fair values of the Company’s other investments are based on security prices in markets that are not active; therefore, these investments are classified as Level 2 in the fair value hierarchy.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at September 30, 2016:



(in millions)	Total		Level 1		Level 2		Level 3
Securities available for sale:
Mortgage-backed securities		$19,385		$—		$19,385		$—
State and political subdivisions	8		—		8		—
Equity securities	17		—		17		—
U.S. Treasury and other	15		15		—		—
Total securities available for sale	19,425		15		19,410		—
Loans held for sale, at fair value:
Residential loans held for sale	456		—		456		—
Commercial loans held for sale	70		—		70		—
Total loans held for sale, at fair value	526		—		526		—
Derivative assets:
Interest rate swaps	1,056		—		1,056		—
Foreign exchange contracts	118		—		118		—
Other contracts	18		—		18		—
Total derivative assets	1,192		—		1,192		—
Other investment securities, at fair value:
Money market mutual fund	108		108		—		—
Other investments	5		—		5		—
Total other investment securities, at fair value	113		108		5		—
Total assets		$21,256		$123		$21,133		$—
Derivative liabilities:
Interest rate swaps		$854		$—		$854		$—
Foreign exchange contracts	113		—		113		—
Other contracts	9		—		9		—
Total derivative liabilities	976		—		976		—
Total liabilities		$976		$—		$976		$—

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents assets and liabilities measured at fair value including gross derivative assets and liabilities on a recurring basis at December 31, 2015:



(in millions)	Total		Level 1		Level 2		Level 3
Securities available for sale:
Mortgage-backed securities		$17,842		$—		$17,842		$—
State and political subdivisions	9		—		9		—
Equity securities	17		—		17		—
U.S. Treasury	16		15		1		—
Total securities available for sale	17,884		15		17,869		—
Loans held for sale, at fair value:
Residential loans held for sale	268		—		268		—
Commercial loans held for sale	57		—		57		—
Total loans held for sale, at fair value	325		—		325		—
Derivative assets:
Interest rate swaps	636		—		636		—
Foreign exchange contracts	163		—		163		—
Other contracts	8		—		8		—
Total derivative assets	807		—		807		—
Other investment securities, at fair value:
Money market mutual fund	65		65		—		—
Other investments	5		—		5		—
Total other investment securities, at fair value	70		65		5		—
Total assets		$19,086		$80		$19,006		$—
Derivative liabilities:
Interest rate swaps		$505		$—		$505		$—
Foreign exchange contracts	156		—		156		—
Other contracts	5		—		5		—
Total derivative liabilities	666		—		666		—
Total liabilities		$666		$—		$666		$—

The changes in Level 3 assets measured at fair value on a recurring basis are presented below:



	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions)	2016		2015			2016		2015
Beginning of period balance		$—		$1			$—		$5
Purchases, issuances, sales and settlements:
Purchases	—		—			—		1
Sales	—		—			—		—
Settlements	—		—			—		—
Net (losses) gains	—		(1		)	—		(1		)
Transfers from Level 3 to Level 2	—		—			—		(5		)
End of period balance		$—		$—			$—		$—
Net unrealized gain (loss) included in net income for the year relating to assets held at period end		$—		$—			$—		$—

In March 2015, the Company transferred $5 million of securities from Level 3 to Level 2. The fair values of these securities are based on security prices in the market that are not active.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Nonrecurring Fair Value Measurements

The following valuation techniques are utilized to measure significant assets for which the Company utilizes fair value on a nonrecurring basis:

Impaired Loans

The carrying amount of collateral-dependent impaired loans is compared to the appraised value of the collateral less costs to dispose and is classified as Level 2. Any excess of carrying amount over the appraised value is charged to the ALLL.

Mortgage Servicing Rights

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. Refer to Note 1 “Significant Accounting Policies” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015 and Note 6 “Mortgage Banking” for more information.

Foreclosed assets

Foreclosed assets consist primarily of residential properties. Foreclosed assets are carried at the lower of carrying value or fair value less costs to dispose. Fair value is based upon independent market prices or appraised values of the collateral and is classified as Level 2.

The following table presents gains (losses) on assets and liabilities measured at fair value on a nonrecurring basis and recorded in earnings:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Impaired collateral-dependent loans		($18	)		($9	)		($29	)		($22	)
MSRs	(2		)	(1		)	(6		)	6
Foreclosed assets	—			—			(2		)	(2		)

The following table presents assets and liabilities measured at fair value on a nonrecurring basis:



	September 30, 2016								December 31, 2015
(in millions)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Impaired collateral-dependent loans		$353		$—		$353		$—		$60		$—		$60		$—
MSRs	163		—		—		163		178		—		—		178
Foreclosed assets	47		—		47		—		42		—		42		—

Disclosures about Fair Value of Financial Instruments

Following is a description of valuation methodologies used to estimate the fair value of financial instruments for disclosure purposes (these instruments are not recorded in the financial statements at fair value):

Securities held to maturity

The fair value of securities classified as HTM is estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. The pricing models used to value these securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the unique characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each security’s value to changes in interest rates and prepayment speeds.

Other investment securities, at cost

The fair value of other investment securities, at cost, such as FHLB stock and FRB stock, is assumed to approximate the cost basis of the securities. As a member of the FHLB and FRB, the Company is required to hold FHLB and FRB stock. The stock can be sold only to the FHLB and FRB upon termination of membership, or redeemed at the FHLB’s or FRB’s sole discretion.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Loans and leases

For loans and leases not recorded at fair value on a recurring basis that are not accounted for as collateral-dependent impaired loans, fair value is estimated by using one of two methods: a discounted cash flow method or a securitization method. The discounted cash flow method involves discounting the expected future cash flows using current rates which a market participant would likely use to value similar pools of loans. Inputs used in this method include observable information such as contractual cash flows (net of servicing cost) and unobservable information such as estimated prepayment speeds, credit loss exposures, and discount rates. The securitization method involves utilizing market securitization data to value the assets as if a securitization transaction had been executed. Inputs used include observable market-based MBS data and pricing adjustments based on unobservable data reflecting the liquidity risk, credit loss exposure and other characteristics of the underlying loans. The internal risk-weighted balances of loans are grouped by product type for purposes of these estimated valuations. For nonaccruing loans, fair value is estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets. Fair value of collateral-dependent loans is primarily based on the appraised value of the collateral.

Other loans held for sale

Balances represent loans that were transferred to other loans held for sale and are reported at the lower of cost or fair value.

Deposits

The fair value of demand deposits, checking with interest accounts, regular savings and money market accounts is the amount payable on demand at the balance sheet date. The fair value of term deposits is estimated by discounting the expected future cash flows using rates currently offered for deposits of similar remaining maturities.

Federal funds purchased and securities sold under agreements to repurchase, other short-term borrowed funds, and long-term borrowed funds

Rates currently available to the Company for debt of similar terms and remaining maturities are used to discount the expected cash flows of existing debt.

The following table presents the fair value for financial instruments not recorded at fair value in the unaudited interim Consolidated Financial Statements. The carrying amounts are recorded in the Consolidated Balance Sheets under the indicated captions:



	September 30, 2016
	Total				Level 1				Level 2				Level 3
(in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Securities held to maturity		$5,289		$5,431		$—		$—		$5,289		$5,431		$—		$—
Other investment securities, at cost	877		877		—		—		877		877		—		—
Other loans held for sale	—		—		—		—		—		—		—		—
Loans and leases	105,467		105,637		—		—		353		353		105,114		105,284
Financial Liabilities:
Deposits	108,327		108,329		—		—		108,327		108,329		—		—
Federal funds purchased and securities sold under agreements to repurchase	900		900		—		—		900		900		—		—
Other short-term borrowed funds	2,512		2,512		—		—		2,512		2,512		—		—
Long-term borrowed funds	11,902		12,127		—		—		11,902		12,127		—		—

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	December 31, 2015
	Total				Level 1				Level 2				Level 3
(in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Securities held to maturity		$5,258		$5,297		$—		$—		$5,258		$5,297		$—		$—
Other investment securities, at cost	863		863		—		—		863		863		—		—
Other loans held for sale	40		40		—		—		—		—		40		40
Loans and leases	99,042		99,026		—		—		60		60		98,982		98,966
Financial Liabilities:
Deposits	102,539		102,528		—		—		102,539		102,528		—		—
Federal funds purchased and securities sold under agreements to repurchase	802		802		—		—		802		802		—		—
Other short-term borrowed funds	2,630		2,630		—		—		2,630		2,630		—		—
Long-term borrowed funds	9,886		9,837		—		—		9,886		9,837		—		—

NOTE 15 - REGULATORY MATTERS

As a BHC, the Company is subject to regulation and supervision by the FRB. The primary subsidiaries of the Company are its two insured depository institutions 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. Under the Basel III capital framework that took effect on January 1, 2015, the Company and its banking subsidiaries must meet specific capital requirements. Basel III requirements are expressed in terms of the following ratios: (1) common equity tier 1 capital (common equity tier 1 capital/risk-weighted on- and off-balance sheet assets); (2) tier 1 capital (tier 1 capital/risk-weighted on- and off-balance sheet assets); (3) total capital (total capital/risk-weighted on- and off-balance sheet assets); and (4) tier 1 leverage (tier 1 capital/adjusted average quarterly assets). To meet the regulatory capital requirements, the Company and its banking subsidiaries must maintain minimum regulatory levels for each ratio. In addition, the Company must not be subject to a written agreement, order or capital directive with any of its regulators. Failure to meet minimum capital requirements can result in the initiation of certain actions that, if undertaken, could have a material effect on the Company’s Consolidated Financial Statements.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s capital and capital ratios under Basel III Transitional rules as of September 30, 2016 and December 31, 2015. Certain Basel III requirements are subject to phase-in through 2019, and these phase-in rules are used in this report of actual regulatory ratios. In addition, the Company has declared itself as an “AOCI opt-out” institution, which means that the Company is not required to change its methodology for recognizing in regulatory capital, only a subset of unrealized gains and losses that are classified as AOCI. As an AOCI opt-out institution, the Company is not required to recognize within regulatory capital the impacts of net unrealized gains and losses on securities AFS, accumulated net gains and losses on cash-flow hedges included in AOCI, net gains and losses on certain defined benefit pension plan assets, and net unrealized gains and losses on securities held to maturity included in AOCI.



	Transitional Basel III
									FDIA Requirements
	Actual				Minimum Capital Adequacy				Classification as Well-capitalized
(dollars in millions)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2016
Common equity tier 1 capital ^{(1) (5)}		$13,763	11.3	%		$6,233	5.125	%		$7,905	6.5	%
Tier 1 capital ^{(2) (5)}	14,010		11.5		8,057		6.625		9,729		8.0
Total capital ⁽³⁾⁽⁵⁾	17,290		14.2		10,489		8.625		12,161		10.0
Tier 1 leverage ⁽⁴⁾	14,010		10.1		5,537		4.000		6,921		5.0
As of December 31, 2015
Common equity tier 1 capital ⁽¹⁾		$13,389	11.7	%		$5,134	4.5	%		$7,415	6.5	%
Tier 1 capital ⁽²⁾	13,636		12.0		6,845		6.0		9,127		8.0
Total capital ⁽³⁾	17,505		15.3		9,127		8.0		11,408		10.0
Tier 1 leverage ⁽⁴⁾	13,636		10.5		5,218		4.0		6,523		5.0

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

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

⁽⁴⁾ “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under Basel III Standardized approach.

⁽⁵⁾“Minimum Capital ratio” for 2016 includes capital conservation buffer of 0.625%.

Under the Capital Plan Rule, the Company may only make capital distributions, including payment of dividends, in accordance with a capital plan that has been reviewed by the Federal Reserve and to which the Federal Reserve has not objected.

In April 2016, the Company submitted its 2016 Capital Plan to the Federal Reserve under the annual CCAR process. On June 29, 2016, the FRBG indicated that it did not object to the Company’s 2016 Capital Plan or to its proposed capital actions in the period beginning July 1, 2016 and ending June 30, 2017. The Company’s 2016 Capital Plan includes proposed quarterly common dividends of $0.12 per share through the end of 2016, a potential 17% increase to quarterly common dividends to $0.14 per share in 2017, and a share repurchase plan of up to $690 million through the second quarter of 2017.

For more information on share repurchases during the three months ended September 30, 2016, see Part II, Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds, included in this report.

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

In the three and nine months ended September 30, 2016, the Company paid total common dividends of approximately $62 million and $179 million, respectively. The Company also declared a preferred dividend of $7 million during the first and the third quarter of 2016, or a total of $14 million for the nine months ended September 30, 2016. Additionally, during the three months ended September 30, 2016, the Company repurchased 11.1 million shares of common stock, which reduced shareholders’ equity by $250 million.

In accordance with federal and state banking regulations, dividends paid by the Company’s banking subsidiaries to the Company itself are generally limited to the retained earnings of the respective banking subsidiaries unless specifically approved by the appropriate bank regulator.

On March 13, 2014, the OCC determined that CBNA no longer meets the condition to own a financial subsidiary — namely that CBNA must be both well capitalized and well managed. A financial subsidiary is permitted to engage in a broader range of activities, similar to those of a financial holding company, than those permissible for a national bank itself. CBNA has two financial subsidiaries, Citizens Securities, Inc., a registered broker-dealer, and RBS Citizens Insurance Agency, Inc., a dormant

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

entity. CBNA has entered into an agreement with the OCC pursuant to which the Company has developed and submitted to the OCC a remediation plan, that sets forth the specific actions it will take to bring itself back into compliance with the conditions to own a financial subsidiary.

NOTE 16 - EXIT COSTS AND RESTRUCTURING RESERVES

The Company incurred no restructuring costs for the three and nine months ended September 30, 2016.

For the three months ended September 30, 2015, the Company incurred no restructuring costs. For the nine months ended September 30, 2015, the Company incurred $27 million of restructuring costs, consisting of $18 million of facilities costs in occupancy, $6 million in outside services, and $3 million in salaries and employee benefits, substantially completing the restructuring initiatives designed to enhance operating efficiencies and reduce expense growth.

For segment reporting, all of these restructuring costs are reported within Other. See Note 18 “Business Segments” for further information.

The following tables present the activity in the exit costs and restructuring reserves:



	As of and for the Three Months Ended September 30,
	2016											2015
(in millions)	Salaries & Employee Benefits			Occupancy & Equipment			Other		Total			Salaries & Employee Benefits			Occupancy & Equipment			Other			Total
Beginning of period balance		$8			$12			$—		$20			$21			$27			$4			$52
Additions	—			—			—		—			—			1			—			1
Reversals	—			—			—		—			—			(1		)	—			(1		)
Utilization	(6		)	(1		)	—		(7		)	(5		)	(8		)	(1		)	(14		)
End of period balance		$2			$11			$—		$13			$16			$19			$3			$38



	As of and for the Nine Months Ended September 30,
	2016												2015
(in millions)	Salaries & Employee Benefits			Occupancy & Equipment			Other			Total			Salaries & Employee Benefits			Occupancy & Equipment			Other			Total
Beginning of period balance		$12			$16			$5			$33			$23			$18			$3			$44
Additions	—			—			—			—			5			18			6			29
Reversals	—			—			—			—			(2		)	(1		)	—			(3		)
Utilization	(10		)	(5		)	(5		)	(20		)	(10		)	(16		)	(6		)	(32		)
End of period balance		$2			$11			$—			$13			$16			$19			$3			$38

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 17 - RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in the balances, net of income taxes, of each component of AOCI:



	As of and for the three months ended September 30,
(in millions)	Net Unrealized Gains (Losses) on Derivatives			Net Unrealized Gains (Losses) on Securities			Defined Benefit Pension Plans			Total AOCI
Balance at beginning of period July 1, 2015		($13	)		$27			($373	)		($359	)
Other comprehensive income before reclassifications	48			61			—			109
Other-than-temporary impairment not recognized in earnings on securities	—			(8		)	—			(8		)
Amounts reclassified from other comprehensive (loss) income	(4		)	—			3			(1		)
Net other comprehensive income	44			53			3			100
Balance at end of period September 30, 2015		$31			$80			($370	)		($259	)

Balance at beginning of period July 1, 2016		$39			$166			($364	)		($159	)
Other comprehensive income before reclassifications	(1		)	(28		)	—			(29		)
Other-than-temporary impairment not recognized in earnings on securities	—			3			—			3
Amounts reclassified from other comprehensive (loss) income	(6		)	2			2			(2		)
Net other comprehensive (loss) income	(7		)	(23		)	2			(28		)
Balance at end of period September 30, 2016		$32			$143			($362	)		($187	)



	As of and for the nine months ended September 30,
(in millions)	Net Unrealized Gains (Losses) on Derivatives			Net Unrealized Gains (Losses) on Securities			Defined Benefit Pension Plans			Total AOCI
Balance at beginning of period January 1, 2015		($69	)		$74			($377	)		($372	)
Other comprehensive income before reclassifications	108			41			—			149
Other-than-temporary impairment not recognized in earnings on securities	—			(26		)	—			(26		)
Amounts reclassified from other comprehensive (loss) income	(8		)	(9		)	7			(10		)
Net other comprehensive income	100			6			7			113
Balance at end of period September 30, 2015		$31			$80			($370	)		($259	)

Balance at beginning of period January 1, 2016		$10			($28	)		($369	)		($387	)
Other comprehensive income before reclassifications	45			190			—			235
Other-than-temporary impairment not recognized in earnings on securities	—			(18		)	—			(18		)
Amounts reclassified from other comprehensive (loss) income	(23		)	(1		)	7			(17		)
Net other comprehensive income	22			171			7			200
Balance at end of period September 30, 2016		$32			$143			($362	)		($187	)

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the amounts reclassified out of each component of AOCI and into the Consolidated Statements of Operations:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
Details about AOCI Components													Affected Line Item in the Consolidated Statements of Operations
Reclassification adjustment for net derivative gains (losses) included in net income:		$23			$22			$66			$57		Interest income
	(8		)	(15		)	(24		)	(44		)	Interest expense
	(5		)	—			(5		)	—			Other income
	10			7			37			13			Income before income tax expense
	4			3			14			5			Income tax expense
		$6			$4			$23			$8		Net income
Reclassification of net securities gains (losses) to net income:		$—			$2			$13			$19		Securities gains, net
	(3		)	(2		)	(11		)	(5		)	Net securities impairment losses recognized in earnings
	(3		)	—			2			14			Income before income tax expense
	(1		)	—			1			5			Income tax expense
		($2	)		$—			$1			$9		Net income
Reclassification of changes related to defined benefit pension plans:		($4	)		($3	)		($12	)		($10	)	Salaries and employee benefits
	(4		)	(3		)	(12		)	(10		)	Income before income tax expense
	(2		)	—			(5		)	(3		)	Income tax expense
		($2	)		($3	)		($7	)		($7	)	Net income
Total reclassification gains (losses)		$2			$1			$17			$10		Net income

The following table presents the effects on net income of the amounts reclassified out of AOCI:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2016		2015		2016		2015
Net interest income (includes $15, $7, $42 and $13 of AOCI reclassifications, respectively)		$945		$856		$2,772		$2,532
Provision for credit losses	86		76		267		211
Noninterest income (includes ($8), $0, ($3) and $14 of AOCI reclassifications, respectively)	435		353		1,120		1,060
Noninterest expense (includes $4, $3, $12 and $10 of AOCI reclassifications, respectively)	867		798		2,505		2,449
Income before income tax expense	427		335		1,120		932
Income tax expense (includes $1, $3, $10 and $7 income tax net expense from reclassification items, respectively)	130		115		357		313
Net income		$297		$220		$763		$619

NOTE 18 - BUSINESS SEGMENTS

The Company is managed by its CEO on a segment basis. The Company’s two business segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided, or the type of customer served. Each segment has one or more segment heads who report directly to the CEO. The CEO has final authority over resource allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the CEO. 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, and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Reportable Segments

Segment results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the Company’s organizational and management structure and accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. A description of each reportable segment and table of financial results is presented below:

Consumer Banking

The Consumer Banking segment focuses on retail customers and small businesses with annual revenues of up to $25 million. It offers traditional banking products and services, including checking, savings, home loans, student loans, credit cards, business loans and financial management services. It also operates an indirect auto financing business, providing financing for both new and used vehicles through auto dealerships. The segment’s distribution channels include a branch network, ATMs and a work force of experienced specialists ranging from financial consultants, mortgage loan officers and business banking officers to private bankers. Our Consumer Banking value proposition is based on providing simple, easy to understand product offerings and a convenient banking experience with a more personalized approach.

Commercial Banking

The Commercial Banking segment primarily targets companies with annual revenues from $25 million to $2.5 billion and provides a full complement of financial products and solutions, including loans, leases, trade financing, deposits, cash management, commercial cards, foreign exchange, interest rate risk management, corporate finance and capital markets advisory capabilities. It focuses on middle-market companies, large corporations and institutions and has dedicated teams with industry expertise in government banking, not-for-profit, healthcare, technology, professionals, oil & gas, asset finance, franchise finance, asset-based lending, commercial real estate, private equity and sponsor finance. While the segment’s business development efforts are predominantly focused in the Company’s footprint, some of its specialized industry businesses also operate selectively on a national basis (such as healthcare, asset finance and franchise finance). A key component of Commercial Banking’s growth strategy is to bring ideas to clients that help their businesses thrive, and in doing so, expand the loan portfolio and ancillary product sales.

Non-segment Operations

Other

In addition to non-segment operations, Other includes certain reconciling items in order to translate the segment results that are based on management accounting practices into consolidated results. For example, Other includes goodwill and any associated goodwill impairment charges.



