BASIS OF PRESENTATION

The accounting and reporting policies of Citizens Financial Group, Inc. conform to GAAP. The Company’s principal business activity is banking, conducted through its subsidiaries Citizens Bank, National Association and Citizens Bank of Pennsylvania.

Basis of Presentation

The Consolidated Financial Statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany transactions and balances have been eliminated. The Company has evaluated its unconsolidated entities and does not believe that any entity in which it has an interest, but does not currently consolidate, meets the requirements to be consolidated as a variable interest entity.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for credit losses, evaluation of unrealized losses on securities for other-than-temporary impairment, accounting for income taxes, the valuation of AFS and HTM securities, and derivatives.

Certain prior period noninterest income amounts reported in the Consolidated Statement of Operations have been reclassified to conform to the current period presentation and student loans were renamed “education” loans to more closely align with the full range of services offered to borrowers, from loan origination to refinancing. These changes had no effect on net income, total comprehensive income, total assets or total stockholders’ equity as previously reported.

Additionally, certain prior period balances in the table of deferred tax assets and liabilities in Note 22 — “Income Taxes” have been reclassified to reflect current year presentation. These changes had no effect on net income, total comprehensive income, total assets or total stockholders’ equity as previously reported.

Significant Accounting Policies

Revenue Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured.

Interest income on loans and securities classified as AFS or HTM is determined using the effective interest method. This method calculates periodic interest income at a constant effective yield on the net investment in the loan or security, to provide a constant rate of return over the terms of the financial assets. Financial assets accounted for using the fair value option are measured at fair value with corresponding changes recognized in noninterest income.

Other types of noninterest revenues, such as service charges on deposits, interchange income on credit cards and trust revenues, are accrued and recognized into income as services are provided and the amount of fees earned are reasonably determinable.

Transfer of Financial Assets

A transfer of financial assets is accounted for as a sale when control over the assets transferred is surrendered. Assets transferred that satisfy the conditions of a sale are derecognized, and all assets obtained and liabilities incurred in a purchase are recognized and measured at fair value. Servicing rights retained in the transfer of financial assets are initially recognized at fair value. Subsequent to the initial recognition date, servicing rights are accounted for at the lower of cost or market. The Company recognizes periodic amortization expense of servicing rights and assesses servicing rights for impairment.

The following table identifies the Company’s significant accounting policies and the Note and Page where a detailed description of each policy can be found.



Policy	Note	Page
Cash and Due From Banks	Note 2	130
Securities	Note 3	130
Loans and Leases	Note 4	135
Allowance for Credit Losses	Note 5	138
Premises, Equipment and Software	Note 6	152
Operating Lease Assets	Note 6	152
Mortgage Servicing Rights	Note 8	153
Goodwill	Note 9	155
Variable Interest Entities	Note 10	157
Derivative Instruments	Note 13	161
Employee Benefits	Note 14	164
Treasury Stock	Note 16	171
Employee Share-Based Compensation	Note 17	172
Fair Value Measurement	Note 19	176
Other Income	Note 20	183
Income Taxes	Note 22	183
Earnings Per Share	Note 23	186

Accounting and Reporting Developments

Accounting Pronouncements Adopted in 2017



Pronouncement	Summary of Guidance	Effects on Financial Statements
Reporting Comprehensive Income Issued February 2018	• If elected, requires a reclassification between AOCI and retained earnings for the effect of remeasuring deferred tax assets and liabilities to the newly enacted tax rate of 21% under the 2017 Tax Legislation. • The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remained in AOCI and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted 21% U.S. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations.	• The Company adopted retrospectively to December 31, 2017, ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, elected to reclassify $145 million between AOCI and retained earnings, including indirect impacts from the decreased federal tax effect on future state tax benefits, and reflected this reclassification in the Company’s 2017 Consolidated Financial Statements, included in this report.
Stock Compensation Issued March 2016	• Requires that all excess tax benefits and excess tax deductions that pertain to employee stock-based incentive payments are recognized within income tax expense in the Consolidated Statement of Operations, rather than within additional paid in capital. • This standard also allows entities to make a one-time policy election to account for forfeitures when they occur, which the Company elected to do.	• Adopted January 1, 2017. • Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

Accounting Pronouncements Pending Adoption



Pronouncement	Summary of Guidance	Effects on Financial Statements
Stock Compensation Issued May 2017	• Requires modification accounting unless the fair value, vesting conditions, and classification of the modified award are the same as the original award immediately before the modification. • Applied prospectively to all modifications of share-based awards after the adoption date.	• Required effective date: January 1, 2018. Early adoption is permitted. The Company will adopt the new standard in the first quarter of 2018. • Adoption will not have a material impact on the Company’s Consolidated Financial Statements.
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost Issued March 2017	• Requires the service cost component of net periodic pension and postretirement benefit cost to be reported separately in the Consolidated Statements of Operations from the other components (e.g., expected return on assets, interest costs, amortization of gains/losses and prior service costs). • Requires presentation in the Consolidated Statements of Operations of the service cost component in the same line item as other employee compensation costs and presentation of the other components in a different line item from the service cost component. • Retrospective application is required for all periods presented.	• Required effective date: January 1, 2018. Early adoption is permitted. The Company will adopt the new standard in the first quarter of 2018. • Adoption will have no impact on the Company’s net income, but based on recent experience that the expected return on assets exceeds the sum of the other components, the Company expects that the guidance will result in an increase in salaries and employee benefits expense and a reduction in other operating expense.
Revenue Recognition: Revenue from Contracts with Customers Issued May 2014	• Requires that revenue from contracts with customers be recognized upon transfer of control of a good or service in the amount of consideration expected to be received. • Changes the accounting for certain contract costs including whether they may be offset against revenues in the Consolidated Statements of Operations. • Requires new qualitative and quantitative disclosures, including information about disaggregation of revenue and performance obligations. • May be adopted using a full retrospective basis or a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.	• Required effective date: January 1, 2018. Early adoption is permitted. • The Company will adopt the revenue guidance in the first quarter of 2018 using the modified retrospective method. Net interest income on financial assets and liabilities is explicitly excluded from the scope of the pronouncement. • The Company’s implementation efforts included the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts and related accounting policies. Based on these efforts, the adoption will not result in a material change in the timing or amount of revenue recognized from contracts with customers. • Upon adoption, underwriting costs will be presented on a gross basis as expense. Currently such costs are presented net of the related underwriting fees. • The Company has completed its evaluation of the expanded disclosure requirements and the most significant item will be the disaggregation of revenue.
Recognition and Measurement of Financial Assets and Financial Liabilities Issued January 2016	• Requires equity securities with readily determinable fair values to be measured at fair value on the balance sheet, with changes in the fair value recognized through earnings. • 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. • 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.	• Required effective date: January 1, 2018. Early adoption is permitted. • Adoption will not have a material impact on the Company’s Consolidated Financial Statements.