	As of and for the Three Months Ended September 30, 2016
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated
Net interest income (expense)		$621		$327		($3	)		$945
Noninterest income	229		123		83			435
Total revenue	850		450		80			1,380
Noninterest expense	650		181		36			867
Profit before provision for credit losses	200		269		44			513
Provision for credit losses	57		19		10			86
Income before income tax expense (benefit)	143		250		34			427
Income tax expense (benefit)	51		88		(9		)	130
Net income		$92		$162		$43			$297
Total average assets		$56,689		$47,902		$39,808			$144,399

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	As of and for the Three Months Ended September 30, 2015
(in millions)	Consumer Banking		Commercial Banking		Other		Consolidated
Net interest income		$556		$299		$1		$856
Noninterest income	235		100		18		353
Total revenue	791		399		19		1,209
Noninterest expense	623		175		—		798
Profit before provision for credit losses	168		224		19		411
Provision for credit losses	64		3		9		76
Income before income tax expense (benefit)	104		221		10		335
Income tax expense	36		76		3		115
Net income		$68		$145		$7		$220
Total average assets		$53,206		$43,113		$38,784		$135,103



	As of and for the Nine Months Ended September 30, 2016
(in millions)	Consumer Banking		Commercial Banking		Other			Consolidated
Net interest income		$1,804		$941		$27			$2,772
Noninterest income	656		344		120			1,120
Total revenue	2,460		1,285		147			3,892
Noninterest expense	1,898		554		53			2,505
Profit before provision for credit losses	562		731		94			1,387
Provision for credit losses	169		27		71			267
Income before income tax expense (benefit)	393		704		23			1,120
Income tax expense (benefit)	140		245		(28		)	357
Net income		$253		$459		$51			$763
Total average assets		$55,825		$46,869		$39,101			$141,795



	As of and for the Nine Months Ended September 30, 2015
(in millions)	Consumer Banking		Commercial Banking			Other			Consolidated
Net interest income		$1,633		$861			$38			$2,532
Noninterest income	684		308			68			1,060
Total revenue	2,317		1,169			106			3,592
Noninterest expense	1,832		529			88			2,449
Profit before provision for credit losses	485		640			18			1,143
Provision for credit losses	187		(11		)	35			211
Income (loss) before income tax expense (benefit)	298		651			(17		)	932
Income tax expense (benefit)	103		224			(14		)	313
Net income (loss)		$195		$427			($3	)		$619
Total average assets		$52,438		$42,451			$39,766			$134,655

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Management accounting practices utilized by the Company as the basis for presentation of segment results include the following:

FTP adjustments

The Company utilizes an FTP system to eliminate the effect of interest rate risk from the segments’ net interest income because such risk is centrally managed within the Treasury function. The FTP system credits (or charges) the segments with the economic value of the funds created (or used) by the segments. The FTP system provides a funds credit for sources of funds and a funds charge for the use of funds by each segment. The sum of the interest income/expense and FTP charges/credits for each segment is its designated net interest income. The variance between the Company’s cumulative FTP charges and cumulative FTP credits is offset in Other.

Provision for credit losses allocations

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

Income tax allocations

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

Expense allocations

Noninterest expenses incurred by centrally managed operations or business lines that directly support another business line’s operations are charged to the applicable business line based on its utilization of those services.

Goodwill

For impairment testing purposes, the Company allocates goodwill to its Consumer Banking and Commercial Banking reporting units. For management reporting purposes, the Company presents the goodwill balance (and any related impairment charges) in Other.

Substantially all revenues generated and long-lived assets held by the Company’s business segments are derived from clients that reside in the United States. Neither business segment earns revenue from a single external customer that represents 10 percent or more of the Company’s total revenues.

NOTE 19 - EARNINGS PER SHARE



	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions, except share and per-share data)	2016		2015		2016		2015
Numerator (basic and diluted):
Net income		$297		$220		$763		$619
Less: Preferred stock dividends	7		7		14		7
Net income available to common stockholders		$290		$213		$749		$612
Denominator:
Weighted-average common shares outstanding - basic	519,458,976		530,985,255		525,477,273		538,279,222
Dilutive common shares: share-based awards	1,663,490		2,412,903		1,784,111		2,647,139
Weighted-average common shares outstanding - diluted	521,122,466		533,398,158		527,261,384		540,926,361
Earnings per common share:
Basic		$0.56		$0.40		$1.43		$1.14
Diluted	0.56		0.40		1.42		1.13

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period, plus the effect of potential dilutive common shares such as share-based awards, using the treasury stock method. Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive.

CITIZENS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 20 - OTHER OPERATING EXPENSE

The following table presents the details of other operating expense:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2016		2015		2016		2015
Deposit insurance		$32		$28		$87		$88
Promotional expense	24		25		73		76
Other	88		80		227		241
Other operating expense		$144		$133		$387		$405

NOTE 21 - SUBSEQUENT EVENTS

The Company has evaluated the impacts of events that have occurred subsequent to September 30, 2016 through the date the Consolidated Financial Statements were filed with the SEC. Based on this evaluation, the Company has determined none of these events were required to be recognized or disclosed in the Consolidated Financial Statements and related Notes, except as follows:

On October 19, 2016, the Company declared a quarterly common stock dividend of $0.12 per share, or approximately $62 million, payable on November 16, 2016 to stockholders of record at the close of business on November 2, 2016.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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



		Page
Forward-Looking Statements		59
Selected Consolidated Financial Data		60
Overview		62
Recent Events		63
Key Factors Affecting Our Business		63
Principal Components of Operations and Key Performance Metrics Used By Management		65
Results of Operations — Three and Nine Months Ended September 30, 2016 Compared with Three and Nine Months Ended September 30, 2015		74
Highlights		74
Net Income		76
Net Interest Income		77
Noninterest Income		80
Provision for Credit Losses		81
Noninterest Expense		81
Income Tax Expense		81
Business Segments		82
Analysis of Financial Condition — September 30, 2016 Compared with December 31, 2015		88
Loans and Leases		88
Non-Core Assets		89
Allowance for Credit Losses and Nonperforming Assets		89
Securities		93
Deposits		94
Borrowed Funds		94
Derivatives		96
Capital		97
Liquidity		102
Off-Balance Sheet Commitments		106
Critical Accounting Estimates		106
Risk Governance		112
Market Risk		115

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 Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms;


•	The effect of the current low interest rate environment or 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, 2015.

CITIZENS FINANCIAL GROUP, INC.

SELECTED CONSOLIDATED FINANCIAL DATA

Selected Consolidated Financial Data

The summary Consolidated Operating Data for the three and nine months ended September 30, 2016 and 2015 and the summary Consolidated Balance Sheet data as of September 30, 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.

In our opinion, the 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, 2016 are not necessarily indicative of those to be expected for the year ending December 31, 2016 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)	2016			2015			2016			2015
OPERATING DATA:
Net interest income		$945			$856			$2,772			$2,532
Noninterest income	435			353			1,120			1,060
Total revenue	1,380			1,209			3,892			3,592
Provision for credit losses	86			76			267			211
Noninterest expense	867			798			2,505			2,449
Income before income tax expense	427			335			1,120			932
Income tax expense	130			115			357			313
Net income		$297			$220			$763			$619
Net income available to common stockholders		$290			$213			$749			$612
Net income per common share - basic		$0.56			$0.40			$1.43			$1.14
Net income per common share - diluted		$0.56			$0.40			$1.42			$1.13
OTHER OPERATING DATA:
Return on average common equity ⁽¹⁾	5.82		%	4.40		%	5.08		%	4.23		%
Return on average tangible common equity	8.58			6.60			7.51			6.34
Return on average total assets ⁽²⁾	0.82			0.65			0.72			0.62
Return on average total tangible assets	0.86			0.68			0.75			0.65
Efficiency ratio	62.88			66.02			64.36			68.17
Net interest margin ⁽³⁾	2.84			2.76			2.85			2.75

CITIZENS FINANCIAL GROUP, INC.

SELECTED CONSOLIDATED FINANCIAL DATA



(in millions)	September 30, 2016			December 31, 2015
BALANCE SHEET DATA:
Total assets		$147,015			$138,208
Loans and leases ⁽⁴⁾	105,467			99,042
Allowance for loan and lease losses	1,240			1,216
Total securities	25,704			24,075
Goodwill	6,876			6,876
Total liabilities	126,834			118,562
Total deposits	108,327			102,539
Federal funds purchased and securities sold under agreements to repurchase	900			802
Other short-term borrowed funds	2,512			2,630
Long-term borrowed funds	11,902			9,886
Total stockholders’ equity	20,181			19,646
OTHER BALANCE SHEET DATA:
Asset Quality Ratios:
Allowance for loan and lease losses as a percentage of total loans and leases	1.18		%	1.23		%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases	112.03			114.60
Nonperforming loans and leases as a percentage of total loans and leases	1.05			1.07
Capital Ratios:⁽⁵⁾
CET1 capital ratio ⁽⁶⁾	11.3			11.7
Tier 1 capital ratio ⁽⁷⁾	11.5			12.0
Total capital ratio ⁽⁸⁾	14.2			15.3
Tier 1 leverage ratio ⁽⁹⁾	10.1			10.5

⁽¹⁾“Return on average common equity” is defined as annualized net income available to common stockholders divided by average common equity.

⁽²⁾“Return on average total assets” is defined as annualized net income divided by average total assets.

⁽³⁾“Net interest margin” is defined as annualized net interest income divided by average total interest-earning assets.

⁽⁴⁾Excludes loans held for sale of $526 million and $365 million as of September 30, 2016 and December 31, 2015, respectively.

⁽⁵⁾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, 2016 and December 31, 2015 are prepared using the Basel III Standardized transitional approach.

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

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

⁽⁹⁾ “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under Basel III Standardized approach.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Overview

We are one of the nation’s oldest and largest financial institutions, with $147.0 billion of total assets as of September 30, 2016. Headquartered in Providence, Rhode Island, we deliver a broad range of retail and commercial banking products and services to individuals, institutions and companies. Our approximately 17,600 colleagues strive to meet the financial needs of customers and prospects through approximately 1,200 branches and approximately 3,200 ATMs operated in 11 states in the New England, Mid-Atlantic and Midwest regions and through our online, telephone and mobile banking platforms. We conduct our banking operations through two wholly-owned banking subsidiaries, Citizens Bank, N.A. and Citizens Bank of Pennsylvania, and we operate our businesses through two operating segments, Consumer Banking and Commercial Banking.

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, student loans, auto financing, credit cards, business loans and wealth management and investment services. Consumer Banking average loans and leases totaled $54.5 billion and $51.1 billion, or 53% of average loan and leases (including loans held for sale) for both the nine months of 2016 and 2015, respectively.

Commercial Banking offers 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 hedging, leasing and asset finance, specialty finance and trade finance. Commercial Banking average loans and leases totaled $45.5 billion compared with $41.2 billion, or 44% and 43% of average loan and leases (including loans held for sale) for both the nine months 2016 and 2015, respectively.

Non-core assets totaled $3.0 billion as of September 30, 2016 compared with $2.3 billion as of December 31, 2015, an increase of 26%. Non-core assets are primarily loans that are not aligned to our strategic priorities, generally as a result of geographic location, industry, product type, or risk level. This increase was driven by the transfer of a $1.2 billion commercial lease and loan portfolio tied to legacy RBS aircraft leasing borrowers that we placed in runoff following a review of the Asset Finance business in third quarter 2016. This portfolio of largely investment-grade client aircraft leases do not meet go-forward business model strategic and risk-adjusted return parameters, and we plan to exit these non-strategic relationships. These assets were designated as non-core and transferred to Other.

The largest component of our retail non-core portfolio is the home equity products serviced by others portfolio (a portion of which we now service internally). Non-core assets are included in Other along with the treasury function, securities portfolio, wholesale funding activities, goodwill, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses not attributed to the Consumer Banking or Commercial Banking segments.

We regularly incur expenses associated with investments in our infrastructure. For example, from 2011 to 2015 we invested $1.3 billion in infrastructure and technology, and plan to invest approximately $181 million in 2016 and approximately $210 million in 2017. We invested $131 million in our infrastructure in the first nine months of 2016. These investments, which are designed to lower our operating costs and improve our customer experience, include significant programs to enhance our resiliency, upgrade customer-facing technology and streamline operations.

For the third quarter 2016, we recorded income before income tax expense and net income of $427 million and $297 million, respectively. Third quarter 2016 results included a $31 million pre-tax, or $19 million after-tax benefit from notable items, presented below.



	Three Months Ended September 30, 2016
(dollars in millions, except EPS impact)	Pre tax			After tax			EPS Impact
Gain on mortgage/home equity TDR Transaction		$72			$45			$0.09
Home equity operational items⁽¹⁾	(8		)	(5		)	(0.01		)
TDR gain after impact of home equity operational items	64			40			0.08

Asset Finance repositioning⁽²⁾	(16		)	(10		)	(0.02		)
TOP III efficiency initiatives⁽³⁾	(17		)	(11		)	(0.02		)
Total		$31			$19			$0.04

⁽¹⁾ Pre-tax reflects $3 million of other expense, $3 million of amortization of software and $2 million of outside services.

⁽²⁾ Pre-tax reflects ($5) million noninterest income impact and $11 million of other expense related to lease-residual impairment tied to legacy RBS aircraft leasing borrowers moved to runoff in non-core.

⁽³⁾ Pre-tax expense reflects $11 million in salaries and benefits and $6 million in outside services associated with TOP III efficiency initiatives.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Recent Events

In third quarter 2016, we repurchased $250 million, or 11,062,192 shares of common stock at an average price of $22.60.

On July 28, 2016, we issued $350 million of 2.375% fixed-rate senior notes due 2021, and used the net proceeds and available cash to repurchase $500 million of our subordinated debt.

Key Factors Affecting Our Business

Macroeconomic conditions

Our business is affected by national and regional economic conditions, as well as the perception of future conditions and economic prospects. The significant macroeconomic factors that impact our business include the rate of economic expansion, the health of the housing market, unemployment levels and interest rates in the United States.

The U.S. economy continued to expand at a moderate pace, with GDP rising by 2.9% in third quarter 2016, following 1.9% growth in 2015. The housing sector remains steady as previous quarters, with three month average existing home sales of 5.4 million units.

The labor market continued to improve, with moderate job gains and lower levels of unemployment. The U.S. unemployment rate was 5.0% at September 30, 2016 and December 31, 2015. Average monthly nonfarm employment increased by 192,000 in third quarter 2016, after a revised average increase of 146,000 in second quarter 2016.

The FRB maintained very accommodative monetary policy conditions during third quarter 2016, and continues to target a 0.25% to 0.50% federal funds rate range at the short end of the yield curve. Interest rates remain relatively low. See “—Interest rates” below for further discussion of the impact of interest rates on our results. Observable inflation levels remain below the FRB’s longer-term objective of 2.0%. Further labor market improvement and the dissipation of the effects of a decline in energy and import prices are expected to bring inflation closer to the FRB’s inflation objective.

Interest rates

Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the contractual cost of such liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Risk Governance” and “—Market Risk — Non-Trading Risk,” included in this report.

The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the FRB’s actions. However, the yields generated by our loans and securities are typically driven by both short-term and long-term interest rates, which are set by the market or, at times, by the FRB’s actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. In 2015 and through third quarter 2016, short-term and long-term interest rates remained at very low levels by historical standards, with many benchmark rates, such as the federal funds rate and one- and three-month LIBOR, near zero. Further declines in the yield curve or a decline in longer-term yields relative to short-term yields (a flatter yield curve) would have an adverse impact on our net interest margin and net interest income.

In 2015 and through third quarter 2016, the FRB maintained a highly accommodative monetary policy, and indicated that this policy would remain in effect for a considerable time after its asset purchase program ended on October 29, 2014 and the economic recovery strengthens in the United States. More recently, the FRB has started to move down the path of interest rate normalization by raising the federal funds rate by 25 basis points in December 2015. However, the FRB will likely continue to target a highly accommodative monetary policy for some time to come.

Credit trends

Credit metrics and asset quality remained strong and broadly stable in third quarter 2016. Nonperforming loans of $1.1 billion as of September 30, 2016 increased $73 million from September 30, 2015, reflecting an increase in commercial nonperforming assets largely driven by commodity-based businesses, partially offset by improvement in retail products. Net charge-offs of $83 million increased $8 million from $75 million in third quarter 2015, largely driven by the commercial oil and gas portfolio, and included $62 million in recoveries of prior period charge-offs, compared with $45 million in third quarter 2015. Annualized net charge-offs as a percentage of total average loans of 0.32%, was relatively stable compared to 0.31% in third quarter 2015.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Credit metrics and asset quality remained relatively stable in the first nine months of 2016. Net charge-offs of $231 million increased $24 million from $207 million in the first nine months of 2015, which included $153 million in recoveries for the first nine months of 2016 compared to $149 million in recoveries for the first nine months of 2015. Annualized net charge-offs as a percentage of total average loans of 0.30%, was relatively stable compared to 0.29% in the first nine months of 2015.

Regulatory trends

We are subject to extensive regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment also has heightened regulatory expectations around many regulations including consumer compliance, the Bank Secrecy Act, anti-money laundering compliance, and increased internal audit activities. As a result of these heightened expectations, we expect to incur additional costs for additional compliance personnel and/or professional fees associated with advisors and consultants.

Dodd-Frank regulation

As described under “Regulation and Supervision” in Part I, Item 1 — Business included in our Annual Report on Form 10-K for the year ended December 31, 2015, we are subject to a variety of laws and regulations, including the Dodd-Frank Act. The Dodd-Frank Act is complex, and many aspects of the Dodd-Frank Act are subject to final rulemaking or phased implementation that will take effect over several years. The Dodd-Frank Act will continue to impact our earnings through fee reductions, higher costs and imposition of new restrictions on us. The Dodd-Frank Act may also continue to have a material adverse impact on the value of certain assets and liabilities held on our balance sheet. The ultimate impact of the Dodd-Frank Act on our business will depend on regulatory interpretation and rulemaking as well as the success of any of our actions to mitigate the negative impacts of certain provisions. Key parts of the Dodd-Frank Act that specifically impact our business are the repeal of a previous prohibition against payment of interest on demand deposits, which became effective in July 2011, and the introduction of a capital planning and stress-testing framework developed by the FRBG, known as CCAR and DFAST. Under this supervisory framework, we are required to submit annual capital plans to the FRB and are subject to annual supervisory and semiannual internal stress tests requirements.

Consistent with these requirements, we must submit our annual capital plan and the results of our annual company-run stress tests to the FRB by April 5^th of each year and disclose certain results within 15 days of the date the FRB discloses the results of its supervisory-run tests. We submitted our 2016 Capital Plan and related annual stress test results to the Federal Reserve on April 5, 2016. We published our estimated results under the supervisory severely adverse scenario on the Investor Relations regulatory filings and disclosures page of our corporate website on June 23, 2016. The annual DFAST process projects net income, loan losses and capital ratios during a nine-quarter horizon under hypothetical, stressful macroeconomic and financial market scenarios developed by the FRBG as well as certain mandated assumptions about capital distributions prescribed in the DFAST rule. Consistent with the purpose of these exercises and the assumptions used to assess our performance during hypothetical economic conditions, the projected results under the required stress scenarios show severe negative impacts on earnings and decline in capital ratios. However, these pro forma results should not be interpreted as management expectations but rather as a possible result under hypothetical, severely adverse economic conditions that do not take into account capital conservation actions that would be mandated by internal policy if such conditions were actually to occur.

Similarly, we are required to submit the results of our mid-cycle company-run DFAST stress tests by October 5^th of each year and disclose the results under an internally developed severely adverse scenario between October 5^th and November 4^th. We submitted the results of our 2016 mid-cycle stress test to the FRB on October 3, 2016 and disclosed a summary of the results on October 5, 2016.

The Dodd-Frank Act also requires each of our bank subsidiaries to conduct stress tests on an annual basis and to disclose the stress test results. CBNA submitted its 2016 annual stress tests to the OCC on April 5, 2016 and published a summary of the results along with the stress test result of the bank holding company parent in June 2016. CBPA submitted its 2016 annual stress tests to the FDIC on April 5, 2016 and published its summary results as an update to the CFG / CBNA Dodd-Frank Act Company-Run Stress Test Disclosure on our Investor Relations site on October 17, 2016, prior to the October 31, 2016 deadline that the FDIC sets for banks with $10 - $50 billion in total assets.

Comprehensive Capital Analysis and Review

CCAR is an annual exercise by the FRBG to ensure that the largest bank holding companies have sufficient capital to continue operations throughout times of economic and financial stress and robust forward-looking capital planning processes that account for their unique risks.

As part of CCAR, the FRBG evaluates institutions’ capital adequacy, internal capital adequacy assessment processes and their plans to make capital distributions, such as dividend payments or stock repurchases. The FRBG may either object to our capital plan, in whole or in part, or provide a notice of non-objection. If the FRBG objects to our capital plan, we may not make any capital distribution other than those with respect to which the FRBG has indicated its non-objection.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

In April 2016, we submitted our 2016 Capital Plan to the Federal Reserve under the annual CCAR process. On June 29, 2016, the FRBG indicated that it did not object to our 2016 Capital Plan or to our proposed capital actions in the period beginning July 1, 2016 and ending June 30, 2017. Our 2016 Capital Plan includes proposed quarterly common dividends of $0.12 per share through the end of 2016, a potential 17% increase to quarterly common dividends to $0.14 per share in 2017, and a share repurchase plan of up to $690 million through the second quarter of 2017.

All proposed capital distributions are subject to consideration and approval by CFG’s Board of Directors prior to execution. The timing and exact amount of dividends and share repurchases will depend on various factors, including our capital position, financial performance and market conditions. The Board has approved a share repurchase plan that may be executed in the open market or in privately negotiated transactions, including under Rule 10b5-1 plans.

Repeal of the prohibition on depository institutions paying interest on demand deposits

We began offering interest-bearing corporate checking accounts after the 2011 repeal of the prohibition on depository institutions paying interest on demand deposits. Currently, industry wide interest rates for this product are very low and thus far the impact of the repeal has not had a significant effect on our results. However, market rates could increase more significantly in the future. If we need to pay higher interest rates on checking accounts to maintain current clients or attract new clients, our interest expense would increase, perhaps materially. Furthermore, if we fail to offer interest rates at a sufficient level to retain demand deposits, our core deposits may be reduced, which would require us to obtain funding in other ways or limit potential future asset growth.

Basel III final rules applicable to us and our banking subsidiaries

In July 2013, the FRB, OCC, and FDIC issued the U.S. Basel III final rules. The rules implement the Committee on Banking Supervision’s Basel III capital framework and certain provisions of the Dodd-Frank Act, including the Collins Amendment. The U.S. Basel III final rules substantially revised the risked-based capital and leverage requirements applicable to bank holding companies and their insured depository institution subsidiaries, including CBNA and CBPA. The U.S. Basel III final rules became effective for us and our depository institution subsidiaries, including CBNA and CBPA, on January 1, 2015 (subject to a phase-in period for certain provisions). In order to comply with the new capital requirements, we established internal capital ratio targets that meet or exceed U.S. regulatory expectations under fully phased-in Basel III rules, and increased our capital requirements in anticipation of the transition that is underway.

HELOC payment shock

Attention has been given by regulators, rating agencies, and the general press regarding the potential for increased exposure to credit losses associated with HELOCs that were originated during the period of rapid home price appreciation between 2003 and 2007. Industry wide, many of the HELOCs originated during this timeframe were structured with an extended interest-only payment period followed by a requirement to convert to a higher payment amount that would begin fully amortizing both principal and interest beginning at a certain date in the future. To help manage this exposure, in September 2013, we launched 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. As of September 30, 2016, approximately 21% of our $14.5 billion HELOC portfolio, or $3.0 billion in drawn balances were subject to a payment reset or balloon payment between October 1, 2016 and December 31, 2018, including $24 million in balloon balances where full payment is due at the end of a ten-year interest only draw period.

As of September 30, 2016, for the $1.6 billion of our HELOC portfolio that was originally structured with a reset period in 2014 and 2013, 94% of the balances were refinanced, paid off or were current on payments, 2% were past due and 4% had been charged off. As of September 30, 2016, for the $1.3 billion in balances originally structured with a reset period in 2015, 94% of the balances were refinanced, paid off or were current on payments, 4% were past due and 2% had been charged off. A total of $995 million in balances were originally structured with a reset period in 2016, with $138 million scheduled to reset for the remainder of 2016. Factors that affect our future expectations for charge-off risk for the portion of our HELOC portfolio subject to reset periods in the future include improved loan-to-value ratios resulting from continued home price appreciation, stable portfolio credit score profiles and more robust loss mitigation efforts.

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.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 and net income. 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.

Net interest income

Net interest income is the difference between the interest earned on interest-earning assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the cost of such liabilities. Net interest income is impacted by the relative mix of interest-earning assets and interest-bearing liabilities, movements in market interest rates, levels of nonperforming assets and pricing pressure from competitors. The mix of interest-earning assets is influenced by loan demand and by management’s continual assessment of the rate of return and relative risk associated with various classes of interest-earning assets.

The mix of interest-bearing liabilities is influenced by management’s assessment of the need for lower cost funding sources weighed against relationships with customers and growth requirements and is impacted by competition for deposits in our market and the availability and pricing of other sources of funds.

Noninterest income

The primary components of our noninterest income are service charges and fees, card fees, trust and investment services fees and mortgage banking fees.

Total revenue

Total revenue is the sum of our net interest income and our noninterest income.

Provision for credit losses

The provision for credit losses is the amount of expense that, based on our judgment, is required to maintain the allowance for credit losses at an amount that reflects probable losses inherent in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under relevant accounting guidance. The provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. The determination of the amount of the allowance for credit losses is complex and involves a high degree of judgment and subjectivity. For additional information regarding the provision for credit losses, see “—Critical Accounting Estimates — Allowance for Credit Losses,” Note 1 “Significant Accounting Policies” to the audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015 and Note 4 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

Noninterest expense

Noninterest expense includes salaries and employee benefits, outside services, occupancy expense, equipment expense, amortization of software, goodwill impairment, and other operating expenses.

Net income and Net Income Available to Common Stockholders

We evaluate our net income and net income available to common stockholders based on measures including return on average common equity, return on average total assets and return on average tangible common equity.

Loans and leases

We classify our loans and leases pursuant to the following classes: 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, student, credit cards and other retail. Our SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others, which we now service a portion of internally.

Loans are reported at the amount of their outstanding principal, net of charge-offs, unearned income, deferred loan origination fees and costs and unamortized premiums or discounts (on purchased loans). Deferred loan origination fees and costs and purchase discounts and premiums are amortized as an adjustment of yield over the life of the loan, using the level yield interest method. Unamortized amounts remaining upon prepayment or sale are recorded as interest income or gain (loss) on sale, respectively. Credit card receivables include billed and uncollected interest and fees.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Leases are classified at the inception of the lease by type. Lease receivables, including leveraged leases, are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income, including unamortized investment credits. Lease residual values are reviewed at least annually for other-than-temporary impairment, with valuation adjustments recognized currently against noninterest income and noninterest expense. Leveraged leases are reported net of non-recourse debt. Unearned income is recognized to yield a level rate of return on the net investment in the leases.

Loans held for sale, at fair value

Mortgage loans and commercial loans held for sale are carried at fair value.

Other loans held for sale

Balances represent loans that were transferred to other loans held for sale are reported at the lower of cost or fair value.

Securities

Our securities portfolio is managed to seek return while maintaining prudent levels of quality, market risk and liquidity. Investments in debt and equity securities are carried in four portfolios: AFS, HTM, trading securities and other investment securities. We determine the appropriate classification at the time of purchase. Securities in our AFS portfolio will be held for indefinite periods of time and may be sold in response to changes in interest rates, changes in prepayment risk or other factors relevant to our asset and liability strategy. Securities in our AFS portfolio are carried at fair value, with unrealized gains and losses reported in OCI, as a separate component of stockholders’ equity, net of taxes. Securities are classified as HTM because we have the ability and intent to hold the securities to maturity, and securities in our HTM portfolio are carried at amortized cost. Other investment securities are composed mainly of FHLB stock and FRB stock (which are carried at cost), and money market mutual fund investments held by our broker-dealer (which are carried at fair value, with changes in fair value recognized in noninterest income).

Allowance for credit losses

Our estimate of probable losses in the loan and lease portfolios is recorded in the ALLL and the reserve for unfunded lending commitments. Together these are referred to as the allowance for credit losses. We evaluate the adequacy of the allowance for credit losses using the following ratios: ALLL as a percentage of total loans and leases; ALLL as a percentage of nonperforming loans and leases; and nonperforming loans and leases as a percentage of total loans and leases. For additional information, see “—Critical Accounting Estimates — Allowance for Credit Losses,” and Note 1 “Significant Accounting Policies” to the audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015 and Note 4 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

Deposits

Our deposits include: on demand checking, checking with interest, regular savings accounts, money market accounts and term deposits.

Borrowed funds

As of September 30, 2016, our total short-term borrowed funds included federal funds purchased, securities sold under agreement to repurchase, the current portion of FHLB advances and other short-term borrowed funds. As of September 30, 2016, our long-term borrowed funds included subordinated debt, unsecured notes, Federal Home loan advances and other long-term borrowed funds. For additional information, see “—Analysis of Financial Condition — Borrowed Funds,” and Note 7 “Borrowed Funds” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

Derivatives

We use pay-fixed swaps to lengthen liabilities synthetically and offset duration in fixed-rate assets. We also use pay-fixed swaps to hedge floating-rate wholesale funding.

We use receive-fixed interest rate swaps to manage the interest rate exposure on our medium term borrowings. We also use receive-fixed swaps to minimize the exposure to variability in the interest cash flows on our floating rate assets. The assets and liabilities recorded for derivatives designated as hedges reflect the market value of these hedge instruments.

We sell interest rate swaps and foreign exchange forwards to commercial customers. Interest rate and foreign exchange derivative contracts are transacted to effectively minimize our market risk associated with the customer derivative contracts. The assets and liabilities recorded for derivatives not designated as hedges reflect the market value of these transactions. For additional information, see “—Analysis of Financial Condition — Derivatives,” and Note 11 “Derivatives” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Key performance metrics and non-GAAP financial measures

We consider certain key performance metrics 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;


•	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 (Basel III fully phased-in basis), represents CET1 divided by total risk-weighted assets as defined under Basel III Standardized approach.

We present and provide reconciliations of certain non-GAAP measures. These reconciliations are adjusted for restructuring charges, special items and/or notable items, which are included, where applicable, in the financial results presented in accordance with GAAP. Restructuring charges and special items include expenses related to our efforts to improve processes and enhance efficiencies, as well as rebranding, separation from RBS and regulatory expenses. Notable items include certain revenue or expense items 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 restructuring charges, special items and/or notable items in any period do not reflect the operational performance of the business in that period and, accordingly, it is useful to consider these line items with and without restructuring charges, special items and/or notable items. We believe this presentation also increases comparability of period-to-period results.

Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by other companies. We caution investors not to place undue reliance on such non-GAAP measures, but instead to consider them with the most directly comparable GAAP measure. Non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for our results reported under GAAP.

Non-GAAP measures are denoted throughout “—Results of Operations” by the use of the term “adjusted” and are followed by an asterisk (*).

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table contains computations of key performance metrics and reconciliations of non-GAAP financial measures:



		As of and for the Three Months Ended September 30,					As of and for the Nine Months Ended September 30,
(dollars in millions, except per-share amounts)	Ref.	2016			2015		2016			2015
Noninterest income, adjusted:
Noninterest income (GAAP)			$435			$353		$1,120			$1,060
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)			$368			$353		$1,053			$1,060

Total revenue, adjusted:
Total revenue (GAAP)	A		$1,380			$1,209		$3,892			$3,592
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)	B		$1,313			$1,209		$3,825			$3,592

Noninterest expense, adjusted:
Noninterest expense (GAAP)	C		$867			$798		$2,505			$2,449
Less: Restructuring charges		—			—		—			26
Less: Special items		—			—		—			24
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)	D		$831			$798		$2,469			$2,399

Pre-provision profit, adjusted:
Total revenue, adjusted (non-GAAP)	B		$1,313			$1,209		$3,825			$3,592
Noninterest expense, adjusted (non-GAAP)	D	831			798		2,469			2,399
Pre-provision profit, adjusted (non-GAAP)			$482			$411		$1,356			$1,193

Income before income tax expense, adjusted:
Income before income tax expense (GAAP)			$427			$335		$1,120			$932
Less: Restructuring charges		—			—		—			(26		)
Less: Special items		—			—		—			(24		)
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)			$396			$335		$1,089			$982

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,
(dollars in millions, except per-share amounts)	Ref.	2016			2015		2016			2015
Income tax expense, adjusted:
Income tax expense (GAAP)			$130			$115		$357			$313
Less: Restructuring charges		—			—		—			(10		)
Less: Special items		—			—		—			(9		)
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)			$118			$115		$345			$332

Net income, adjusted:
Net income (GAAP)	E		$297			$220		$763			$619
Add: Restructuring charges, net of tax expense		—			—		—			16
Add: Special items, net of tax expense		—			—		—			15
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)	F		$278			$220		$744			$650

Net income available to common stockholders, adjusted:
Net income available to common stockholders (GAAP)	G		$290			$213		$749			$612
Add: Restructuring charges, net of tax expense		—			—		—			16
Add: Special items, net of tax expense		—			—		—			15
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)	H		$271			$213		$730			$643

Net income per average common share-basic and diluted, adjusted:
Average common shares outstanding - basic (GAAP)	I	519,458,976			530,985,255		525,477,273			538,279,222
Average common shares outstanding - diluted (GAAP)	J	521,122,466			533,398,158		527,261,384			540,926,361
Net income per average common share - basic (GAAP)	G/I		$0.56			$0.40		$1.43			$1.14
Net income per average common share - diluted (GAAP)	G/J	0.56			0.40		1.42			1.13
Net income per average common share-basic, adjusted (non-GAAP)	H/I	0.52			0.40		1.39			1.20
Net income per average common share-diluted, adjusted (non-GAAP)	H/J	0.52			0.40		1.39			1.19

Impact of restructuring charges, special items and/or notable items on net income per average common share - basic:
Restructuring charges			$—			$—		$—			$0.03
Special items		—			—		—			0.03
Notable items:
Gain on mortgage/home equity TDR Transaction		0.09			—		0.09			—
Home equity operational items		(0.01		)	—		(0.01		)	—
Asset Finance repositioning		(0.02		)	—		(0.02		)	—
TOP III efficiency initiatives		(0.02		)	—		(0.02		)	—
Impact of restructuring charges, special items and/or notable items on net income per average common share - basic			$0.04			$—		$0.04			$0.06

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,
(dollars in millions, except per-share amounts)	Ref.	2016			2015			2016			2015
Return on average common equity and return on average common equity, adjusted:
Average common equity (GAAP)	K		$19,810			$19,261			$19,715			$19,352
Return on average common equity	G/K	5.82		%	4.40		%	5.08		%	4.23		%
Return on average common equity, adjusted (non-GAAP)	H/K	5.44		%	4.40		%	4.95		%	4.45		%

Return on average tangible common equity and return on average tangible common equity, adjusted:
Average common equity (GAAP)	K		$19,810			$19,261			$19,715			$19,352
Less: Average goodwill (GAAP)		6,876			6,876			6,876			6,876
Less: Average other intangibles (GAAP)		1			4			2			5
Add: Average deferred tax liabilities related to goodwill (GAAP)		509			453			495			438
Average tangible common equity	L		$13,442			$12,834			$13,332			$12,909
Return on average tangible common equity	G/L	8.58		%	6.60		%	7.51		%	6.34		%
Return on average tangible common equity, adjusted (non-GAAP)	H/L	8.02		%	6.60		%	7.32		%	6.67		%

Return on average total assets and return on average total assets, adjusted:
Average total assets (GAAP)	M		$144,399			$135,103			$141,795			$134,655
Return on average total assets	E/M	0.82		%	0.65		%	0.72		%	0.62		%
Return on average total assets, adjusted (non-GAAP)	F/M	0.77		%	0.65		%	0.70		%	0.65		%

Return on average total tangible assets and return on average total tangible assets, adjusted:
Average total assets (GAAP)	M		$144,399			$135,103			$141,795			$134,655
Less: Average goodwill (GAAP)		6,876			6,876			6,876			6,876
Less: Average other intangibles (GAAP)		1			4			2			5
Add: Average deferred tax liabilities related to goodwill (GAAP)		509			453			495			438
Average tangible assets	N		$138,031			$128,676			$135,412			$128,212
Return on average total tangible assets	E/N	0.86		%	0.68		%	0.75		%	0.65		%
Return on average total tangible assets, adjusted (non-GAAP)	F/N	0.80		%	0.68		%	0.73		%	0.68		%

Efficiency ratio and efficiency ratio, adjusted:
Efficiency ratio	C/A	62.88		%	66.02		%	64.36		%	68.17		%
Efficiency ratio, adjusted (non-GAAP)	D/B	63.31		%	66.02		%	64.54		%	66.78		%

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		As of and for the Three Months Ended September 30,
		2016											2015
(dollars in millions)	Ref.	Consumer Banking			Commercial Banking			Other		Consolidated			Consumer Banking			Commercial Banking			Other		Consolidated
Net income available to common stockholders:
Net income (GAAP)	O		$92			$162			$43		$297			$68			$145			$7		$220
Less: Preferred stock dividends		—			—			7		7			—			—			7		7
Net income available to common stockholders (GAAP)	P		$92			$162			$36		$290			$68			$145			$—		$213

Efficiency ratio:
Total revenue (GAAP)	Q		$850			$450			$80		$1,380			$791			$399			$19		$1,209
Noninterest expense (GAAP)	R	650			181			36		867			623			175			—		798
Efficiency ratio	R/Q	76.46		%	40.21		%	NM		62.88		%	78.72		%	43.75		%	NM		66.02		%

Return on average total tangible assets:
Average total assets (GAAP)			$56,689			$47,902			$39,808		$144,399			$53,206			$43,113			$38,784		$135,103
Less: Average goodwill (GAAP)		—			—			6,876		6,876			—			—			6,876		6,876
Less: Average other intangibles (GAAP)		—			—			1		1			—			—			4		4
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			509		509			—			—			453		453
Average total tangible assets	S		$56,689			$47,902			$33,440		$138,031			$53,206			$43,113			$32,357		$128,676
Return on average total tangible assets	O/S	0.64		%	1.35		%	NM		0.86		%	0.51		%	1.34		%	NM		0.68		%

Return on average tangible common equity:
Average common equity (GAAP)⁽¹⁾			$5,190			$5,172			$9,448		$19,810			$4,791			$4,722			$9,748		$19,261
Less: Average goodwill (GAAP)		—			—			6,876		6,876			—			—			6,876		6,876
Less: Average other intangibles (GAAP)		—			—			1		1			—			—			4		4
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			509		509			—			—			453		453
Average tangible common equity ⁽¹⁾	T		$5,190			$5,172			$3,080		$13,442			$4,791			$4,722			$3,321		$12,834
Return on average tangible common equity ⁽¹⁾	P/T	7.04		%	12.50		%	NM		8.58		%	5.67		%	12.24		%	NM		6.60		%

⁽¹⁾ Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to

a sustainable target level for common equity tier 1 and then allocate that approximation to the segments based on economic capital.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



		As of and for the Nine Months Ended September 30,
		2016											2015
(dollars in millions)	Ref.	Consumer Banking			Commercial Banking			Other		Consolidated			Consumer Banking			Commercial Banking			Other			Consolidated
Net income available to common stockholders:
Net income (GAAP)	U		$253			$459			$51		$763			$195			$427			($3	)		$619
Less: Preferred stock dividends		—			—			14		14			—			—			7			7
Net income available to common stockholders (GAAP)	V		$253			$459			$37		$749			$195			$427			($10	)		$612

Efficiency ratio:
Total revenue (GAAP)	W		$2,460			$1,285			$147		$3,892			$2,317			$1,169			$106			$3,592
Noninterest expense (GAAP)	X	1,898			554			53		2,505			1,832			529			88			2,449
Efficiency ratio	X/W	77.15		%	43.15		%	NM		64.36		%	79.07		%	45.26		%	NM			68.17		%

Return on average total tangible assets:
Average total assets (GAAP)			$55,825			$46,869			$39,101		$141,795			$52,438			$42,451			$39,766			$134,655
Less: Average goodwill (GAAP)		—			—			6,876		6,876			—			—			6,876			6,876
Less: Average other intangibles (GAAP)		—			—			2		2			—			—			5			5
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			495		495			—			—			438			438
Average total tangible assets	Y		$55,825			$46,869			$32,718		$135,412			$52,438			$42,451			$33,323			$128,212
Return on average total tangible assets	U/Y	0.60		%	1.31		%	NM		0.75		%	0.50		%	1.35		%	NM			0.65		%

Return on average tangible common equity:
Average common equity (GAAP)⁽¹⁾			$5,130			$5,001			$9,584		$19,715			$4,708			$4,625			$10,019			$19,352
Less: Average goodwill (GAAP)		—			—			6,876		6,876			—			—			6,876			6,876
Less: Average other intangibles (GAAP)		—			—			2		2			—			—			5			5
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			495		495			—			—			438			438
Average tangible common equity ⁽¹⁾	Z		$5,130			$5,001			$3,201		$13,332			$4,708			$4,625			$3,576			$12,909
Return on average tangible common equity⁽¹⁾	V/Z	6.58		%	12.27		%	NM		7.51		%	5.55		%	12.35		%	NM			6.34		%

⁽¹⁾ Operating segments are allocated capital on a risk-adjusted basis considering economic and regulatory capital requirements. We approximate that regulatory capital is equivalent to

a sustainable target level for common equity tier 1 and then allocate that approximation to the segments based on economic capital.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Results of Operations — Three Months Ended September 30, 2016 Compared with Three Months Ended September 30, 2015

Highlights

For third quarter 2016:


•	Net income of $297 million increased $77 million from $220 million in third quarter 2015;


•	Net income included the benefit of $19 million in after-tax notable items. Excluding notable items, adjusted net income* increased $58 million, or 26%, to $278 million from $220 million in third quarter 2015;


•	Net income available to common stockholders of $290 million increased $77 million or 36%, from $213 million in third quarter 2015. Excluding notable items, adjusted net income available to common stockholders* increased $58 million, or 27%, to $271 million from $213 million in third quarter 2015;


•	Net interest income of $945 million increased $89 million, or 10%, from $856 million in third quarter 2015 driven by 7% average loan growth and an eight basis point improvement in net interest margin;

•

Net interest margin of 2.84% increased eight basis points, compared to 2.76% in third quarter 2015. Results reflect improved loan yields given continued pricing and portfolio optimization initiatives, as well as higher short-term interest rates. These benefits were partially offset by a reduction in investment portfolio yields, including a reduction in FRB stock dividends, as well as increased borrowing costs;


•	Noninterest income of $435 million increased $82 million, or 23%, from third quarter 2015 driven by the TDR Transaction gain. Excluding this impact, adjusted noninterest income increased $15 million as strength in mortgage banking fees, capital market fees and service charges and fees was partially offset by lower trust and investment service fees and other income;

•

Noninterest expense of $867 million increased $69 million, or 9%, compared to $798 million in third quarter 2015 driven by the impact of $36 million in notable items. Excluding this impact, adjusted noninterest expense* increased $33 million driven by higher salaries and employee benefits, largely reflecting a change in the timing of merit increases and incentive payments that drove higher payroll taxes and retirement plan contributions, as well as increased software amortization, outside services, and higher occupancy and equipment expense;


•	Provision for credit losses of $86 million increased $10 million, or 13%, from $76 million in third quarter of 2015, largely reflecting an increase tied to loan growth;


•	Return on average common equity of 5.82% compared to 4.40% in third quarter 2015;


•	Return on average tangible common equity of 8.58% and adjusted return on average tangible common equity* of 8.02%, compared with 6.60% in third quarter 2015;


•	Average loans and leases of $104.0 billion increased $7.2 billion, or 7%, from $96.8 billion in third quarter 2015 reflecting a $4.5 billion increase in commercial loans and a $2.7 billion increase in retail loans;


•	Average interest-bearing deposits of $79.2 billion increased $4.9 billion, or 7%, from $74.2 billion in third quarter 2015, driven by growth in every deposit category;

•

Net charge-offs of $83 million increased $8 million, or 11%, from $75 million in third quarter 2015. The ALLL of $1.2 billion increased $24 million compared to fourth quarter 2015. ALLL to total loans and leases ratio of 1.18% as of September 30, 2016, compared with 1.23% as of December 31, 2015. ALLL to nonperforming loans and leases ratio of 112% as of September 30, 2016, compared with 115% as of December 31, 2015; and


•	Net income per average common share of $0.56 and adjusted net income per common share* of $0.52, compared to $0.40 per average common share in third quarter 2015.

Results of Operations — Nine Months Ended September 30, 2016 Compared with Nine Months Ended September 30, 2015

Highlights

For the first nine months of 2016:


•	Net income of $763 million increased $144 million compared to $619 million in the first nine months of 2015;


•	Net income included $19 million in after-tax notable items, compared with $31 million in after-tax restructuring charges and special noninterest expense items in the first nine months of 2015. Excluding the impact of restructuring charges, special items and notable items, adjusted net income* increased $94 million, or 14%, to $744 million from $650 million in the first nine months of 2015;


•	Net income available to common stockholders of $749 million increased $137 million, compared to $612 million in the first nine months of 2015. Excluding the impact of restructuring charges, special items and notable items, adjusted net income available to common stockholders* increased $87 million, or 14%, to $730 million from $643 million in the first nine months of 2015;


•	Net interest income of $2.8 billion increased $240 million, or 9%, compared to $2.5 billion in the first nine months of 2015, reflecting 7% average loan growth, 6% average deposit growth and a 10 basis point improvement in net interest margin;


•	Net interest margin of 2.85% increased 10 basis points, compared to 2.75% in the first nine months of 2015 driven by improved loan yields reflecting higher interest rates and continued improvement in loan mix as well as flat deposit costs;


•	Noninterest income of $1.1 billion increased $60 million, or 6%, from the first nine months of 2015 levels largely driven by the TDR Transaction gain. Lower mortgage banking fees, card fees, trust and investment services fees, and foreign exchange and letter of credit fees were partially offset by an increase in service charges and fees and other income;

•

Noninterest expense of $2.5 billion increased $56 million, or 2%, compared to $2.4 billion in the first nine months of 2015. Results reflected $36 million in notable items, compared to $50 million of restructuring charges and special items in the first nine months of 2015. Excluding the impact of restructuring charges, special items and notable items adjusted noninterest expense* increased $70 million, which reflected increases in salaries and employee benefits and outside services, software amortization, and occupancy and equipment expense, partially offset by other operating expense;


•	Provision for credit losses of $267 million increased $56 million, or 27%, from $211 million in the first nine months of 2015, reflecting continued improvement in credit quality and improvement in retail net charge-offs. The first nine months of 2016 included a $36 million reserve build compared to a $4 million reserve build in the first nine months of 2015;


•	Return on average common equity was 5.08% compared to 4.23% for the first nine months of 2015;


•	Return on average tangible common equity was 7.51%,compared to 6.34% for the first nine months of 2015. Excluding the impact of restructuring charges, special items and notable items, adjusted return on average tangible common equity* improved to 7.32% from 6.67% in the first nine months of 2015;


•	Average loans and leases of $102.3 billion increased $6.9 billion, or 7%, from $95.5 billion in the first nine months of 2015, driven by commercial loan growth across most products, and an increase in student, residential mortgage, and auto loans, partially offset by a decrease in home equity outstandings;


•	Average interest-bearing deposits of $76.9 billion increased $4.8 billion, or 7% from $72.1 billion in the first nine months of 2015, driven by growth in all deposit products;

•

Net charge-offs of $231 million increased $24 million, or 12%, from $207 million in the first nine months of 2015. The ALLL of $1.2 billion increased $24 million compared to fourth quarter 2015. ALLL to total loans and leases was 1.18% as of September 30, 2016, compared with 1.23% as of December 31, 2015. ALLL to nonperforming loans and leases ratio was 112% as of September 30, 2016, compared with 115% as of December 31, 2015; and


•	Net income per average common share, basic and diluted was $1.43 and $1.42, compared to $1.14 and $1.13, per average common share, basic and diluted, respectively, in the first nine months of 2015.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Income

Net income totaled $297 million, up $77 million, or 35%, from $220 million in third quarter 2015. Third quarter 2016 results include a $19 million after-tax benefit from notable items, largely related to the gain on TDR Transaction sale as well as efforts to improve processes and enhance efficiencies. Excluding these items, adjusted net income* increased $58 million from third quarter 2015.