Pronouncement	Summary of Guidance	Effects on Financial Statements
Classification of Certain Cash Receipts and Cash Payments Issued August 2016	• Amends current guidance on specific cashflows to determine the appropriate classification as operating, investing or financing activities which has required significant judgment. • The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified.	• Required effective date: January 1, 2018. • Adoption will not have a material impact on the Company’s Consolidated Financial Statements.
Derivatives and Hedging Issued August 2017	• Reduces the complexity and operational burdens of the current hedge accounting model and portrays more clearly the effects of hedge accounting in the financial statements. • Modifies current requirements to facilitate the application of hedge accounting to partial-term hedges, hedges of prepayable financial instruments, and other strategies. Adoption of these optional changes would occur on a prospective basis. • Requires the effects of fair value hedges to be classified in the same income statement line as the earnings effect of the hedged item. Adoption of this change will occur on a prospective basis. • Requires all effects of cash flow hedges to be deferred in other comprehensive income until the hedged cash flows affect earnings. Periodic hedge ineffectiveness will no longer be recognized in earnings. Adoption of this change will occur on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.	• Required effective date: January 1, 2019. Early adoption is permitted. The Company is still evaluating whether or not it will adopt this guidance prior to the required effective date. • The transition entries required upon adoption are not expected to have a material impact on the Company’s Consolidated Financial Statements.
Premium Amortization on Purchased Callable Debt Securities Issued March 2017	• Requires amortization of premiums to the earliest call date on debt securities with call features that are explicit, noncontingent and callable at fixed prices and on preset dates. • Requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.	• Required effective date: January 1, 2019. • Adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements. The Company does not currently hold callable debt securities.



Pronouncement	Summary of Guidance	Effects on Financial Statements
Leases Issued February 2016	• 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. • Requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests. • Requires that for finance leases, a lessee recognize interest expense on the lease liability separately from the amortization of the right-of-use asset in the Consolidated Statements of Operations, while for operating leases, such amounts should be recognized as a combined expense. • Requires expanded disclosures about the nature and terms of lease agreements. • Requires adoption using a modified cumulative effect approach wherein the guidance is applied to all periods presented.	• Required effective date: January 1, 2019. Early adoption is permitted. The Company does not intend to adopt the guidance prior to the effective date. • The Company occupies certain banking offices and equipment under non-cancelable operating lease agreements, which currently are not reflected on its Consolidated Balance Sheets. • The Company expects to report increased assets and liabilities as a result of recognizing right-of-use assets and lease liabilities in its Consolidated Balance Sheets. As of December 31, 2017, the Company was committed to $842 million of minimum lease payments under non-cancelable operating lease agreements. • The evaluation of the impact of the leasing pronouncement will be adjusted based on execution of new leases, termination of existing leases prior to the effective date, and any changes to key lease assumptions such as renewals, extensions and discount rates. • The Company does not expect a material change to the timing of expense recognition on the Consolidated Statements of Operations.
Goodwill Issued January 2017	• Requires an impairment loss to be recognized when the estimated fair value of a reporting unit falls below its carrying value. • Eliminates the second condition in the current guidance that requires an impairment loss to be recognized only if the estimated implied fair value of the goodwill is below its carrying value. • Applied prospectively to all goodwill impairment tests performed after the adoption date.	• Required effective date: January 1, 2020. Early adoption is permitted. The Company does not currently intend to early adopt the new standard. • Adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Financial Instruments - Credit Losses Issued June 2016	• Replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost (including securities HTM), which will reflect management’s estimate of credit losses over the full remaining expected life of the financial assets. • Amends existing impairment guidance for securities AFS to incorporate an allowance, which will allow for reversals of impairment losses in the event that the credit of an issuer improves. • Requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.	• Required effective date: January 1, 2020. Early adoption permitted on January 1, 2019. The Company does not intend to adopt the guidance prior to the effective date. • The Company established a company-wide, cross-discipline governance structure to implement the new standard. The Company is currently identifying key interpretive issues and is comparing existing credit loss forecasting models and processes with the new guidance to determine what modifications may be required. • While the Company is currently evaluating the impact the standard will have on its Consolidated Financial Statements, the Company expects the standard will result in an earlier recognition of credit losses and an increase in the allowance for credit losses. The magnitude of the increase in the Company’s allowance for loan losses at the adoption date will be dependent upon the nature of the characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date.