Net income totaled $763 million, up $144 million, or 23%, from $619 million in the first nine months of 2015. The first nine months of 2016 results include a $19 million after-tax benefit from notable items, compared with $31 million of after tax restructuring charges and special items for the first nine months of 2015. Excluding the impact of restructuring charges, special items and notable items, adjusted net income* increased $94 million from the first nine months of 2015.

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



	Three Months Ended September 30,										Nine Months Ended September 30,
(dollars in millions)	2016			2015			Change			Percent	2016			2015			Change			Percent
Operating Data:
Net interest income		$945			$856			$89		10%		$2,772			$2,532			$240		9%
Noninterest income	435			353			82			23	1,120			1,060			60			6
Total revenue	1,380			1,209			171			14	3,892			3,592			300			8
Provision for credit losses	86			76			10			13	267			211			56			27
Noninterest expense	867			798			69			9	2,505			2,449			56			2
Income before income tax expense	427			335			92			27	1,120			932			188			20
Income tax expense	130			115			15			13	357			313			44			14
Net income	297			220			77			35	763			619			144			23
Net income available to common stockholders	290			213			77			36	749			612			137			22
Return on average common equity	5.82		%	4.40		%	142		bps	—	5.08		%	4.23		%	85		bps	—
Return on average tangible common equity	8.58		%	6.60		%	198		bps	—	7.51		%	6.34		%	117		bps	—

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:



	Three Months Ended September 30,
	2016							2015							Change
(dollars in millions)	Average Balances			Income/ Expense		Yields/ Rates		Average Balances			Income/ Expense		Yields/ Rates		Average Balances			Yields/ Rates
Assets
Interest-bearing cash and due from banks and deposits in banks		$2,121			$2	0.41	%		$1,322			$2	0.44	%		$799		(3) bps
Taxable investment securities	24,961			146		2.34		24,440			154		2.52		521			(18)
Non-taxable investment securities	8			—		2.60		9			—		2.60		(1		)	—
Total investment securities	24,969			146		2.34		24,449			154		2.52		520			(18)
Commercial	35,986			290		3.14		32,832			243		2.89		3,154			25
Commercial real estate	9,905			71		2.82		8,406			54		2.50		1,499			32
Leases	3,813			23		2.43		3,936			24		2.45		(123		)	(2)
Total commercial	49,704			384		3.02		45,174			321		2.78		4,530			24
Residential mortgages	14,155			127		3.59		12,470			117		3.76		1,685			(17)
Home equity loans	2,088			30		5.75		2,928			40		5.32		(840		)	43
Home equity lines of credit	14,314			115		3.20		14,813			111		2.97		(499		)	23
Home equity loans serviced by others	837			16		7.24		1,086			19		6.93		(249		)	31
Home equity lines of credit serviced by others	256			2		2.47		425			3		2.30		(169		)	17
Automobile	14,053			104		2.96		13,810			95		2.75		243			21
Student	5,750			73		5.10		3,530			45		5.01		2,220			9
Credit cards	1,623			46		11.24		1,616			44		10.95		7			29
Other retail	1,256			29		9.39		939			17		7.72		317			167
Total retail	54,332			542		3.98		51,617			491		3.79		2,715			19
Total loans and leases	104,036			926		3.52		96,791			812		3.32		7,245			20
Loans held for sale, at fair value	474			4		3.35		327			3		3.69		147			(34)
Other loans held for sale	69			1		6.41		128			3		6.96		(59		)	(55)
Interest-earning assets	131,669			1,079		3.25		123,017			974		3.13		8,652			12
Allowance for loan and lease losses	(1,243		)					(1,197		)					(46		)
Goodwill	6,876							6,876							—
Other noninterest-earning assets	7,097							6,407							690
Total noninterest-earning assets	12,730							12,086							644
Total assets		$144,399							$135,103							$9,296
Liabilities and Stockholders’ Equity
Checking with interest		$19,997			$9	0.20	%		$16,934			$5	0.12	%		$3,063		8 bps
Money market and savings	46,376			37		0.31		44,572			33		0.29		1,804			2
Term deposits	12,806			25		0.76		12,730			27		0.84		76			(8)
Total interest-bearing deposits	79,179			71		0.36		74,236			65		0.34		4,943			2
Federal funds purchased and securities sold under agreements to repurchase ⁽¹⁾	910			1		0.24		2,880			4		0.52		(1,970		)	(28)
Other short-term borrowed funds	2,564			10		1.54		5,062			17		1.32		(2,498		)	22
Long-term borrowed funds	10,905			52		1.89		4,059			32		3.16		6,846			(127)
Total borrowed funds	14,379			63		1.72		12,001			53		1.75		2,378			(3)
Total interest-bearing liabilities	93,558			134		0.57		86,237			118		0.54		7,321			3
Demand deposits	27,467							26,754							713
Other liabilities	3,317							2,604							713
Total liabilities	124,342							115,595							8,747
Stockholders’ equity	20,057							19,508							549
Total liabilities and stockholders’ equity		$144,399							$135,103							$9,296
Interest rate spread						2.68	%						2.59	%				9
Net interest income					$945							$856
Net interest margin						2.84	%						2.76	%				8 bps
Memo: Total deposits (interest-bearing and demand)		$106,646			$71	0.27	%		$100,990			$65	0.25	%		$5,656		2 bps

⁽¹⁾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 are scheduled to run off by the end of 2017. See “—Analysis of Financial Condition — September 30, 2016 Compared with December 31, 2015 — Derivatives” for further information.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net interest income of $945 million increased $89 million, or 10%, compared to $856 million in third quarter 2015, driven by 7% average loan growth and an eight basis point improvement in net interest margin.

Compared to third quarter 2015, average interest-earning assets of $131.7 billion increased $8.7 billion, or 7%, from third quarter 2015, driven by a $4.5 billion increase in average commercial loans and leases, a $2.7 billion increase in average retail loans, and a $1.3 billion 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 student, residential mortgage, automobile and other retail balances.

Average deposits of $106.6 billion increased $5.7 billion from third quarter 2015 with particular strength in savings, checking with interest and demand deposits. Total interest-bearing deposit costs increased two basis points compared to third quarter 2015. Checking with interest costs of 0.20% in 2016 compared with 0.12% in 2015, term deposit costs decreased to 0.76% in 2016 from 0.84% in 2015, and money market account and savings account costs increased to 0.31% from 0.29% in 2015.

Total borrowed funds of $14.4 billion increased $2.4 billion, or 20%, from third quarter 2015, reflecting continued incremental funding of earning asset growth. Total borrowed funds costs of $63 million increased $10 million from third quarter 2015 primarily due to issuance of long-term senior term debt and the reduction of securities sold under agreements to repurchase.

Net interest margin of 2.84% increased eight basis points compared to 2.76% in third quarter 2015 driven by improved loan yields reflecting both higher interest rates and continued improvement in loan mix. Margin results also reflected the benefit of modest rise in deposit costs relative to loan yields and lower pay-fixed swap expense. These benefits were partially offset by increased long-term borrowing costs, including the effect of additional senior debt issuances and a decline from investment securities yield tied to the drop in long-term interest rates. Average interest-earning asset yields of 3.25% increased 12 basis points from 3.13% in third quarter 2015.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	Nine Months Ended September 30,
	2016							2015							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		$1,915			$6	0.40	%		$1,820			$4	0.26	%		$95		14 bps
Taxable investment securities	24,294			432		2.37		24,824			468		2.52		(530		)	(15)
Non-taxable investment securities	9			—		2.60		10			—		2.60		(1		)	—
Total investment securities	24,303			432		2.37		24,834			468		2.52		(531		)	(15)
Commercial	35,212			832		3.10		32,536			704		2.85		2,676			25
Commercial real estate	9,555			200		2.75		8,020			155		2.54		1,535			21
Leases	3,864			71		2.44		3,909			74		2.51		(45		)	(7)
Total commercial	48,631			1,103		2.98		44,465			933		2.77		4,166			21
Residential mortgages	13,705			375		3.65		12,104			342		3.77		1,601			(12)
Home equity loans	2,263			95		5.63		3,117			126		5.41		(854		)	22
Home equity lines of credit	14,474			343		3.16		15,059			332		2.95		(585		)	21
Home equity loans serviced by others	898			49		7.09		1,151			60		6.94		(253		)	15
Home equity lines of credit serviced by others	298			5		2.21		479			9		2.45		(181		)	(24)
Automobile	13,940			304		2.91		13,412			274		2.73		528			18
Student	5,338			202		5.06		3,064			116		5.06		2,274			—
Credit cards	1,608			135		11.24		1,620			133		10.99		(12		)	25
Other retail	1,177			79		9.01		988			56		7.64		189			137
Total retail	53,701			1,587		3.95		50,994			1,448		3.80		2,707			15
Total loans and leases	102,332			2,690		3.49		95,459			2,381		3.32		6,873			17
Loans held for sale, at fair value	383			10		3.46		293			8		3.48		90			(2)
Other loans held for sale	185			6		4.53		122			7		7.27		63			(274)
Interest-earning assets	129,118			3,144		3.23		122,528			2,868		3.11		6,590			12
Allowance for loan and lease losses	(1,225		)					(1,196		)					(29		)
Goodwill	6,876							6,876							—
Other noninterest-earning assets	7,026							6,447							579
Total noninterest-earning assets	12,677							12,127							550
Total assets		$141,795							$134,655							$7,140
Liabilities and Stockholders’ Equity
Checking with interest		$19,001			$24	0.17	%		$16,515			$14	0.11	%		$2,486		6 bps
Money market and savings	45,319			98		0.29		43,082			87		0.27		2,237			2
Term deposits	12,530			72		0.77		12,498			76		0.81		32			(4)
Total interest-bearing deposits	76,850			194		0.34		72,095			177		0.33		4,755			1
Federal funds purchased and securities sold under agreements to repurchase ⁽¹⁾	922			2		0.22		3,947			13		0.44		(3,025		)	(22)
Other short-term borrowed funds	3,133			33		1.38		6,169			51		1.09		(3,036		)	29
Long-term borrowed funds	10,375			143		1.84		3,964			95		3.21		6,411			(137)
Total borrowed funds	14,430			178		1.63		14,080			159		1.50		350			13
Total interest-bearing liabilities	91,280			372		0.54		86,175			336		0.52		5,105			2
Demand deposits	27,362							26,313							1,049
Other liabilities	3,191							2,654							537
Total liabilities	121,833							115,142							6,691
Stockholders’ equity	19,962							19,513							449
Total liabilities and stockholders’ equity		$141,795							$134,655							$7,140
Interest rate spread						2.69	%						2.59	%
Net interest income					$2,772							$2,532
Net interest margin						2.85	%						2.75	%				10 bps
Memo: Total deposits (interest-bearing and demand)		$104,212			$194	0.25	%		$98,408			$177	0.24	%		$5,804		1 bps

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net interest income of $2.8 billion in the first nine months of 2016 increased $240 million, or 9%, compared to $2.5 billion in the first nine months of 2015, reflecting 7% average loan growth and a ten basis point improvement in net interest margin.

Average interest-earning assets of $129.1 billion increased $6.6 billion, or 5%, from the first nine months of 2015, driven by a $4.2 billion increase in average commercial loans and leases and a $2.7 billion increase in average retail loans, partially offset by a $436 million decrease in average investments and interest-bearing cash and due from banks and deposits in banks. Commercial loan growth was driven by strength in commercial and commercial real estate. Retail loan growth was driven by strength in student, residential mortgage, and automobile loan balances.

Average deposits of $104.2 billion increased $5.8 billion from the first nine months of 2015 with particular strength in savings, checking with interest and demand deposits. Total interest-bearing deposit costs of $194 million increased $17 million, or 10%, from $177 million in the first nine months of 2015 and reflected a one basis point increase in interest-bearing deposit costs to 0.34%. Checking with interest costs of 0.17% in the first nine months of 2016 compared with 0.11% in the first nine months of 2015, term deposit costs decreased to 0.77% in the first nine months of 2016 from 0.81% in the first nine months of 2015, and money market account and savings account costs increased to 0.29% from 0.27% in the first nine months of 2015.

Total borrowed funds of $14.4 billion increased $350 million from the first nine months of 2015. Total borrowed funds costs of $178 million increased $19 million from the first nine months of 2015.

Net interest margin of 2.85% increased ten basis points compared to 2.75% in the first nine months of 2015 driven by improved loan yields reflecting both higher interest rates and continued improvement in loan mix. Results also reflected the benefit of relatively flat deposit costs. Average interest-earning asset yields of 3.23% increased 12 basis points from 3.11% in the first nine months of 2015.

Noninterest Income

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



	Three Months Ended September 30,									Nine Months Ended September 30,
(dollars in millions)	2016		2015		Change			Percent		2016		2015		Change			Percent
Service charges and fees		$152		$145		$7		5	%		$446		$419		$27		6	%
Card fees	52		60		(8		)	(13	)	153		172		(19		)	(11	)
Trust and investment services fees	37		41		(4		)	(10	)	112		118		(6		)	(5	)
Capital markets fees	34		21		13			62		91		73		18			25
Foreign exchange and letter of credit fees	23		22		1			5		65		67		(2		)	(3	)
Mortgage banking fees	33		18		15			83		76		81		(5		)	(6	)
Bank-owned life insurance income	14		14		—			—		40		40		—			—
Securities gains, net	—		2		(2		)	(100	)	13		19		(6		)	(32	)
Other income ⁽¹⁾	90		30		60			200		124		71		53			75
Noninterest income		$435		$353		$82		23	%		$1,120		$1,060		$60		6	%

⁽¹⁾ Includes net securities impairment losses on securities available for sale recognized in earnings and other income.

Noninterest income of $435 million increased $82 million, or 23%, from $353 million in third quarter 2015, driven by the pre-tax $67 million benefit from notable items in other income. Excluding the impact of these items, adjusted noninterest income* increased $15 million or 4% largely reflecting higher mortgage banking fees, capital market fees, and service charges and fees partially offset by lower trust and investment services fees and other income. Service charges and fees increased $7 million, driven by both improved pricing and volume. Capital markets fees increased $13 million, reflecting improved loan syndication volumes and continued broadening of our capabilities. Card fees decreased $8 million from third quarter 2015 levels, reflecting the impact of a reclass of card reward costs. Mortgage banking fees increased $15 million from third quarter 2015 levels, reflecting the benefit of higher application volumes and sale gains and spreads.

Noninterest income of $1.1 billion in the first nine months of 2016, increased $60 million, or 6%, compared to the first nine months of 2015 driven by the pre-tax $67 million benefit from notable items in other income. Excluding the impact of these items, adjusted noninterest income* decreased $7 million, or 1%, as the impact of lower mortgage banking fees, securities gains, card fees, trust and investment services fees, and foreign exchange and letter of credit fees were partially offset by increases in service charges and capital market fees. Service charges increased $27 million, driven by both improved pricing and volume. Capital market fees increased $18 million reflecting underlying business momentum and the impact of building capabilities. Card fees decreased $19 million from the first nine months of 2015 results, which were $20 million higher given the reclass of card reward costs. Mortgage banking fees decreased $5 million from higher 2015 levels that included higher MSR valuation gains.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Provision for Credit Losses

Provision for credit losses of $86 million increased $10 million, or 13%, from $76 million in third quarter 2015. Third quarter 2016 results reflected a $3 million reserve build, compared to a $1 million reserve build in third quarter 2015. Results also reflected an $8 million increase in net charge-offs as higher energy portfolio losses were partially offset by a reduction in retail.

Provision for credit losses of $267 million increased $56 million, compared to $211 million in the first nine months of 2015 and reflected a $24 million increase in net charge-offs due to higher commercial and retail losses. The first nine months of 2016 reflected a $36 million reserve build largely tied to loan growth compared to a $4 million reserve build in the first nine months of 2015.

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 included 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 displays the significant components of our noninterest expense for the periods indicated:



	Three Months Ended September 30,								Nine Months Ended September 30,
(dollars in millions)	2016		2015		Change		Percent		2016		2015		Change			Percent
Salaries and employee benefits		$432		$404		$28	7	%		$1,289		$1,234		$55		4	%
Outside services	102		89		13		15		279		267		12			4
Occupancy	78		75		3		4		230		245		(15		)	(6	)
Equipment expense	65		62		3		5		194		190		4			2
Amortization of software	46		35		11		31		126		108		18			17
Other operating expense	144		133		11		8		387		405		(18		)	(4	)
Noninterest expense		$867		$798		$69	9	%		$2,505		$2,449		$56		2	%

Noninterest expense of $867 million increased $69 million, or 9%, from $798 million in third quarter 2015 and included $36 million in notable items. Excluding this impact, adjusted noninterest expense* increased $33 million reflecting higher salaries and employee benefits, software amortization, equipment expense, outside services, and higher occupancy.

Noninterest expense of $2.5 billion in the first nine months of 2016 increased $56 million, or 2%, compared to the first nine months of 2015 as the impact of higher salaries and employee benefits, outside services and amortization of software were partially offset by lower occupancy and other operating expense. The first nine months of 2016 results reflected $36 million of notable items compared with $50 million of restructuring charges and special items for the nine months of 2015. Excluding the impact of restructuring charges, special items and notable items adjusted noninterest expense* increased $70 million.

Income Tax Expense

Income tax expense was $130 million and $115 million in the third quarter of 2016 and 2015, respectively. This resulted in an effective tax rate of 30.5% and 34.1% in the third quarter of 2016 and 2015, respectively. The decrease in the effective income tax rate from the third quarter of 2015 to the third quarter of 2016 was primarily attributable to the impact of prior year federal and state tax credit recoveries and a reduction of non-deductible permanent expense items.

Income tax expense was $357 million and $313 million in the first nine months of 2016 and 2015, respectively. This resulted in an effective tax rate of 31.9% and 33.5% in the first nine months of 2016 and 2015, respectively. The decrease in the effective rate from 2015 to 2016 was primarily attributable to an increase in tax advantaged investing and the impact of prior year federal and state tax credit recoveries.

At September 30, 2016, we reported a net deferred tax liability of $994 million, compared to a $730 million liability at December 31, 2015. The increase in the net deferred tax liability was primarily attributable to the tax effect of net unrealized gains on securities and derivatives arising during the period and the tax effect of current year timing adjustments. For further discussion, see Note 10 “Income Taxes” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Business Segments

The following tables present certain financial data of our business segments:



	As of and for the Three Months Ended September 30, 2016
(dollars in millions)	Consumer Banking			Commercial Banking			Other⁽⁴⁾			Consolidated
Net interest income (expense)		$621			$327			($3	)		$945
Noninterest income	229			123			83			435
Total revenue	850			450			80			1,380
Noninterest expense	650			181			36			867
Profit before provision for credit losses	200			269			44			513
Provision for credit losses	57			19			10			86
Income before income tax expense (benefit)	143			250			34			427
Income tax expense (benefit)	51			88			(9		)	130
Net income		$92			$162			$43			$297
Loans and leases and loans held for sale (period-end)		$56,230			$46,292			$3,471			$105,993
Average Balances:
Total assets		$56,689			$47,902			$39,808			$144,399
Loans and leases and loans held for sale	55,376			46,611			2,592			104,579
Deposits	72,141			27,847			6,658			106,646
Interest-earning assets	55,423			46,666			29,580			131,669
Key Performance Metrics:
Net interest margin ⁽¹⁾	4.46		%	2.79		%	NM			2.84		%
Efficiency ratio	76.46			40.21			NM			62.88
Average loans to average deposits ratio ⁽²⁾	76.76			167.38			NM			98.06
Return on average total tangible assets ⁽¹⁾	0.64			1.35			NM			0.86
Return on average tangible common equity ^{(1) (3)}	7.04			12.50			NM			8.58

⁽¹⁾Ratios for the period ended September 30, 2016 are presented on an annualized basis.

⁽²⁾Ratio includes loans and leases held for sale.

⁽³⁾ 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 CET1 and then allocate that approximation to the segments based on economic capital.

⁽⁴⁾Includes the financial impact of non-core, liquidating loan portfolios and other non-core assets, our treasury activities, wholesale funding activities, securities portfolio, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses not attributed to our Consumer Banking or Commercial Banking segments. For a description of non-core assets, see “—Analysis of Financial Condition — September 30, 2016 Compared with December 31, 2015 — Loans and Leases-Non-Core Assets.”

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	As of and for the Nine Months Ended September 30, 2016
(dollars in millions)	Consumer Banking			Commercial Banking			Other⁽⁴⁾			Consolidated
Net interest income		$1,804			$941			$27			$2,772
Noninterest income	656			344			120			1,120
Total revenue	2,460			1,285			147			3,892
Noninterest expense	1,898			554			53			2,505
Profit before provision for credit losses	562			731			94			1,387
Provision for credit losses	169			27			71			267
Income before income tax expense (benefit)	393			704			23			1,120
Income tax expense (benefit)	140			245			(28		)	357
Net income		$253			$459			$51			$763
Loans and leases and loans held for sale (period-end)		$56,230			$46,292			$3,471			$105,993
Average Balances:
Total assets		$55,825			$46,869			$39,101			$141,795
Loans and leases and loans held for sale	54,494			45,532			2,874			102,900
Deposits	71,627			25,938			6,647			104,212
Interest-earning assets	54,542			45,611			28,965			129,118
Key Performance Metrics:
Net interest margin ⁽¹⁾	4.42		%	2.76		%	NM			2.85		%
Efficiency ratio	77.15			43.15			NM			64.36
Average loans to average deposits ratio ⁽²⁾	76.08			175.54			NM			98.74
Return on average total tangible assets ⁽¹⁾	0.60			1.31			NM			0.75
Return on average tangible common equity ^{(1) (3)}	6.58			12.27			NM			7.51

⁽¹⁾Ratios for the period ended September 30, 2016 are presented on an annualized basis.

⁽²⁾Ratio includes loans and leases held for sale.

We operate our business through two 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 to the operating segments and Other. Residual assets, liabilities, capital and their related revenues, provision for credit losses and expenses are attributed to Other.

Other includes our treasury function, securities portfolio, wholesale funding activities, goodwill and goodwill impairment, community development assets and other unallocated assets, liabilities, capital, revenues, provision for credit losses and expenses not attributed to Consumer Banking or Commercial Banking. Other also includes our non-core assets. Non-core assets are primarily loans inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. The non-core portfolio totaled $3.0 billion as of September 30, 2016, an increase of 26% from December 31, 2015. This increase was driven by the transfer of a $1.2 billion commercial lease and loan portfolio tied to legacy RBS aircraft leasing borrowers that we placed in runoff following a review of the Asset Finance business in third quarter 2016. This portfolio of largely investment-grade client aircraft leases do not meet go-forward business model strategic and risk-adjusted return parameters, and we plan to exit these non-strategic relationships. Given recent deterioration in aircraft values, along with the impact of exiting these client relationships, we believe the underlying residual value has been impaired. See “—Overview” for further discussion of the residual value impairment. The largest component of our retail non-core portfolio is our home equity products currently or formerly serviced by others portfolio.

Our capital levels are evaluated and managed centrally, however, capital is allocated to the operating segments to support evaluation of business performance. 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. Interest income and expense is determined based on the assets and liabilities managed by the business segment. Because funding and asset liability management is a central function, funds transfer-pricing methodologies are utilized to allocate a cost of funds used, or credit for the funds

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

provided, to all business 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 funds transfer pricing process, is included in Other.

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

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

Income taxes are assessed to each business 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 segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines change, or our organizational structure changes.

Consumer Banking



	As of and for the Three Months Ended September 30,											As of and for the Nine Months Ended September 30,
(dollars in millions)	2016			2015			Change			Percent		2016			2015			Change			Percent
Net interest income		$621			$556			$65		12	%		$1,804			$1,633			$171		10	%
Noninterest income	229			235			(6		)	(3	)	656			684			(28		)	(4	)
Total revenue	850			791			59			7		2,460			2,317			143			6
Noninterest expense	650			623			27			4		1,898			1,832			66			4
Profit before provision for credit losses	200			168			32			19		562			485			77			16
Provision for credit losses	57			64			(7		)	(11	)	169			187			(18		)	(10	)
Income before income tax expense	143			104			39			38		393			298			95			32
Income tax expense	51			36			15			42		140			103			37			36
Net income		$92			$68			$24		35			$253			$195			$58		30
Loans and leases and loans held for sale (period-end)		$56,230			$52,468			$3,762		7			$56,230			$52,468			$3,762		7
Average Balances:
Total assets		$56,689			$53,206			$3,483		7	%		$55,825			$52,438			$3,387		6	%
Loans and leases and loans held for sale	55,376			51,886			3,490			7		54,494			51,062			3,432			7
Deposits	72,141			70,527			1,614			2		71,627			69,347			2,280			3
Interest-earning assets	55,423			51,928			3,495			7		54,542			51,100			3,442			7
Key Performance Metrics:
Net interest margin ⁽¹⁾	4.46		%	4.25		%	21 bps			—		4.42		%	4.27		%	15		bps	—
Efficiency ratio	76.46			78.72			(226) bps			—		77.15			79.07			(192		) bps	—
Average loans to average deposits ratio ⁽²⁾	76.76			73.57			319 bps			—		76.08			73.63			245		bps	—
Return on average total tangible assets ⁽¹⁾	0.64			0.51			13 bps			—		0.60			0.50			10		bps	—
Return on average tangible common equity ^{(1) (3)}	7.04			5.67			137 bps			—		6.58			5.55			103		bps	—

⁽¹⁾ Ratios for the periods ended September 30, 2016 and 2015 are presented on an annualized basis.

⁽²⁾Ratio includes loans and leases held for sale.

Consumer Banking net income of $92 million increased $24 million, or 35%, from $68 million in third quarter 2015, as the benefit of a $59 million increase in revenue and a $7 million decrease in provision was partially offset by a $27 million increase in noninterest expense.

Net interest income of $621 million increased $65 million, or 12%, from third quarter 2015, driven by the benefit of a $3.5 billion increase in average loans, reflecting growth in student, mortgage, consumer unsecured loans and auto loans as well as improved loan and deposit spreads.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Noninterest income decreased $6 million, or 3%, from third quarter 2015 levels, as an increase in mortgage banking fees was more than offset by a reduction in card fees.

Noninterest expense of $650 million increased $27 million, or 4%, from $623 million in third quarter 2015, driven by higher salaries and benefits given continued investments to drive growth. Results also reflect an increase in outside services, driven by continued product extension and the impact of operational and remediation notable items as well as increased fraud costs and software amortization expense.

Provision for credit losses of $57 million decreased $7 million, or 11%, from $64 million in third quarter 2015, driven by lower net charge-offs in home equity.

Consumer Banking net income of $253 million increased $58 million, or 30%, from $195 million in the first nine months of 2015, as the benefit of a $143 million increase in revenue was partially offset by a $66 million increase in noninterest expense.

Net interest income of $1.8 billion increased $171 million, or 10% from the first nine months of 2015, driven by growth in student, mortgage and auto loans, improved loan yields which reflected the benefit of higher rates and improved mix as well as the benefit of growth in lower cost deposits.

Noninterest income decreased $28 million, or 4%, from the first nine months of 2015, driven by lower mortgage banking fees partially offset by higher service charges and fees.

Noninterest expense of $1.9 billion increased $66 million, or 4%, from the first nine months of 2015, driven by higher outside services expense, salaries and benefits and equipment expense.

Provision for credit losses of $169 million decreased $18 million, or 10%, from $187 million in the first nine months of 2015, driven by lower net charge-offs in home equity.

Commercial Banking



	As of and for the Three Months Ended September 30,										As of and for the Nine Months Ended September 30,
(dollars in millions)	2016			2015			Change		Percent		2016			2015			Change		Percent
Net interest income		$327			$299			$28	9	%		$941			$861			$80	9	%
Noninterest income	123			100			23		23		344			308			36		12
Total revenue	450			399			51		13		1,285			1,169			116		10
Noninterest expense	181			175			6		3		554			529			25		5
Profit before provision for credit losses	269			224			45		20		731			640			91		14
Provision for credit losses	19			3			16		NM		27			(11		)	38		NM
Income before income tax expense	250			221			29		13		704			651			53		8
Income tax expense	88			76			12		16		245			224			21		9
Net income		$162			$145			$17	12			$459			$427			$32	7
Loans and leases and loans held for sale (period-end)		$46,292			$42,090			$4,202	10			$46,292			$42,090			$4,202	10
Average Balances:
Total assets		$47,902			$43,113			$4,789	11	%		$46,869			$42,451			$4,418	10	%
Loans and leases and loans held for sale	46,611			41,993			4,618		11		45,532			41,240			4,292		10
Deposits	27,847			24,604			3,243		13		25,938			23,094			2,844		12
Interest-earning assets	46,666			42,070			4,596		11		45,611			41,323			4,288		10
Key Performance Metrics:
Net interest margin ⁽¹⁾	2.79		%	2.81		%	(2) bps		—		2.76		%	2.78		%	(2) bps		—
Efficiency ratio	40.21			43.75			(354) bps		—		43.15			45.26			(211) bps		—
Average loans to average deposits ratio ⁽²⁾	167.38			170.68			(330) bps		—		175.54			178.58			(304) bps		—
Return on average total tangible assets ⁽¹⁾	1.35			1.34			1 bps		—		1.31			1.35			(4) bps		—
Return on average tangible common equity ^{(1) (3)}	12.50			12.24			26 bps		—		12.27			12.35			(8) bps		—

⁽¹⁾ Ratios for the periods ended September 30, 2016 and 2015 are presented on an annualized basis.

⁽²⁾Ratio includes loans and leases held for sale.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Commercial Banking net income of $162 million increased $17 million, or 12%, from $145 million in third quarter 2015, as a $51 million increase in total revenue was partially offset by a $6 million increase in noninterest expense and higher provision for credit losses.

Net interest income of $327 million increased $28 million, or 9%, from $299 million in third quarter 2015, reflecting the benefit of a $4.6 billion increase in average loans and leases, improved deposit spreads and a $3.2 billion increase in average deposits.

Noninterest income of $123 million increased $23 million, or 23%, from $100 million in third quarter 2015, reflecting strength in capital markets fees, service charges and fees, and interest rate products (presented in other income).

Noninterest expense of $181 million increased $6 million, or 3%, from $175 million in third quarter 2015, largely reflecting an increase in salaries and employee benefits, FDIC insurance costs and amortization of software, partially offset by lower outside services expense.

Provision for credit losses of $19 million increased $16 million from third quarter 2015 levels, reflecting higher net charge-offs in the oil and gas portfolio.

Commercial Banking net income of $459 million increased $32 million, or 7%, from $427 million in the first nine months of 2015, as the benefit of a $116 million increase in total revenue was partially offset by a $25 million increase in noninterest expense and a $38 million increase in provision for credit losses.

Net interest income of $941 million increased $80 million, or 9%, from $861 million in the first nine months of 2015, reflecting a $4.3 billion increase in average loans and leases, improved deposit spreads, and a $2.8 billion increase in deposits.

Noninterest income of $344 million increased $36 million, or 12%, from the first nine months of 2015, reflecting strength in capital markets, service charges and fees and interest rate products.

Noninterest expense of $554 million increased $25 million, or 5%, from $529 million in the first nine months of 2015, reflecting increased salaries and employee benefits and FDIC insurance costs and amortization of software.

Provision for credit losses of $27 million increased $38 million from the first nine months of 2015, driven by higher losses in the commercial loan portfolio largely related to commodity-related credits.

Other



	As of and for the Three Months Ended September 30,										As of and for the Nine Months Ended September 30,
(dollars in millions)	2016			2015		Change			Percent		2016			2015			Change			Percent
Net interest income		($3	)		$1		($4	)	NM			$27			$38			($11	)	(29	%)
Noninterest income	83			18		65			NM		120			68			52			76
Total revenue	80			19		61			NM		147			106			41			39
Noninterest expense	36			—		36			100		53			88			(35		)	(40	)
Profit before provision for credit losses	44			19		25			132		94			18			76			NM
Provision for credit losses	10			9		1			11		71			35			36			103
Income (loss) before income tax expense (benefit)	34			10		24			240		23			(17		)	40			235
Income tax expense (benefit)	(9		)	3		(12		)	NM		(28		)	(14		)	(14		)	(100	)
Net income (loss)		$43			$7		$36		NM			$51			($3	)		$54		NM
Loans and leases and loans held for sale (period-end)		$3,471			$3,293		$178		5			$3,471			$3,293			$178		5
Average Balances:
Total assets		$39,808			$38,784		$1,024		3	%		$39,101			$39,766			($665	)	(2	%)
Loans and leases and loans held for sale	2,592			3,367		(775		)	(23	)	2,874			3,572			(698		)	(20	)
Deposits	6,658			5,859		799			14		6,647			5,967			680			11
Interest-earning assets	29,580			29,019		561			2		28,965			30,105			(1,140		)	(4	)

Other net income of $43 million increased from $7 million in third quarter 2015, driven by the net impact of $23 million in notable items and an income tax benefit, offset by higher noninterest expense. Noninterest income of $83 million increased $65

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

million from third quarter 2015, largely reflecting the TDR Transaction gain. Noninterest expense increased $36 million, driven by the impact of other notable items.

Other net income of $51 million increased from a $3 million net loss in the first nine months of 2015, driven by the net impact of notable items, restructuring charges and special items, lower noninterest expense, and income tax benefit, offset by an increase in provision for credit losses.

As mentioned previously, Other includes the non-core portfolio. Non-core assets totaled $3.0 billion as of September 30, 2016, an increase of $614 million, or 26%, compared to December 31, 2015. Retail non-core loan balances of $1.6 billion decreased $499 million, or 23%, compared to December 31, 2015. Commercial non-core loans of $1.1 billion increased $978 million compared to December 31, 2015. This increase was due to a $1.2 billion lease portfolio tied to legacy RBS aircraft leasing borrowers that we placed in runoff following a review of the Asset Finance business in third quarter 2016. This portfolio of largely investment-grade client aircraft leases do not meet go-forward business model strategic and risk-adjusted return parameters, and we plan to exit these non-strategic relationships. See “—Overview” for further discussion of the residual value impairment. Given recent deterioration in aircraft values, along with the impact of exiting these client relationships, we believe the underlying residual value has been impaired.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Analysis of Financial Condition — September 30, 2016 Compared with December 31, 2015

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, student, credit cards and other retail. Our SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others. We now service a portion of this portfolio internally. The following table shows the composition of loans and leases, including non-core loans, as of:



(dollars in millions)	September 30, 2016		December 31, 2015		Change			Percent
Commercial		$36,449		$33,264		$3,185		10	%
Commercial real estate	10,152		8,971		1,181			13
Leases	3,788		3,979		(191		)	(5	)
Total commercial	50,389		46,214		4,175			9
Residential mortgages	14,602		13,318		1,284			10
Home equity loans	2,027		2,557		(530		)	(21	)
Home equity lines of credit	14,271		14,674		(403		)	(3	)
Home equity loans serviced by others	796		986		(190		)	(19	)
Home equity lines of credit serviced by others	238		389		(151		)	(39	)
Automobile	14,063		13,828		235			2
Student	5,997		4,359		1,638			38
Credit cards	1,644		1,634		10			1
Other retail	1,440		1,083		357			33
Total retail	55,078		52,828		2,250			4
Total loans and leases ^{(1) (2)}		$105,467		$99,042		$6,425		6	%

⁽¹⁾ Excluded from the table above are loans held for sale totaling $526 million and $365 million as of September 30, 2016 and December 31, 2015, respectively.

⁽²⁾Mortgage loans serviced for others by our subsidiaries are not included above, and amounted to $17.4 billion and $17.6 billion at September 30, 2016 and December 31, 2015, respectively.

Total loans and leases of $105.5 billion as of September 30, 2016, increased $6.4 billion, or 6%, from $99.0 billion as of December 31, 2015, reflecting growth in both commercial and retail products. Total commercial loans and leases of $50.4 billion grew $4.2 billion, or 9%, from $46.2 billion as of December 31, 2015, reflecting commercial loan growth of $3.2 billion and commercial real estate loan growth of $1.2 billion. Total retail loans of $55.1 billion increased by $2.3 billion, or 4%, from $52.8 billion as of December 31, 2015, largely driven by a $1.6 billion increase in student loans and a $1.3 billion increase in residential mortgages, partially offset by lower home equity balances.

Loan purchases and sales, including loans held for sale, net of runoff of previously purchased loans, reduced loan growth in the first nine months of 2016 by $344 million. See Note 3 “Loans and Leases” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report, for further information.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Non-Core Assets

The table below shows the composition of our non-core assets as of the dates indicated:



(dollars in millions)	September 30, 2016		December 31, 2015		(Date of Designation) June 30, 2009		Change from 2016-2015		Change from 2016-2009
Commercial		$154		$38		$1,900	305	%	(92	%)
Commercial real estate	88		130		3,412		(32	)	(97	)
Leases	904		—		—		100		100
Total commercial	1,146		168		5,312		582		(78	)
Residential mortgages	185		297		1,467		(38	)	(87	)
Home equity loans	62		69		384		(10	)	(84	)
Home equity lines of credit	62		74		231		(16	)	(73	)
Home equity loans serviced by others	796		986		4,591		(19	)	(83	)
Home equity lines of credit serviced by others	238		389		1,589		(39	)	(85	)
Automobile	—		—		769		—		(100	)
Student	302		329		1,495		(8	)	(80	)
Credit cards	—		—		995		—		(100	)
Other retail	—		—		3,268		—		(100	)
Total retail	1,645		2,144		14,789		(23	)	(89	)
Total non-core loans	2,791		2,312		20,101		21		(86	)
Other assets	161		26		378		519		(57	)
Total non-core assets		$2,952		$2,338		$20,479	26	%	(86	%)

Non-core assets are primarily loans and leases inconsistent with our strategic goals, generally as a result of geographic location, industry, product type or risk level. Between June 30, 2009 and September 30, 2016, the portfolio decreased $17.5 billion, or 86%, including principal repayments of $10.7 billion, charge-offs of $3.9 billion, transfers back to the core portfolio of $2.8 billion, and sales of $1.3 billion, partially offset by a third quarter 2016 transfer into non-core of $1.2 billion.

Non-core assets totaled $3.0 billion as of September 30, 2016, an increase of $614 million, or 26%, compared to December 31, 2015. Retail non-core loan balances of $1.6 billion decreased $499 million, or 23%, compared to December 31, 2015. Commercial non-core loans of $1.1 billion increased $978 million compared to December 31, 2015. This increase was driven by the transfer of a $1.2 billion lease and loan portfolio tied to legacy RBS aircraft leasing borrowers that we placed in runoff following a review of the Asset Finance business in third quarter 2016. This portfolio of largely investment-grade client aircraft leases do not meet go-forward business model strategic and risk-adjusted return parameters, and we plan to exit these non-strategic relationships. These assets were designated as non-core and transferred to Other.

The largest component of our retail non-core portfolio is the home equity SBO portfolio, which totaled $1.0 billion as of September 30, 2016, compared to $1.4 billion as of December 31, 2015. The SBO portfolio is a liquidating portfolio consisting of pools of home equity loans and lines of credit purchased between 2003 and 2007. Although our SBO portfolio consists of loans that were initially serviced by others, we now service a portion of this portfolio internally. SBO balances serviced externally totaled $551 million and $763 million as of September 30, 2016 and December 31, 2015, respectively. The SBO portfolio has been closed to new purchases since the third quarter of 2007. The SBO portfolio represented 3% of the retail real estate secured portfolio and 2% of the overall retail loan portfolio as of September 30, 2016.

The credit profile of the SBO portfolio was weaker than the core real estate portfolio, with a weighted-average refreshed FICO score of 711 and CLTV of 89% as of September 30, 2016. The proportion of the portfolio in a second lien position was 97% with 71% of the portfolio in out-of-footprint geographies including 27% in California, Nevada, Arizona and Florida.

SBO net charge-offs of $5 million decreased $2 million compared to fourth quarter 2015. The SBO portfolio annualized net charge-off rate increased one basis point to 1.87%, compared to 1.86% in fourth quarter 2015, driven by balance liquidation.

Allowance for Credit Losses and Nonperforming Assets

We and our banking subsidiaries, CBNA and CBPA, maintain an allowance for credit losses, consisting of an ALLL and a reserve for unfunded lending commitments. This allowance is created through charges to income, specifically through the provision for credit loss account, and is maintained at an appropriate level adequate to absorb anticipated losses and is determined

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

in accordance with GAAP. For further information on our processes to determine our allowance for credit losses, see “—Critical Accounting Estimates — Allowance for Credit Losses,” Note 1 “Significant Accounting Policies” to the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015 and Note 4 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

The allowance for credit losses totaled $1.3 billion at September 30, 2016 and December 31, 2015. Our ALLL was 1.18% of total loans and leases and 112% of nonperforming loans and leases as of September 30, 2016 compared with 1.23% and 115%, respectively, as of December 31, 2015. There were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and the reserve for unfunded lending commitments. However, as part of the annual review of loss emergence periods, the incurred loss periods for retail property secured loans were extended.

Overall, loan portfolio credit quality remained relatively strong in the nine months ended September 30, 2016. Net charge-offs of $231 million increased $24 million, or 12%, from $207 million for the nine months ended September 30, 2015, driven by higher losses in the commercial loan portfolio largely related to commodity-related credits. Annualized net charge-offs of 0.30% of average total loans and leases was relatively stable with 0.29% for the nine months ended September 30, 2015. The 90 day or more past due delinquency rate was 0.9% as of both September 30, 2016 and December 31, 2015. Nonperforming loans and leases totaled $1.1 billion as of September 30, 2016 and December 31, 2015, which was 1.05% of the total loan and lease portfolio as of September 30, 2016, and 1.07% of the total loan and lease portfolio as of December 31, 2015.

Commercial Loan Asset Quality

Our commercial loan and lease portfolio consists of traditional commercial loans, commercial real estate loans and leases. 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. However, we also do business in certain specialized industry sectors on a national basis.

For commercial loans and leases, we use 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 that indicates an increased probability of future loss. See Note 4 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

As of September 30, 2016, nonperforming commercial loans and leases increased $248 million to $396 million, compared to $148 million as of December 31, 2015, driven by a $193 million increase in nonperforming oil and gas industry loans following negative guidance related to multi-tiered debt structures. As of September 30, 2016, total commercial nonperforming loans were 0.8% of the commercial loan portfolio, compared to 0.3% as of December 31, 2015. Total commercial loan and lease portfolio net charge-offs of $19 million in third quarter 2016 compared to net charge-offs of $5 million in third quarter 2015.

Total commercial criticized loans and leases portfolio of $2.9 billion, or 5.7% of the portfolio compared to $2.6 billion, or 5.6% at December 31, 2015. Commercial criticized balances were $2.2 billion, or 6.0%, of commercial loans as of September 30, 2016, compared to $2.0 billion, or 6.0%, as of December 31, 2015. Commercial real estate criticized balances of $506 million, or 5.0%, of the commercial real estate portfolio compared to $521 million, or 5.8%, as of December 31, 2015. Commercial criticized loans to total criticized loans of 76% as of September 30, 2016 remained unchanged from 76% as of December 31, 2015. Commercial real estate accounted for 18% of criticized loans as of September 30, 2016, compared to 20% as of December 31, 2015.

Retail Loan Asset Quality

For retail loans, we primarily utilize payment and delinquency status to monitor credit quality. Historical experience indicates that the longer a loan is past due, the greater the likelihood of future credit loss. These credit quality indicators are continually updated and monitored. Our retail loan portfolio remains focused on lending across the New England, Mid-Atlantic and Midwest regions, with continued geographic expansion outside the footprint primarily in the auto finance, student lending and unsecured portfolios. Retail assets increased $2.3 billion to $55.1 billion as of September 30, 2016, a 4.3% increase from December 31, 2015, driven by growth in the student lending, other unsecured and residential mortgage portfolios, offset by a reduction in home equity.

The credit composition of our retail loan portfolio at September 30, 2016 remained favorable and well-positioned across all product lines with an average refreshed FICO score of 758, which was stable with December 31, 2015 levels. The real estate secured portfolio CLTV ratio is calculated as the mortgage and second lien loan balance divided by the appraised value of the property and was 63% as of September 30, 2016 compared to 64% as of December 31, 2015. Retail asset quality continued to improve with an annualized net charge-off rate (core and non-core) of 0.47% in third quarter 2016, a decrease of 13 basis points from fourth quarter 2015, driven by broad improvement in home equity and seasonal improvement in the student portfolio.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Nonperforming retail loans as a percentage of total retail loans were 1.3% as of September 30, 2016, a decrease of 40 basis points from December 31, 2015, driven primarily by the third quarter 2016 TDR Transaction and the reclassification of residential mortgage loans guaranteed by government entities to accruing status in keeping with industry practice. Nonperforming balances at September 30, 2016 excluded $48 million of government guaranteed loans.

Special Topics-HELOC Payment Shock

For further information regarding the possible HELOC payment shock, see “—Key Factors Affecting Our Business — HELOC Payment Shock.”

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. As of September 30, 2016, $812 million of retail loans were classified as retail TDRs, compared with $1.2 billion as of December 31, 2015. The decrease was driven by the third quarter 2016 sale of $310 million of retail TDRs, including $255 million of residential mortgages and $55 million of home equity loans. As of third quarter 2016, $260 million of retail TDRs were in nonaccrual status of which 62% were current with payments compared to $379 million of retail TDRs at fourth quarter 2015 with 51% current on payments. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are evaluated for impairment individually. Loans are 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 1 “Significant Accounting Policies” to the audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015 and Note 4 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

The tables that follow present an aging of our retail TDRs:



	September 30, 2016
(in millions)	Current		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total
Recorded Investment:
Residential mortgages		$123		$2		$6		$44		$175
Home equity loans	125		3		4		20		152
Home equity lines of credit	169		4		3		21		197
Home equity loans serviced by others	58		3		1		2		64
Home equity lines of credit serviced by others	6		—		—		3		9
Automobile	15		1		1		1		18
Student	153		4		1		1		159
Credit cards	24		1		1		—		26
Other retail	11		1		—		—		12
Total		$684		$19		$17		$92		$812

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS



	December 31, 2015
(in millions)	Current		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total
Recorded Investment:
Residential mortgages		$327		$25		$12		$77		$441
Home equity loans	170		13		6		35		224
Home equity lines of credit	163		7		4		20		194
Home equity loans serviced by others	67		2		1		4		74
Home equity lines of credit serviced by others	6		1		—		3		10
Automobile	13		1		—		—		14
Student	157		4		2		2		165
Credit cards	25		1		1		1		28
Other retail	14		1		—		—		15
Total		$942		$55		$26		$142		$1,165

The tables that follow present the accrual status of our retail TDRs:



	September 30, 2016
(in millions)	Accruing		Nonaccruing		Total
Recorded Investment:
Residential mortgages		$93		$82		$175
Home equity loans	107		45		152
Home equity lines of credit	127		70		197
Home equity loans serviced by others	46		18		64
Home equity lines of credit serviced by others	4		5		9
Automobile	9		9		18
Student	129		30		159
Credit cards	26		—		26
Other retail	11		1		12
Total		$552		$260		$812



	December 31, 2015
(in millions)	Accruing		Nonaccruing		Total
Recorded Investment:
Residential mortgages		$279		$162		$441
Home equity loans	158		66		224
Home equity lines of credit	107		87		194
Home equity loans serviced by others	52		22		74
Home equity lines of credit serviced by others	4		6		10
Automobile	6		8		14
Student	138		27		165
Credit cards	27		1		28
Other retail	15		—		15
Total		$786		$379		$1,165

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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:



	September 30, 2016				December 31, 2015
(dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Change in Fair Value
Securities Available for Sale:
U.S. Treasury and other		$15		$15		$16		$16		($1	)	(6	%)
State and political subdivisions	8		8		9		9		(1		)	(11	)
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	18,606		18,956		17,234		17,320		1,636			9
Other/non-agency	456		429		555		522		(93		)	(18	)
Total mortgage-backed securities	19,062		19,385		17,789		17,842		1,543			9
Total debt securities	19,085		19,408		17,814		17,867		1,541			9
Marketable equity securities	5		5		5		5		—			—
Other equity securities	12		12		12		12		—			—
Total equity securities	17		17		17		17		—			—
Total securities available for sale		$19,102		$19,425		$17,831		$17,884		$1,541		9	%
Securities Held to Maturity:
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities		$4,279		$4,380		$4,105		$4,121		$259		6	%
Other/non-agency	1,010		1,051		1,153		1,176		(125		)	(11	)
Total securities held to maturity		$5,289		$5,431		$5,258		$5,297		$134		3
Total securities available for sale and held to maturity		$24,391		$24,856		$23,089		$23,181		$1,675		7	%

As of September 30, 2016, the fair value of the AFS and HTM securities portfolio increased $1.7 billion to $24.9 billion, compared with $23.2 billion as of December 31, 2015, driven by an increase in market value due to a decline in interest rates and net purchases of $1.3 billion in securities that were bought for liquidity management purposes.

As of September 30, 2016, the portfolio’s average effective duration was 2.7 years compared with 3.5 years as of December 31, 2015, largely reflecting the impact of an increase in prepayment speeds due to lower long term rates. The reduction in securities duration was most pronounced in the first quarter 2016 as interest rates declined significantly in this period. We proactively manage the combination of securities duration, swap positions, and borrowed funds. Refer to “—Market Risk — Non-Trading Risk” for more information.

The securities portfolio includes high-quality, highly-liquid investments reflecting our ongoing commitment to maintaining appropriate contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and government-sponsored entity-issued mortgage-backed securities represents the vast majority of the securities portfolio holdings. The portfolio composition is also dominated by holdings backed by mortgages to facilitate our ability to pledge them to the FHLBs. This has become increasingly important due to the enhanced liquidity requirements of the liquidity coverage ratio. For further discussion of the liquidity coverage ratios, see “Regulation and Supervision — Liquidity Standards” in Part I — Business, included in the Annual Report on Form 10-K for the year ended December 31, 2015.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Deposits

The table below presents the major components of our deposits:



(dollars in millions)	September 30, 2016		December 31, 2015		Change			Percent
Demand		$27,292		$27,649		($357	)	(1	%)
Checking with interest	20,573		17,921		2,652			15
Regular savings	8,797		8,218		579			7
Money market accounts	38,258		36,727		1,531			4
Term deposits	13,407		12,024		1,383			12
Total deposits		$108,327		$102,539		$5,788		6	%

Total deposits as of September 30, 2016 increased $5.8 billion to $108.3 billion, compared to $102.5 billion, as growth in checking with interest, money market products, term deposits and savings was partially offset by a decrease in demand deposits.

Borrowed Funds

Short-term borrowed funds

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



(dollars in millions)	September 30, 2016		December 31, 2015		Change			Percent
Federal funds purchased		$95		$—		$95		100	%
Securities sold under agreements to repurchase	805		802		3			—
Other short-term borrowed funds (primarily current portion of FHLB advances)	2,512		2,630		(118		)	(4	)
Total short-term borrowed funds		$3,412		$3,432		($20	)	(1	%)

Short-term borrowed funds of $3.4 billion as of September 30, 2016, decreased $20 million from December 31, 2015, reflecting an $118 million decline in other short-term borrowed funds (primarily short-term FHLB advances) partially offset by a $95 million increase in Fed funds purchased and a $3 million increase in customer repurchase agreements.

As of September 30, 2016, our total contingent liquidity was $24.2 billion, consisting of $1.9 billion in net cash at the FRB (which is defined as excess cash balances held at the FRBs), $19.2 billion in unencumbered high-quality and liquid securities, and $3.1 billion in unused FHLB borrowing capacity. Asset liquidity, a component of contingent liquidity, consisting of excess cash balances at the FRB and unencumbered high-quality and liquid securities, was $21.1 billion. Additionally, $11.9 billion in secured Discount Window capacity from the FRBs created total available liquidity of approximately $36.1 billion.

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 Three Months Ended September 30,						As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,
(dollars in millions)	2016			2015			2016			2015			2015
Weighted-average interest rate at period-end:
Federal funds purchased and securities sold under agreements to repurchase	0.03		%	0.25		%	0.03		%	0.25		%	0.15		%
Other short-term borrowed funds (primarily current portion of FHLB advances)	0.63			0.29			0.63			0.29			0.44
Maximum amount outstanding at month-end during the period:
Federal funds purchased and securities sold under agreements to repurchase		$1,032			$3,356			$1,274			$5,375			$5,375
Other short-term borrowed funds (primarily current portion of FHLB advances)	2,515			5,861			4,764			7,004			7,004
Average amount outstanding during the period:
Federal funds purchased and securities sold under agreements to repurchase		$910			$2,880			$922			$3,947			$3,364
Other short-term borrowed funds (primarily current portion of FHLB advances)	2,564			5,062			3,133			6,169			5,865
Weighted-average interest rate during the period:
Federal funds purchased and securities sold under agreements to repurchase	0.10		%	0.32		%	0.09		%	0.22		%	0.22		%
Other short-term borrowed funds (primarily current portion of FHLB advances)	0.63			0.29			0.62			0.27			0.28

Long-term borrowed funds

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



(in millions)	September 30, 2016		December 31, 2015
Citizens Financial Group, Inc.:
4.150% fixed rate subordinated debt, due 2022		$347		$350
5.158% fixed-to-floating rate subordinated debt, (LIBOR + 3.56%) callable, due 2023	333		333
3.750% fixed rate subordinated debt, due 2024	250		250
4.023% fixed rate subordinated debt, due 2024	42		331
4.082% fixed rate subordinated debt, due 2025	—		331
4.350% fixed rate subordinated debt, due 2025	249		250
4.300% fixed rate subordinated debt, due 2025	749		750
2.375% fixed rate senior unsecured debt, due 2021	348		—
Banking Subsidiaries:
1.600% senior unsecured notes, due 2017	750		749
2.300% senior unsecured notes, due 2018	752		747
2.450% senior unsecured notes, due 2019	761		752
2.500% senior unsecured notes, due 2019	749		—
2.550% senior unsecured notes, due 2021	998		—
Federal Home Loan advances due through 2033	5,564		5,018
Other	10		25
Total long-term borrowed funds		$11,902		$9,886

Note: The September 30, 2016 balances above reflect the impact of unamortized deferred issuance costs and discounts. See Note 7 “Borrowed Funds” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

On July 28, 2016, we issued $350 million of 2.375% fixed-rate senior notes due 2021, and used the net proceeds and available cash to repurchase $500 million of our subordinated notes. Specifically, we retired $334 million of our 4.082% subordinated notes due 2025 and $166 million of our 4.023% subordinated notes due 2024.

On December 3, 2015, we repurchased $750 million of outstanding subordinated debt instruments. The $3 million difference between the repurchase price and the net carrying amount of the subordinated debt was recognized as a gain on

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

extinguishment of the debt. To fund the repurchase, we issued $750 million of new subordinated debt with a 4.300% fixed rate and a ten year maturity.

On July 31, 2015, we issued $250 million of subordinated debt with a 4.350% fixed rate and a ten year maturity. On August 3, 2015, we used the net proceeds of this issuance to repurchase 9,615,384 shares of our common stock.

Long-term borrowed funds of $11.9 billion as of September 30, 2016 increased $2.0 billion from December 31, 2015, primarily driven by a $2.1 billion increase in senior bank debt and an increase of $546 million in long-term FHLB borrowings, offset by a reduction of $620 million in subordinated debt. Access to additional funding through repurchase agreements, collateralized borrowed funds or asset sales continues to be available. Additionally, capacity remains to grow deposits or issue senior or subordinated notes.

Derivatives

We use pay-fixed swaps to hedge floating rate wholesale funding and to offset duration in fixed-rate assets. Notional balances on wholesale funding hedges totaled $4.5 billion as of September 30, 2016 and $5.0 billion as of December 31, 2015. Pay-fixed rates on the swaps ranged from 1.96% to 4.30% as of September 30, 2016 and December 31, 2015. As of September 30, 2016, we received the daily federal funds effective rate on a $500 million notional position, which matures in October 2016, while the remaining $4.0 billion are forward starting positions which begin accruing interest starting in January 2017 and later periods. At December 31, 2015 we also had a $500 million hedge of forecasted term debt issuance at a 1.82% pay fixed rate which was unwound in July 2016.

We use receive-fixed swaps to minimize the exposure to variability in the interest cash flows on our floating rate assets, and to hedge market risk on fixed rate capital markets debt issuances. At September 30, 2016 and December 31, 2015, the notional amount of receive-fixed swap hedges totaled $12.9 billion and $11.3 billion, respectively. The fixed-rate ranges were 0.88% to 2.04% and 0.77% to 2.05%, respectively. We paid one-month and three-month LIBOR on these swaps.

In third quarter 2016, we entered into $2.9 billion five-year receive-fixed interest rate swap designed to hedge the interest-rate exposure on floating rate commercial loans and modestly reduce longer-term net interest income sensitivity. We receive fixed at rates ranging from 0.88% to 1.07% on the agreements and pay one month LIBOR.

In July 2016, we unwound $1 billion in swaps related to a subordinated debt buy back, comprised of a $500 million fair value hedge of the notes bought back, and $500 million hedging the forecast senior debt issuance used to retire the debt.

In June 2016, we entered into a $500 million five-year receive-fixed interest rate swap designed to hedge the interest-rate exposure on floating rate commercial loans and modestly reduce longer-term net interest income sensitivity. We receive a fixed rate of 1.09% on the agreement and pay one month LIBOR.

In March and May 2016, we entered into receive-fixed interest-rate swaps totaling $750 million and $1.0 billion, respectively, to manage the interest rate exposure on a medium term debt issued in the same months. These agreements converted the fixed-rate debt coupon to three-month LIBOR based floating funding. We receive a fixed rate of 1.06% and 1.17%, respectively, on the swap agreements and pay three month LIBOR.

In February 2016, we terminated $3.0 billion of two-year original term receive-fixed interest rate swaps that hedged the interest rate exposure on floating rate commercial loans. The transaction resulted in a $13 million gain which will be amortized over the remaining life of the swap.

We also sell interest rate swaps and foreign exchange forwards to commercial customers. Interest rate and foreign exchange derivative contracts are transacted to effectively minimize our market risk associated with the customer derivative contracts. The assets and liabilities recorded for derivatives not designated as hedges reflect the market value of these transactions.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The table below presents our derivative assets and liabilities. For additional information regarding our derivative instruments, see Note 11 “Derivatives” in our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.



	September 30, 2016								December 31, 2015
(dollars in millions)	Notional Amount ⁽¹⁾		Derivative Assets			Derivative Liabilities			Notional Amount ⁽¹⁾		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate contracts		$17,350		$347			$233			$16,750		$96			$50
Derivatives not designated as hedging instruments:
Interest rate contracts	51,847		709			621			33,719		540			455
Foreign exchange contracts	8,296		118			113			8,366		163			156
Other contracts	1,845		18			9			981		8			5
Total derivatives not designated as hedging instruments			845			743					711			616
Gross derivative fair values			1,192			976					807			666
Less: Gross amounts offset in the Consolidated Balance Sheets ⁽²⁾			(89		)	(89		)			(178		)	(178		)
Less: Cash collateral applied ⁽²⁾			(1		)	(47		)			(4		)	(3		)
Total net derivative fair values presented in the Consolidated Balance Sheets ⁽³⁾				$1,102			$840					$625			$485

⁽¹⁾The notional or contractual amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk as they do not measure the true economic risk of these contracts.

⁽²⁾Amounts represent the impact of legally enforceable master netting agreements that allow us to settle positive and negative positions.

⁽³⁾We also offset assets and liabilities associated with repurchase agreements on our Consolidated Balance Sheets. See Note 2 “Securities” in our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

At September 30, 2016, the overall derivative asset value increased $477 million and the liability balance increased by $355 million from December 31, 2015, primarily due to decreased fixed interest rates at September 30, 2016, compared to December 31, 2015.

Capital

As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRBG. Our primary subsidiaries are our two insured depository institutions, CBNA, a national banking association whose primary federal regulator is the OCC, and CBPA, a Pennsylvania-charted savings bank regulated by the Department of Banking of the Commonwealth of Pennsylvania and supervised by the FDIC as its primary federal regulator.

In July 2013, the FRB, OCC and FDIC issued the U.S. Basel III final rules. The rules implement the Basel Committee on Banking Supervision’s Basel III capital framework and certain provisions of the Dodd-Frank Act, including the Collins Amendment. The U.S. Basel III final rules substantially revised the risk-based capital and leverage requirements applicable to bank holding companies and their insured depository institution subsidiaries, CBNA and CBPA. The U.S. Basel III final rules became effective for us and our depository institution subsidiaries, CBNA and CBPA, on January 1, 2015 (subject to a phase-in period for certain provisions).

The U.S. Basel III final rules, among other things, (i) introduced a new capital measure called CET1, (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) defined CET1 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) expanded the scope of the deductions/adjustments to capital as compared to existing regulations.

The U.S. Basel III final rules also introduced a new capital conservation buffer (“CCB”), composed entirely of CET1, on top of three minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each subsequent January 1, until the buffer reaches its fully phased in level of 2.5% on January 1, 2019. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the applicable capital conservation buffer) will be subject to constraints on capital distributions, including dividends, repurchases and certain executive compensation based on the amount of the shortfall. Under the U.S. Basel III transitional rules, the effective minimum capital ratios as of January 1, 2016 were:


•	5.125% CET1 to risk-weighted assets (minimum of 4.5% plus 0.625% CCB);


•	6.625% Tier 1 capital (CET1 plus Additional Tier 1 capital) to risk-weighted assets (minimum of 6% plus 0.625% CCB);


•	8.625% Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets (minimum of 8% plus 0.625% CCB); and

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•	4.000% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). The minimum leverage ratio of 4% is not impacted by the capital conservation buffer.

Under the U.S. Basel III fully phased-in rules, the effective minimum capital ratios as of January 1, 2019 will be:


•	7.0% CET1 to risk-weighted assets (minimum 4.5% plus 2.5% CCB);


•	8.5% Tier 1 capital (CET1 plus Additional Tier 1 capital) to risk-weighted assets (minimum 6% plus 2.5% CCB); and


•	10.5% Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets (minimum 8% plus 2.5% CCB).

The U.S. Basel III final rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).

The U.S. Basel III final rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

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

The table below presents our actual regulatory capital ratios under Basel III Transitional rules as of September 30, 2016 and December 31, 2015. In addition, the table includes pro forma Basel III ratios as of September 30, 2016 and December 31, 2015, after full phase-in of all requirements to which we will be subject by January 1, 2019. Based on both current and fully phased-in Basel III requirements, all ratios remain well above current and future Basel III minima:



	Transitional Basel III								Pro Forma Basel III Assuming Full Phase-in
(dollars in millions)	Actual Amount		Actual Ratio		Required Minimum		Well-Capitalized Minimum for Purposes of Prompt Corrective Action		Actual Ratio⁽¹⁾		Required Minimum + Required Capital Conservation Buffer for Non-Leverage Ratios		FDIA Required Well-Capitalized Minimum for Purposes of Prompt Corrective Action
Basel III Transitional as of September 30, 2016
Common equity tier 1 capital⁽²⁾⁽⁶⁾		$13,763	11.3	%	5.1	%	6.5	%	11.3	%	7.0	%	6.5	%
Tier 1 capital⁽³⁾⁽⁶⁾	14,010		11.5		6.6		8.0		11.5		8.5		8.0
Total capital⁽⁴⁾⁽⁶⁾	17,290		14.2		8.6		10.0		14.2		10.5		10.0
Tier 1 leverage⁽⁵⁾	14,010		10.1		4.0		5.0		10.1		4.0		5.0
Risk-weighted assets	121,612
Quarterly adjusted average assets	138,425
Basel III Transitional as of December 31, 2015
Common equity tier 1 capital⁽²⁾		$13,389	11.7	%	4.5	%	6.5	%	11.7	%	7.0	%	6.5	%
Tier 1 capital⁽³⁾	13,636		12.0		6.0		8.0		11.9		8.5		8.0
Total capital⁽⁴⁾	17,505		15.3		8.0		10.0		15.3		10.5		10.0
Tier 1 leverage⁽⁵⁾	13,636		10.5		4.0		5.0		10.5		4.0		5.0
Risk-weighted assets	114,084
Quarterly adjusted average assets	130,455

⁽¹⁾Fully phased-in regulatory capital ratios are Key Performance Metrics. For more information on the computation of these Key Performance Metrics, see “—Principal Components of Operations and Key Performance Metrics Used By Management - Key Performance Metrics and Non-GAAP Financial Measures.”

⁽²⁾ “Common equity tier 1 capital ratio” represents CET1 divided by total risk-weighted assets as defined under Basel III Standardized approach.

⁽³⁾“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 Basel III Standardized approach.

⁽⁴⁾“Total capital ratio” is total capital divided by total risk-weighted assets as defined under Basel III Standardized approach.

⁽⁵⁾ “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under Basel III Standardized approach.

⁽⁶⁾“Minimum Capital ratio” for 2016 includes capital conservation buffer of 0.625%.

Standardized Approach

The Basel III Standardized approach measures risk-weighted assets primarily for market risk and credit risk exposures. Exposures subject to market risk are measured on a basis generally consistent with how market risk risk-weighted assets were measured using the Basel 2.5 market risk rules. Refer to “—Market Risk — Market Risk Regulatory Capital,” for further

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

information. We apply the Basel III standardized approach, as defined by the U.S. regulators, for determining the assignment of risk-weighted assets. Under the Standardized approach no distinction is made for variations in credit quality for corporate exposures. Additionally, the economic benefit of collateral is restricted to a limited list of eligible securities and cash. We estimate our common equity tier 1 capital ratio under the Basel III Standardized approach, on a fully phased-in basis, to be 11.3% at September 30, 2016. As of September 30, 2016, we estimated that our Basel III Standardized common equity tier 1 capital would be $13.8 billion and total risk-weighted assets would be $121.8 billion, on a fully-phased in basis. Our estimates under the Basel III Standardized approach may be refined over time because of further rulemaking or clarification by U.S. banking regulators or as our understanding and interpretation of the rules evolve. Actual results could differ from those estimates and assumptions.

A reconciliation of Basel III Standardized Transitional approach to Basel III Standardized estimates on a fully-phased in basis for common equity tier 1 capital, total capital and risk-weighted assets, see the following table.



(dollars in millions)	September 30, 2016			December 31, 2015
Common equity tier 1 capital		$13,763			$13,389
Impact of intangibles at 100%	—			(2		)
Fully phased-in common equity tier 1 capital⁽¹⁾		$13,763			$13,387
Total capital		$17,290			$17,505
Impact of intangibles at 100%	—			(2		)
Fully phased in common total capital⁽¹⁾		$17,290			$17,503
Risk-weighted assets		$121,612			$114,084
Impact of intangibles - 100% capital deduction	—			(2		)
Impact of mortgage servicing assets at 250% risk weight	228			246
Fully phased-in risk-weighted assets⁽¹⁾		$121,840			$114,328
Transitional common equity tier 1 ratio⁽²⁾	11.3		%	11.7		%
Fully phased-in common equity tier 1 ratio⁽¹⁾⁽²⁾	11.3			11.7
Transitional total capital ratio⁽³⁾	14.2			15.3
Fully phased-in total capital ratio⁽¹⁾⁽³⁾	14.2			15.3

⁽²⁾“Common equity tier 1 capital ratio” represents CET1 divided by total risk-weighted assets as defined under Basel III Standardized approach.

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

Regulatory Capital Ratios and Capital Composition

CET1 capital under Basel III Standardized Transitional rules was $13.8 billion at September 30, 2016, an increase of $374 million from $13.4 billion at December 31, 2015. The increase was primarily attributable to net income and amortization of deferred tax related to goodwill for the nine months ended September 30, 2016, net of the repurchase of 11.1 million shares of common stock and dividends paid to stockholders. At September 30, 2016, there was approximately $247 million of additional tier 1 capital, reflecting the capital value after issuance costs of the 5.500% Fixed-to-Floating Non-Cumulative Perpetual Preferred Stock, Series A, issued on April 6, 2015. Tier 1 capital at September 30, 2016 was $14.0 billion, an increase of $374 million from $13.6 billion at December 31, 2015. Total capital was $17.3 billion at September 30, 2016, a decrease of $215 million from December 31, 2015 driven primarily by the redemption of subordinated debt, repurchase of 11.1 million shares of common stock and dividends paid to stockholders offset by net income for the nine months ended September 30, 2016.

Risk-weighted assets based on Basel III Standardized Transitional rules at September 30, 2016 were $121.6 billion, an increase of $7.5 billion as compared to December 31, 2015. The primary drivers for this change were growth in commercial, commercial real estate and student loan exposures.

As of September 30, 2016, the tier 1 leverage ratio decreased approximately 33 basis points to 10.1% from 10.5% as of December 31, 2015. This decline reflected the net impact of an $8.0 billion increase in adjusted quarterly average total assets, which drove a 61 basis point decline in the ratio, and the previously noted increase in tier 1 capital, which added 28 basis points to the ratio.

CITIZENS FINANCIAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents our capital composition under the Basel III capital framework in effect at September 30, 2016 and December 31, 2015:



	Transitional Basel III
(dollars in millions)	September 30, 2016			December 31, 2015
Total common stockholders’ equity		$19,934			$19,399
Exclusions⁽¹⁾:
Net unrealized (gains) losses recorded in accumulated other comprehensive income, net of tax:
Debt and marketable equity securities available for sale	(143		)	28
Derivatives	(32		)	(10		)
Unamortized net periodic benefit costs	362			369
Deductions:
Goodwill	(6,876		)	(6,876		)
Deferred tax liability associated with goodwill	519			480
Other intangible assets	(1		)	(1		)
Total Common Equity Tier 1	13,763			13,389
Qualifying preferred stock	247			247
Total Tier 1 Capital	14,010			13,636

Qualifying long-term debt securities as tier 2	1,970			2,595
Allowance for loan and lease losses	1,240			1,216
Allowance for credit losses for off-balance sheet exposure	70			58
Total capital		$17,290			$17,505

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

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 regulatory changes that will or may apply to future periods. Key analytical frameworks, which enable the comprehensive assessment of capital adequacy versus unexpected loss, supplement our base case forecast. These supplemental frameworks include integrated stress testing, as well as an internal capital adequacy requirement that builds on internally assessed economic capital requirements. A robust governance framework supports our capital planning process. This process includes capital management policies and procedures that document capital adequacy metrics and limits, as well as our comprehensive 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 for us and for our banking subsidiaries feed development of capital plans that are submitted to the FRBG and other bank regulators. We prepare these plans in full compliance with the FRBG’s Capital Plan Rule and we participate annually in the FRBG’s extensive CCAR review process. In addition to the stress test requirements under CCAR, we also participate in semiannual stress tests required by the Dodd-Frank Act.

In April 2016, we submitted our 2016 Capital Plan to the Federal Reserve under the annual CCAR process. On June 29, 2016, the FRBG indicated that it did not object to our 2016 Capital Plan or to our proposed capital actions in the period beginning July 1, 2016 and ending June 30, 2017. Our 2016 Capital Plan includes quarterly common dividends of $0.12 per share through the end of 2016, a potential 17% increase to quarterly common dividends to $0.14 per share in 2017, and a share repurchase plan of up to $690 million through the second quarter of 2017.

All distributions proposed under our 2016 Capital Plan are subject to consideration and approval by the CFG’s Board of Directors prior to execution. The timing and exact amount of dividends and share repurchases will depend on various factors, including our capital position, financial performance and market conditions. For fourth quarter 2016, CFG’s Board of Directors has approved a common dividend of $0.12 per share and the continuation of our share repurchase plan. All of these actions were included in our 2016 Capital Plan to which the Federal Reserve indicated no objection.

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Capital Transactions

During the nine months ended September 30, 2016, we completed the following capital actions:


•	Declared quarterly common stock dividends of $0.10 per share for the first quarter of 2016 and $0.12 per share for each of the second and third quarters of 2016, aggregating to dividend payments of approximately $179 million;


•	Repurchased $125 million aggregate principal amount of our 4.023% subordinated notes due 2024 on March 7, 2016;


•	Repurchased $334 million aggregate principal amount of our 4.082% subordinated notes due 2025 on July 28, 2016;


•	Repurchased $166 million aggregate principal amount of our 4.023% subordinated notes due 2024 on July 28, 2016;


•	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 payments of approximately $7 million on April 6, 2016 and October 6, 2016; and


•	Repurchased 11.1 million shares of common stock reducing regulatory capital by $250 million.

At September 30, 2016, all regulatory ratios remained well above their respective fully phased-in Basel III minimum plus the capital conservation buffer for the risk-based ratios. Fully phased-in regulatory capital ratios are Key Performance Metrics. For more information on the computation of these Key Performance Metrics, see “—Principal Components of Operations and Key Performance Metrics Used By Management — Key Performance Metrics and Non-GAAP Financial Measures”.

Banking Subsidiaries’ Capital

The following table presents our banking subsidiaries’ capital ratios under Basel III Standardized Transitional rules as of September 30, 2016 and December 31, 2015:



	Transitional Basel III
	September 30, 2016				December 31, 2015
(dollars in millions)	Amount		Ratio		Amount		Ratio
Citizens Bank, N.A.
Common equity Tier 1 capital⁽¹⁾		$11,152	11.4	%		$10,754	11.7	%
Tier 1 risk-based capital⁽²⁾	11,152		11.4		10,754		11.7
Total Risk-based Capital⁽³⁾	13,344		13.6		13,132		14.3
Tier 1 Leverage⁽⁴⁾	11,152		10.5		10,754		10.7
Risk-weighted assets	98,173				91,625
Quarterly adjusted average assets	106,506				100,504

Citizens Bank of Pennsylvania
Common equity Tier 1 capital⁽¹⁾		$3,083	12.9	%		$3,017	13.0	%
Tier 1 risk-based capital⁽²⁾	3,083		12.9		3,017		13.0
Total Risk-based Capital⁽³⁾	3,326		13.9		3,559		15.4
Tier 1 Leverage⁽⁴⁾	3,083		8.9		3,017		9.1
Risk-weighted assets	23,983				23,179
Quarterly adjusted average assets	34,812				33,045

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

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

⁽⁴⁾ “Tier 1 leverage ratio” is tier 1 capital divided by quarterly average total assets as defined under Basel III Standardized approach.

CBNA CET1 capital under Basel III Standardized Transitional rules was $11.2 billion at September 30, 2016, an increase of $398 million from $10.8 billion at December 31, 2015. The increase was primarily attributable to net income for the nine months ended September 30, 2016, net of common stock dividends. At September 30, 2016, CBNA held minimal additional tier 1 capital. Total capital was $13.3 billion at September 30, 2016, an increase of $212 million driven primarily by the increase in CET1 capital net of the redemption of subordinated debt.

CBNA risk-weighted assets based on Basel III Standardized Transitional rules at September 30, 2016 were $98.2 billion, an increase of $6.5 billion compared to December 31, 2015. The primary drivers for this change were the growth in commercial, student, auto and personal loans.

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As of September 30, 2016, the CBNA tier 1 leverage ratio decreased approximately 23 basis points to 10.5% from 10.7% as of December 31, 2015, driven by an increase in adjusted quarterly average total assets of $6.0 billion resulting in a 62 basis point decline in the ratio, partially offset by a 39 basis point increase for higher CET1 capital described above.

CBPA CET1 capital under Basel III Standardized Transitional rules was $3.1 billion at September 30, 2016, an increase of $66 million from $3.0 billion at December 31, 2015. The increase was primarily attributable to net income for the nine months ended September 30, 2016 and amortization of deferred tax assets related to goodwill, net of common stock dividends.

At September 30, 2016, there was no additional tier 1 capital. Total capital was $3.3 billion at September 30, 2016, a decrease of $233 million driven primarily by the redemption of subordinated debt offset by an increase in CET1 capital.

CBPA risk-weighted assets based on Basel III Standardized Transitional rules at September 30, 2016 were $24.0 billion, an increase of $804 million as compared to December 31, 2015. The primary drivers for this change were growth in commercial, commercial real estate and student loan exposures. These increases were partially offset by decreases in both the residential mortgage and home equity loans.

As of September 30, 2016, the CBPA tier 1 leverage ratio decreased approximately 27 basis points to 8.9% from 9.1% as of December 31, 2015, driven by an increase in adjusted quarterly average total assets of $1.8 billion resulting in a 47 basis point decline in the ratio, partially offset by a 20 basis point increase resulting from higher CET1 capital described above.

Liquidity

We define liquidity as an institution’s ability to meet its cash-flow and collateral obligations in a timely manner, at a reasonable cost. An institution must maintain current 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 separately identify and manage contingent liquidity (consisting of excess cash balances at the FRB, unencumbered high-quality and liquid securities, and unused FHLB borrowing capacity) and asset liquidity (a component of contingent liquidity, consisting of excess 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 us, CBNA and CBPA.

CFG Liquidity

Our primary sources of cash are (i) dividends and interest received from our banking subsidiaries as a result of investing in bank equity and subordinated debt and (ii) externally issued senior and subordinated debt. Our uses of liquidity include the following: (i) routine cash flow requirements as a bank holding company, including payments of dividends, interest and expenses; (ii) needs of subsidiaries, including our banking subsidiaries, for additional equity and, as required, their needs for debt financing; and (iii) extraordinary requirements for cash.

During the nine month period ending September 30, 2016, we utilized $350 million in proceeds from the sale of senior notes and $275 million in excess cash to repurchase the entire $334 million of our 4.082% Subordinated Notes and $291 million of our 4.023% Subordinated Notes.

Our cash and cash equivalents represent a source of liquidity that can be used to meet various needs. As of September 30, 2016, we held cash and cash equivalents of approximately $591 million, which should be viewed as a liquidity reserve.

Our liquidity risk is low for the following reasons: (i) we have no material non-banking subsidiaries, and our banking subsidiaries are self-funding; (ii) the capital structures of our banking subsidiaries are similar to our capital structure. As of September 30, 2016, our double leverage ratio (the combined equity of our subsidiaries divided by our equity) was 101.8%; and, (iii) our other cash flow requirements, such as operating expenses, are relatively small.

Banking Subsidiaries’ Liquidity

In the ordinary course of business, the liquidity of CBNA and CBPA is managed by matching sources and uses of cash. The primary sources of bank liquidity include (i) deposits from our consumer and commercial franchise 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 loan commitments; and (iv) funding of securities purchases. To the extent that the banks have relied on wholesale borrowings, uses also include payments of related principal and interest.

Our banking subsidiaries’ 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

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maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary.

From an external issuance perspective, during 2014, we created a $3.0 billion Global Note Program for CBNA. This debt represents a key source of unsecured, term, and stable funding, further diversifies the funding sources of CBNA, and creates a more peer-like funding structure for the consolidated enterprise. On March 14, 2016, we increased the size of this program from $3.0 billion to $5.0 billion. Also, on March 14, 2016, CBNA issued $750 million in three-year fixed-rate senior notes, and on May 13, 2016, CBNA issued $1.0 billion in five-year fixed-rate senior notes. On December 3, 2015, CBNA issued $750 million in three-year fixed-rate senior notes, and on December 4, 2014, CBNA issued $1.5 billion in fixed-rate senior notes, consisting of $750 million of three-year notes and $750 million in five-year 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. We manage liquidity risk at the consolidated enterprise level, and for each material legal entity including us, CBNA and CBPA. 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 undermining of market confidence.

Factors Affecting Liquidity

Given the composition of their assets and borrowing sources, contingent liquidity risk at both CBNA and CBPA 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 their balance sheets, the funding liquidity risk of CBNA and CBPA 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, our banking subsidiaries reduced their 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.

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An additional variable affecting our access, and the access of our banking subsidiaries, 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:



	September 30, 2016
	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, N.A.:
Long-term issuer	Baa1	A-	BBB+
Short-term issuer	P-2	A-2	F2
Long-term deposits	A1	NR	A-
Short-term deposits	P-1	NR	F2
Citizens Bank of Pennsylvania:
Long-term issuer	Baa1	A-	BBB+
Short-term issuer	P-2	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, our banking subsidiaries continue to minimize reliance on unsecured wholesale funding. At September 30, 2016, the majority of wholesale funding consisted of secured borrowings from the FHLBs collateralized by high-quality residential mortgages.

Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The FRBG, the OCC, and the FDIC regularly evaluate our liquidity as part of the overall supervisory process, and the U.S. version of the LCR was effective for us beginning January 2016.

The LCR was developed to ensure banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. In September 2014, the U.S. federal banking regulators published the final rule to implement the LCR. This rule also introduced a modified version of the LCR in the United States, which generally applies to BHCs not active internationally (institutions with less than $10 billion of on-balance sheet foreign exposure), with total assets of greater than $50 billion but less than $250 billion. Under this definition, we are designated as a modified LCR company. As compared to the Basel Committee’s version of the LCR, the version of the LCR issued by the U.S. federal banking regulators 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 ends on January 1, 2017. Notably, as a modified LCR company, we were required to be 90% compliant beginning in January 2016, and 100% compliant beginning in January 2017. Achieving sustainable LCR compliance may require changes in the size and/or composition of our investment portfolio, the configuration of our discretionary wholesale funding portfolio, and our average cash position. We have been fully compliant with the LCR since its January 2016 effective date, up through and including September 30, 2016.

The U.S. federal bank regulatory agencies have issued a notice of proposed rulemaking to implement a modified NSFR for certain bank holding companies with more than $50 billion but less than $250 billion in assets and with less than $10 billion in on-balance sheet foreign exposures. Under this definition, we would be designated as a modified NSFR company. The NSFR is one of the two Basel III-based liquidity measures, along with the LCR, and is designed to promote medium- and long-term stable funding of the assets and off-balance sheet activities of banks and bank holding companies over a one-year time horizon. Generally consistent with the Basel Committee’s framework, under the proposed rule banking organizations would be required to hold an amount of available stable funding (“ASF”) over a one-year time horizon that equals or exceeds the institution’s amount of required stable funding (“RSF”), with the ASF representing the numerator and the RSF representing the denominator of the NSFR. Banking organizations subject to the modified NSFR would multiply the RSF amount by 70%, such that the RSF amount required for these companies would be equivalent to 70% of the RSF amount that would be required pursuant to the full NSFR generally applicable to institutions with more than $250 billion in total assets or $10 billion or more in on-balance sheet foreign exposures under the proposed rule. The proposed rule includes detailed descriptions of the items that would comprise ASF and

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RSF and standardized factors that would apply to ASF and RSF items, and would require any institution whose applicable modified NSFR falls under 100% to notify the appropriate federal regulator and develop a remediation plan.

We are currently evaluating the impact of the U.S. federal bank regulatory agencies’ NSFR framework. If ultimately adopted as currently proposed, the implementation of the NSFR could impact our liquidity and funding requirements and practices in the future.

We continue to review and monitor these liquidity requirements to develop appropriate implementation plans and liquidity strategies. We expect to be fully compliant with the final rules on or prior to the applicable effective date.

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 and Liability Management 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), contingent liquidity (to support unexpected funding requirements resulting from idiosyncratic, systemic, and combination stress events), and regulatory liquidity (to address current and emerging requirements such as the LCR and the NSFR). 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 sufficient liquidity buffer of unencumbered high-quality loans and securities. As of September 30, 2016:


•	Core deposits, including loans and deposits held for sale, continued to be our primary source of funding and our consolidated period end loan-to-deposit ratio was 97.8%;


•	Our net overnight position (which is defined as cash balance held at the Federal Reserve Banks less any overnight borrowings) totaled $1.9 billion;

•

Contingent liquidity was $24.2 billion, consisting of our net overnight position (defined above) of $1.9 billion, unencumbered high-quality and liquid securities of $19.2 billion, and unused FHLB capacity of $3.1 billion. Asset liquidity (a component of contingent liquidity) was $21.1 billion consisting of our net overnight position of $1.9 billion and unencumbered high-quality and liquid securities of $19.2 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 consumer loans and totaled $11.9 billion. Use of this borrowing capacity would likely be considered only during exigent circumstances.

The Funding and Liquidity Unit monitors a variety of liquidity and funding early warning indicators and metrics, including specific risk thresholds and limits. The early warning indicators include both the internal and external environment, providing both an inside-out and an outside-in risk perspective. The metrics are broadly classified as follows:


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


•	Contingent or stressed liquidity, including idiosyncratic, systemic and combined stress scenarios, 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 for each of us, our banking subsidiaries, and for our consolidated enterprise on a daily basis, including net overnight position, unencumbered securities, internal 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.

Money-fund reform and other factors have incrementally increased borrowing rates for short-term and unsecured bank liabilities. However, our utilization of unsecured and short-term wholesale funding continues to be de minimis, given our significant portfolio of high quality liquid assets, our access to alternative funding sources including the FHLBs and the long-term capital markets, and our strong franchise deposit base.

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Cash flows from operating activities contributed $1.2 billion in the first nine months of 2016. Net cash used by investing activities was $8.7 billion, primarily reflecting a net increase in loans and leases of $6.7 billion and securities available for sale portfolio purchases of $4.8 billion, partially offset by proceeds from maturities, paydowns and sales of securities available for sale of $3.4 billion. Cash provided by financing activities was $7.3 billion, driven by net increase in deposits of $5.8 billion, and proceeds from issuance of long-term borrowed funds of $9.6 billion, partially offset by a net decrease in other short-term borrowed funds of $1.6 billion, and repayments of long-term borrowed funds of $6.1 billion. The $9.6 billion proceeds included $2.1 billion from issuances of medium term debt and $7.5 billion in FHLB advances. The $6.1 billion of repayments includes $5.5 billion in repayments of FHLB advances and $625 million paid to repurchase subordinated debt. These activities represented a cumulative decrease in cash and cash equivalents of $170 million, which, when added to the cash and cash equivalents balance of $3.1 billion at the beginning of the year, resulted in an ending balance of cash and cash equivalents of $2.9 billion as of September 30, 2016.

In the first nine months of 2015, our operating activities contributed $831 million in net cash. Net cash used by investing activities was $4.2 billion, primarily reflecting net securities available for sale portfolio purchases of $5.4 billion and a net increase in loans and leases of $4.3 billion, partially offset by proceeds from maturities, paydowns and sales of securities available for sale of $5.8 billion. Cash provided by financing activities was $1.8 billion, driven by a net increase in deposits of $6.2 billion. These activities represented a cumulative decrease in cash and cash equivalents of $1.5 billion, which, when added to the cash and cash equivalents balance of $3.3 billion at the beginning of 2015, resulted in an ending balance of cash and cash equivalents of $1.8 billion as of September 30, 2015.

Off-Balance Sheet Commitments

The following table presents our outstanding off-balance sheet commitments. See Note 12 “Commitments and Contingencies” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.



(dollars in millions)	September 30, 2016		December 31, 2015		Change			Percent
Commitment amount:
Undrawn commitments to extend credit		$60,125		$56,524		$3,601		6	%
Financial standby letters of credit	1,980		2,010		(30		)	(1	)
Performance letters of credit	40		42		(2		)	(5	)
Commercial letters of credit	55		87		(32		)	(37	)
Marketing rights	44		47		(3		)	(6	)
Risk participation agreements	51		26		25			96
Residential mortgage loans sold with recourse	9		10		(1		)	(10	)
Total		$62,304		$58,746		$3,558		6	%

On January 7, 2016, we entered into an agreement to purchase student loans on a quarterly basis beginning with the first calendar quarter in 2016 and ending with the fourth calendar quarter in 2016. Under the terms of the agreement, we committed to purchase a minimum of $125 million of loans per quarter. The minimum and maximum amount of the aggregate purchase principal balance of loans under the terms of the agreement are $500 million and $1.0 billion, respectively. The agreement will terminate immediately if at any time during its term the aggregate purchase principal balance of loans equals the maximum amount. The agreement may be extended by written agreement of the parties for an additional four quarters. We may terminate the agreement at will with payment of a termination fee equal to the product of $1 million times the number of calendar quarters remaining in the term.

Our agreement to purchase automobile loans, originally entered into in May 2014, was most recently amended on February 18, 2016. For quarterly periods on or after August 1, 2015, the minimum and maximum purchases are $50 million and $200 million, respectively. The agreement automatically renews until terminated by either party. We may cancel the agreement at will with payment of a variable termination fee. There is no termination fee after May 2017.

Critical Accounting Estimates

Our unaudited interim 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 unaudited interim Consolidated Financial Statements. Estimates are made using facts and circumstances known at a point in

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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 “Significant Accounting Policies” to our audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015, 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. 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.

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.

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, loss given default 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 may be 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 to fair value.

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, LTV ratio, lien position, borrower’s credit, time outstanding, geographic location, delinquency status 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 SBO home equity loans, student loans, and credit card receivables utilize roll rate models to estimate the ALLL. For the portfolios measured using the incurred loss model, roll rate models are also used to support management overlays if deemed necessary.

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, the loss severity 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), months on books 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

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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.

The above measures are all used to assess the PD and LGD for HELOC borrowers for whom we originated the loans. There is also a portfolio of home equity products that were originated and serviced by others; however, we currently service some of the loans in this portfolio. The SBO portfolio is modeled as a separate class and the reserves for this class are generated by using the delinquency roll rate models as described below.

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, even if minor, can significantly affect management’s determination of an appropriate ALLL. For consumer loans, losses are affected by such factors as loss severity, collateral values, economic conditions, and other factors. A 1% and 5% increase in the estimated loss rate for consumer loans at December 31, 2015 would have increased the ALLL by $5 million and $26 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, 2015 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 $36 million and $72 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 “Significant Accounting Policies,” to our audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015 and Note 4 “Allowance for Credit Losses, Nonperforming Assets and Concentrations of Credit Risk,” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in 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.

Significant assets measured at fair value on a recurring basis include our mortgage-backed securities available for sale. These instruments are priced using an external pricing service and are classified as Level 2 within the fair value hierarchy. The

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service’s pricing models use predominantly observable valuation inputs to measure the fair value of these securities under both the market and income approaches. The pricing service utilizes a matrix pricing methodology to price our U.S. agency pass-through securities, which involves making adjustments to to-be-announced security prices based on a matrix of various mortgage-backed securities characteristics such as weighted-average maturities, indices and other pool-level information. Other agency and non-agency mortgage-backed securities are priced using a discounted cash flow methodology. This methodology includes estimating the cash flows expected to be received for each security using projected prepayment speeds and default rates based on historical statistics of the underlying collateral and current market conventions. These estimated cash flows are then discounted using market-based discount rates that incorporate characteristics such as average life, volatility, ratings, performance of the underlying collateral, and prevailing market conditions.

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.

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.

For additional information regarding our fair value measurements, see Note 1 “Significant Accounting Policies,” to our audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015 and Note 2 “Securities,” Note 6 “Mortgage Banking,” Note 11 “Derivatives,” and Note 14 “Fair Value Measurements” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

Goodwill

Goodwill is an asset that represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is not amortized, but is subject to annual impairment tests. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. A reporting unit is a business operating segment or a component of a business operating segment. Citizens has two reporting units with assigned goodwill; the Consumer segment and the Commercial segment. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is deemed to be not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangible assets as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.

We review goodwill for impairment annually as of October 31 or more often if events or circumstances indicate that it is more likely than not that the fair value of one or more reporting units is below its carrying value. We rely on the income approach (discounted cash flow method) as the primary method for determining fair value. Market-based methods are used as benchmarks to corroborate the value determined by the discounted cash flow method.

We rely on several assumptions when estimating the fair value of our reporting units using the discounted cash flow method. These assumptions include the current discount rate, loan loss provision rates, tax rates, earnings and balance sheet growth rates, terminal value growth rate, capital levels, and a terminal value multiple. Discount rates are estimated based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, and beta for the reporting units. The discount rates are also calibrated on the assessment of the risks related to the projected cash flows of each reporting unit. Multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, customer retention standards, market share changes, anticipated loan and deposit growth, forward interest rates, historical performance and

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industry and economic trends, among other considerations. The long-term growth rate used in determining the terminal value of each reporting unit was estimated based on management’s assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic considerations such as gross domestic product and inflation.

We corroborate the fair value of our reporting units determined by the discounted cash flow method using market-based methods: a comparable company method and a comparable transaction method. The comparable company method measures the fair value of a business by comparing it to publicly traded companies in similar lines of business. This involves identifying and selecting the comparable companies based on a number of factors (i.e., size, growth, profitability, risk and return on investment), calculating the market multiples (i.e., price-to-tangible book value, price-to-cash earnings and price-to-net income) of these comparable companies and then applying these multiples to our operating results to estimate the value of the reporting unit’s equity on a marketable, minority basis. A control premium is then applied to this value to estimate the fair value of the reporting unit on a marketable, controlling basis. The comparable transaction method measures fair value of a business based on exchange prices in actual transactions that have comparable factors to the reporting units. Adjustments for differences in factors described earlier (i.e., size, growth, profitability, risk and return on investment) are also considered.

We also corroborate the fair value of our reporting units determined by the discounted cash flow method by adding the aggregated sum of these fair value measurements to the fair value of our other segment operations and comparing this total to our observed market capitalization. As part of this process, we analyze the implied control premium to evaluate its reasonableness. Both positive and negative facts and circumstances are considered when completing this analysis, including company and market-specific factors, observed transaction data and any additional external evidence supporting the implied control premium. Since none of our reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to our common stock price. The sum of the fair values of the reporting units at October 31, 2015 exceeded the overall market capitalization of CFG as of October 31, 2015.

During the first nine months of 2016, we observed significant volatility in the overall market capitalization of CFG. Given this market volatility, we reviewed our market capitalization implied control premium based on end of period, average, median, and high and low stock prices during the second quarter. We also considered the various systematic and cyclical factors affecting bank stocks, as well as idiosyncratic factors such as our above-average capital position and attractive franchise value given our size, footprint, and customer base to evaluate the implied control premium. We will continue to monitor the volatility of our market capitalization. Although we believe it is reasonable to conclude that market capitalization could be an indicator of fair value over time, we do not believe that our current market capitalization reflects the aggregate fair value of our individual reporting units.

The valuation of goodwill is dependent on forward-looking expectations related to the performance of the U.S. economy and our associated financial performance. The prolonged delay in the full recovery of the U.S. economy, and the impact of that delay on earnings expectations, prompted a goodwill impairment test as of June 30, 2013. Although the U.S. economy had demonstrated signs of recovery, notably improvements in unemployment and housing, the pace and extent of recovery in these indicators, as well as in overall gross domestic product, lagged previous expectations. The impact of the slow recovery was most evident in our Consumer Banking reporting unit. Accordingly, the percentage by which the estimated fair value of our Consumer Banking reporting unit exceeded its carrying value declined from 7% at December 31, 2011 to 5% at December 31, 2012.

During the first half of 2013, we observed further deceleration of expected growth for our Consumer Banking reporting unit’s future profits based on forecasted economic growth for the U.S. economy and the continuing impact of the new regulatory framework in the financial industry. This deceleration was incorporated into our revised earnings forecast in the second quarter of 2013, and we subsequently concluded that there was a likelihood of greater than 50% that goodwill impairment had occurred as of June 30, 2013.

An interim goodwill impairment test was subsequently performed for our Consumer Banking and Commercial Banking reporting units. Step One of these tests indicated that (1) the fair value of our Consumer Banking reporting unit was less than its carrying value by 19% and (2) the fair value of our Commercial Banking reporting unit exceeded its carrying value by 27%. Step Two of the goodwill impairment test was subsequently performed for our Consumer Banking reporting unit, which resulted in the recognition of a pre-tax $4.4 billion impairment charge in our Consolidated Statement of Operations for the period ending June 30, 2013. The impairment charge, which was a non-cash item, had minimal impact on our tier 1 risk-based and total risk-based capital ratios. The impairment charge had no impact on our liquidity position or tangible common equity.

We performed an annual test for impairment of goodwill for both reporting units as of October 31, 2015. As of this testing date, the percentage by which the fair value of our Consumer Banking reporting unit exceeded its carrying value was 6%, and the percentage by which the fair value of our Commercial Banking reporting unit exceeded its carrying value was 8%.

We based the fair value estimates used in our annual goodwill impairment testing on assumptions we believe to be representative of assumptions that a market participant would use in valuing the reporting units but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our reporting units. There can be no assurances that future estimates and assumptions

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made for purposes of goodwill testing will prove accurate predictions of the future. If the assumptions regarding business plans, competitive environments, market conditions or anticipated growth rates are not achieved, or a market participant view of our total fair value declines, we may be required to record goodwill impairment charges in future periods.

For additional information regarding our goodwill impairment testing, see Note 1 “Significant Accounting Policies” and Note 9 “Goodwill,” to our audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015.

Income Taxes

Accrued income taxes are reported as a component of either other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets and reflect our estimate of income taxes to be paid or that effectively have been prepaid. Deferred income tax assets and liabilities represent the amount of future income taxes to be paid or that effectively have been prepaid, and the net balance is reported as an asset or liability in the Consolidated Balance Sheets. We determine the realization of the deferred tax asset based upon an evaluation of the four possible sources of taxable income: (1) the future reversals of taxable temporary differences; (2) future taxable income exclusive of reversing temporary differences and carryforwards; (3) taxable income in prior carryback years; and (4) tax planning strategies. In projecting future taxable income, we utilize forecasted pre-tax earnings, adjust for the estimated book tax differences and incorporate assumptions, including the amount of income allocable to taxing jurisdictions. These assumptions require significant judgment and are consistent with the plans and estimates that we use to manage the underlying businesses. The realization of the deferred tax assets could be reduced in the future if these estimates are significantly different than forecasted.

We are subject to income tax in the United States and multiple state and local jurisdictions. The tax laws and regulations in each jurisdiction may be interpreted differently in certain situations, which could result in a range of outcomes. Thus, we are required to exercise judgment regarding the application of these tax laws and regulations. We evaluate and recognize tax liabilities related to any tax uncertainties. Due to the complexity of some of these uncertainties, the ultimate resolution may differ from the current estimate of tax liabilities or refunds.

Our estimate of accrued income taxes, deferred income taxes and income tax expense can also change in any period as a result of new legislative or judicial guidance impacting tax positions, as well as changes in income tax rates. Any changes, if they occur, can be significant to our consolidated financial position, results of operations or cash flows.

For additional information regarding income taxes, see Note 1 “Significant Accounting Policies,” to our audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015 and Note 10 “Income Taxes,” to our unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements, included in this report.

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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 the 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 key committees that specifically consider risk across the enterprise are set out in the diagram below.

Chief Risk Officer

The CRO directs our overall risk management function overseeing the credit, interest rate, market, liquidity, operational, compliance, strategic and reputational risk management. The CRO reports to our CEO and to the Board Risk Committee.

Risk Framework

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

First Line of Defense

The business lines (including their associated support functions) are the first line of defense and are accountable for owning and managing, within our defined risk appetite, the risks which exist in their respective business areas. 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 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. This risk function utilizes training, communications and awareness to provide expert support and advice to the business lines. This includes interpreting the risk policy standards and risk management framework, overseeing compliance by the businesses with policies and responsibilities, including providing relevant management information and escalating concerns where appropriate.

The Executive Risk Committee, chaired by the CRO, actively considers our inherent material risks, analyzes our overall risk profile and seeks confirmation that the risks are being appropriately identified, assessed and mitigated.

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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 Committees on a quarterly basis.

Credit Quality Assurance also reports to the Chief Audit Executive and also 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 would either be unable to achieve our strategic objectives and capital adequacy obligations or would assume an unacceptable amount of risk to do so. The Board Risk Committee advises our Board of Directors in relation to current and potential future risk strategies, including determination of risk appetite and tolerance.

The principal non-market risks to which we are subject are: credit risk, operational risk, liquidity risk, strategic risk and reputational risk. We are also subject to market risks. 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. We are also subject to liquidity risk, discussed under “—Liquidity.”

Our risk appetite framework and risk limit structure establishes guidelines to determine the balance between existing and desired levels of risk and supports the implementation, measurement and management of our risk appetite.

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 credit risk management organization is responsible for approving credit transactions, monitoring portfolio performance, identifying problem loans, and ensuring remedial management.

Organizational Structure

Management and oversight of credit risk is the responsibility of both the line of business 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 CCO reports to the Chief Risk Officer. The CCO, 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 CCO and his 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 CCO 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; and Credit Policy and Administration. Each team under these leaders is composed of highly experienced credit professionals.

The credit risk teams operate independently from the business lines to ensure decisions are not influenced by unbalanced objectives.

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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 issues or changes 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

To ensure credit risks are managed within our risk appetite and business and risk strategies are achieved, we employ a comprehensive and integrated control program. The program’s objective is to proactively (1) identify, (2) measure, (3) monitor, and (4) 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. These models are embedded in the loan origination system, which allows for real-time scoring and automated decisions for many of our products. Periodic validations are performed on our purchased and proprietary scores to ensure fit for purpose. 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.

The origination process is supported by dedicated underwriting teams that reside in the business line. The size of each team depends on the intensity of the approval process as the number of handoffs, documentation, and verification requirements differ substantially depending on the loan product.

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. For accounts with contingent liability (revolving feature), credit policies have been developed that leverage the refreshed customer data to determine if a credit line should be increased, decreased, frozen, or closed. Lastly, behavioral modeling, segmentation, and loan modifications are used to cure delinquency, reduce the severity of loss, and maximize recoveries. Our approach to managing credit risk is highly analytical and, where appropriate, is automated, to ensure consistency and efficiency.

The credit risk team is constantly evaluating current and projected economic conditions, internal credit performance in relation to budget and predefined risk tolerances, and current and expected regulatory guidance to determine the optimal balance of expansion and contraction policies. All policy change proposals receive intense scrutiny and discussion prior to approval and implementation. This process ensures decisions are made based on risk-based analytics with full adherence to regulatory requirements.

Commercial

On the commercial banking side of credit risk, the structure is broken into C&I loans and leases and CRE. Within C&I there are separate verticals established for certain specialty products (e.g., asset-based lending, leasing, franchise finance, health care, 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 Probability of Default (“PD”) and Loss Given Default (“LGD”). Approval then requires 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

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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, validate risk ratings, as well as test the consistency of the credit processes and the effectiveness of credit risk management.

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 (sector), loan type (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.

Apart from Industrials and CRE (which together make up 30% of the commercial outstandings as of September 30, 2016), there are no material sector concentrations. As of September 30, 2016, our CRE outstandings amounted to 10% of total loans and leases. The Industrial sector includes basic C&I lending focused on general manufacturing. The sector is diversified and not managed as a specialized vertical. Our customers are local to our market and present no significant concentration.

Our credit grading system considers many components that directly correlate to loan quality and likelihood of repayment. Our assessment of a borrower’s credit strength is reflected in our risk ratings for such loans, which are also an integral component of our ALLL methodology. When deterioration in credit strength is noted, a loan becomes subject to Watch Review. The Watch Review process involves senior representatives from the business line portfolio management team, the independent Credit Risk team, and our Citizens Restructuring Management group. As appropriate and consistent with regulatory definitions, the credit may be subject to classification as either Criticized or Classified, which would also trigger a credit rating downgrade. As such, the loan and relationship would be subject to more frequent review.

Substantially all loans categorized as Classified are managed by Citizens Restructuring Management, a specialized group of credit professionals that handles the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include developing and implementing action plans, assessing risk ratings, determining the appropriateness of specific reserves relating to the loan, accrual status of the loan, and the ultimate collectability of loans in their portfolio.

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 composed entirely of interest rate risk, as we have no direct currency or commodity risk and de minimis equity risk. This 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.” Our mortgage servicing rights assets also contain interest rate risk as the value of the fee stream is impacted by the level of long-term interest rates.

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 of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a residential mortgage may be fixed for 30 years; the rate paid on a certificate of deposit may be fixed only for a few months. Due to these timing differences, net interest income is sensitive to changes in the level and shape of the yield curve. Second, there are differences in the drivers of rate changes of various assets and liabilities. For example, commercial loans may reprice based on one-month LIBOR or prime; the rate paid on retail money market demand accounts may be only loosely correlated with LIBOR and depend on competitive demand for funds. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.

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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 concentrated at the short end of the yield curve. For the past seven years with the Federal Funds rate near zero, this risk has been asymmetrical with significantly more upside benefit than potential exposure. Exposure to declining rates has lessened modestly in the second quarter given decreased market expectations for additional Federal Open Market Committee (“FOMC”) actions. 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 and Liability Committee (“ALCO”) 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 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 ALCO.

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. Exposures are measured as a percentage change in net interest income over the next year due to either instantaneous or gradual parallel +/- 200 basis point moves in benchmark interest rates. The net interest income simulation analyses do not include possible future actions that management might undertake to mitigate this risk. The current limit is a decrease in net interest income of 10% related to an instantaneous +/- 200 basis point move. As the 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 well within limit. It should be noted that the magnitude of any possible decline in interest rates is constrained by the low absolute starting levels of rates. 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.

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The table below presents our positioning in various parallel yield curve shifts:



	Estimated % Change in Net Interest Income over 12 Months
Basis points	September 30, 2016		December 31, 2015
Instantaneous Change in Interest Rates
+200	11.6	%	10.6	%
+100	5.8		5.8
-100	(5.2	)	(5.8	)
-200	(5.1	)	(6.4	)
Gradual Change in Interest Rates
+200	5.8		6.1
+100	2.9		3.2
-100	(3.9	)	(3.1	)
-200	(4.8	)	(4.6	)

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 fluctuation 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. The current risk limit is set at a decrease of 20% of regulatory capital given an instantaneous +/- 200 basis point change in interest rates. We are operating within that limit as of September 30, 2016.

Asset sensitivity was 5.8% at September 30, 2016, down modestly from 6.1% at December 31, 2015. The asset sensitive risk position was actively managed by adjusting securities investments, interest rate swaps and funding mix. The risk position was managed down to the lower end of the range in the third quarter, given the outlook for a muted pace of FOMC tightenings and a lower market consensus of the neutral level of rates.

We also had market risk associated with the value of the mortgage servicing right assets, which are impacted by the level of interest rates. As of September 30, 2016 and December 31, 2015, our mortgage servicing rights had a carrying value of $152 million and $164 million, respectively, and were carried at the lower of cost or fair value. As of September 30, 2016, and December 31, 2015, the fair value of the mortgage servicing rights was $163 million and $178 million, respectively. Given low interest rates over recent years, there is a valuation allowance of $15 million and $9 million on the asset as of September 30, 2016 and December 31, 2015, respectively. Depending on the interest rate environment, hedges may be used to stabilize the market value of the mortgage servicing right asset.

Trading Risk

We are exposed to market risk primarily through client facilitation activities including derivatives and foreign exchange products. 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 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 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 interest 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 unaudited interim 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

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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 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.

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.

Value-at-Risk 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. In addition, for our secondary traded loans we calculate the VaR on the general interest rate risk embedded within the loans using a standalone model that replicates the general VaR methodology (the related capital is reflected on the “de minimis” line in the following section). 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 10-day holding period. The historical market data applied to calculate the VaR is updated on a 10 business day lag. Refer to “Market Risk Regulatory Capital” below for details of our 10-day VaR metrics for the quarters ended September 30, 2016 and 2015, including high, low, average and period end Value-at-Risk for interest rate and foreign exchange rate risks, as well as total VaR.

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Market Risk Regulatory Capital

Effective January 1, 2013, the U.S. banking regulators adopted “Risk-Based Capital Guidelines: Market Risk” as the regulations covering the calculation of market risk capital (the “Market Risk Rule”). The Market Risk Rule, commonly known as Basel 2.5, 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 needed to maintain a low risk profile qualify as “covered positions.” The internal, management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR. The following table shows the results of our modeled and non-modeled measures for regulatory capital calculations:



(in millions)	For the Quarter Ended September 30, 2016								For the Quarter Ended September 30, 2015
Market Risk Category	Period End		Average		High		Low		Period End		Average		High		Low
Interest Rate		$—		$—		$—		$—		$—		$—		$—		$—
Foreign Exchange Currency Rate	—		—		2		—		—		—		—		—
Diversification Benefit	—		—		NM⁽¹⁾		NM⁽¹⁾		—		—		NM⁽¹⁾		NM⁽¹⁾
General VaR	—		—		2		—		—		—		—		—
Specific Risk VaR	—		—		—		—		—		—		—		—
Total VaR		$—		$—		$—		$—		$—		$—		$1		$—
Stressed General VaR		$2		$2		$5		$1		$2		$2		$4		$2
Stressed Specific Risk VaR	—		—		—		—		—		—		—		—
Total Stressed VaR		$2		$2		$5		$1		$2		$2		$4		$2
Market Risk Regulatory Capital		$7								$8
Specific Risk Not Modeled Add-on	7								5
de Minimis Exposure Add-on	17								9
Total Market Risk Regulatory Capital		$31								$22
Market Risk-Weighted Assets		$385								$272

⁽¹⁾ The high and low for the portfolio may have occurred on different trading days than the high and low for the components. Therefore, there is no diversification benefit shown for the high and low columns.

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. SVaR is also a component of market risk regulatory capital. SVaR for us is calculated daily under its own dynamic window regime. In a dynamic window regime, values of the 10-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.

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 the bank’s trading activities that may not be fully captured by its other models. Hypothetical scenarios also assume that the market moves happen simultaneously and that 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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 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 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. 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. We perform sub-portfolio backtesting as required under the Market Risk Rule, and as approved by our banking regulators, for interest rate and foreign exchange positions. The following graph shows our daily net trading revenue and total internal, modeled VaR for the quarters ended September 30, 2016, June 30, 2016, March 31, 2016, December 31, 2015 and September 30, 2015.

Daily VaR Backtesting: Sub-portfolio Level Backtesting⁽¹⁾

¹⁾The back testing graph reflects seven daily adjustments made during second quarter 2016 and six daily adjustments made during third quarter 2016 to compensate for a risk position feed that overstated VaR/SVaR for those days.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information presented in the “Market Risk” section of Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this quarterly report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In addition to the matters described in the Company's Form 10-K for the year ended December 31, 2015, information required by this item is set forth in Note 12 “Commitments and Contingencies” in the Notes to the unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements of this report, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should consider the risks described under the caption “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2015.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Details of the repurchases of the Company’s common stock during the three months ended September 30, 2016 are included in the following table:



Period	Total Number of Shares Repurchased	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⁾
July 1, 2016 - July 31, 2016	9,624,094	$22.60	9,624,094	$472,495,476
August 1, 2016 - August 31, 2016	—	$—	—	—
September 1, 2016 - September 30, 2016	1,438,098	$22.60	1,438,098	$440,000,000

⁽¹⁾On June 29, 2016, the Company announced that its 2016 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 $690 million for the four-quarter period ending with the second quarter of 2017. This share repurchase plan, which was approved by the Company’s Board of Directors at the time of the announcement, allows for share repurchases that may be executed in the open market or in privately negotiated transactions, including under Rule 10b5-1 plans. Shares repurchased by the Company during the third quarter 2016 were executed pursuant to an accelerated share repurchase transaction, which was commenced during the quarter and completed by September 30, 2016. The timing and exact amount of share repurchases will be consistent with the 2016 Capital Plan and will be subject to various factors, including the Company’s capital position, financial performance and market conditions.

ITEM 6. EXHIBITS


3.1	Amended and Restated Certificate of Incorporation of the Registrant as in effect on the date hereof (incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q, filed November 14, 2014)


3.2	Bylaws of the Registrant (as amended and restated on October 20, 2016) (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed October 24, 2016)


10.1	Executive Employment Agreement dated November 3, 2016, between the Registrant and John Fawcett †*


11.1	Statement re computation of earnings per share (filed herewith as Note 19 to the unaudited interim Consolidated Financial Statements in Part I, Item 1 — Financial Statements of this report, which is incorporated herein by reference)


12.1	Computation of Ratio of Earnings to Fixed Charges*


12.2	Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends*


31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*


31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*


32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

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101

The following materials from the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements*

† Indicates management contract or compensatory plan or arrangement.

* Filed herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 4, 2016.



CITIZENS FINANCIAL GROUP, INC.
(Registrant)

By:	/s/ Randall J. Black
	Name: Randall J. Black
	Title: Executive Vice President and Controller
	(Principal Accounting Officer and Authorized Officer)

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