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. On January 2, 2019, we consolidated our banking subsidiaries via a merger of CBPA into CBNA in order to streamline governance and enterprise risk management, improve CBNA’s risk profile and gain operational efficiencies. CBNA is now our primary subsidiary and our sole banking subsidiary.

Basis of Presentation

The Consolidated Financial Statements include the accounts of Citizens and subsidiaries in which Citizens 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 and the fair value of MSRs.

Significant Accounting Policies

Interest Income Recognition

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.

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 either at the lower of cost or market or fair value. For servicing rights accounted for at the lower of cost or market, Citizens 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.



	Note	Page
Cash and Due From Banks	Note 2
Securities	Note 3
Loans and Leases	Note 4
Allowance for Credit Losses	Note 5
Premises, Equipment and Software	Note 6
Operating Lease Assets	Note 6
Mortgage Servicing Rights	Note 8
Goodwill	Note 9
Variable Interest Entities	Note 10
Derivative Instruments	Note 13
Employee Benefits	Note 14
Treasury Stock	Note 16
Employee Share-Based Compensation	Note 17
Fair Value Measurement	Note 19
Revenue Recognition	Note 20
Income Taxes	Note 22
Earnings Per Share	Note 23

Acquisition

On August 1, 2018, the Company acquired certain assets and assumed certain liabilities of Franklin American Mortgage Company (“FAMC”), a Franklin, Tennessee-based national mortgage servicing and origination firm, for total consideration of $582 million. As part of this transaction, the Company expanded its mortgage servicing position with the addition of an MSR portfolio which had an acquisition date fair value of $590 million. Refer to Note 8 “Mortgage Banking” for more information. The Company initially recognized goodwill of $59 million and other intangibles of $32 million related to the transaction.

As of December 31, 2018, the Company recognized goodwill of $36 million, after a $23 million purchase price allocation adjustment given higher value attributed to purchased net assets, and other intangibles of $30 million, net of $2 million of amortization expense. Refer to Note 9 “Goodwill and Intangible Assets” for more information. The Company expects that some adjustments of the fair values assigned to the assets acquired and liabilities assumed at August 1, 2018 may subsequently be recorded, although any adjustments are not expected to be material.

Accounting Pronouncements Adopted in 2018



Pronouncement	Summary of Guidance	Effects on Financial Statements
Disclosure Requirements - Defined Benefit Plan Issued August 2018	• Amends disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement defined benefit plans. • The guidance eliminates requirements for certain disclosures that are no longer considered relevant or cost beneficial and requires new disclosures that are expected to enhance the usefulness of the financial statements. • Retrospective application is required for all periods presented.	• Citizens adopted the new standard on December 31, 2018. • Adoption did not have a material impact on the Company’s Consolidated Financial Statements.



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 approach or a modified cumulative effect approach wherein the guidance is applied only to existing contracts as of the date of initial adoption and to new contracts transacted after that date.	• Citizens adopted the new standard on January 1, 2018 under the modified retrospective method. Net interest income on financial assets and liabilities is explicitly excluded from the scope of the pronouncement. • Adoption of the new standard did not result in a change in the timing or amount of revenue recognized from contracts with customers. Citizens did not recognize a cumulative adjustment to Retained Earnings upon adoption. • Effective January 1, 2018, underwriting fees are presented on a gross basis in capital market fees, while underwriting costs are presented in other operating expense. Prior to adoption, such costs were presented net of the related underwriting fees.
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.	• Citizens adopted the new standard as of January 1, 2018. • Adoption did not have an 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.	• Citizens retrospectively adopted the new standard as of January 1, 2018. • Adoption did not have an impact on the Company’s net income. • Citizens reclassified prior period amounts in the Consolidated Statements of Operations, which resulted in an immaterial increase in salaries and employee benefits and a corresponding decrease in other operating expense.
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 in 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.	• Citizens adopted the new standard as of January 1, 2018. • Adoption had an immaterial impact on the Company’s Consolidated Financial Statements.
Classification of Certain Cash Receipts and Cash Payments Issued August 2016	• Amends 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.	• Citizens adopted the new standard as of January 1, 2018. • Adoption did not have an impact on the Company’s Consolidated Financial Statements.

Accounting Pronouncements Pending Adoption



Pronouncement	Summary of Guidance	Effects on 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 will not adopt the guidance prior to the required effective date. • Upon adoption, the Company elected to transfer $755 million of securities eligible to be hedged under the last-of-layer method from the HTM portfolio to the AFS portfolio. At the time of the transfer, $15 million of unrealized losses were recognized in OCI. The remaining transition entries required upon adoption are not expected to have a material impact on the Company’s Consolidated 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. • Provides the option to adopt using either a modified cumulative-effect approach wherein the guidance is applied to all periods presented, or through a cumulative-effect adjustment beginning in the period of adoption. • Requires companies with land easements to assess whether the easement meets the definition of a lease before applying other accounting guidance.	• Required effective date: January 1, 2019. Early adoption is permitted. The Company will not 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 will adopt the guidance through a cumulative-effect adjustment to retained earnings on January 1, 2019. Periods prior to January 1, 2019 will not be adjusted. • Upon adoption, the Company will recognize a right-of-use asset and corresponding lease liability of approximately $750 million in its Consolidated Balance Sheets for non-cancelable operating lease agreements. • Adoption of the guidance will not result in a material change to the timing of expense recognition on the Consolidated Statements of Operations.



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 will not adopt the guidance prior to the required effective date. • A company-wide, cross-discipline governance structure to implement the new standard has been in place for more than 18 months. The Company is currently identifying and researching key interpretive issues, revising policies and procedures and completing the development and configuration of most loss forecasting models to meet the requirements of the new guidance. The implementation team is also in the process of assessing forecast accuracy, how the reasonable and supportable forecast period will be determined and documented as well as the impacts of that decision in different parts of the credit cycle, and expects to begin parallel testing in the second half of 2019. • The Company expects the standard will result in earlier recognition of credit losses and an increase in the ACL, as it will cover estimated credit losses over the full remaining expected life of loans and commitments and will consider future reasonable and supportable changes in macroeconomic conditions. Since the magnitude of the increase in the Company’s ACL will be impacted by economic conditions, forecasted economic conditions, credit quality and trends in the Company’s portfolio at the time of adoption, the quantitative impact cannot yet be reasonably estimated.
Implementation Costs Incurred in a Cloud Computing Arrangement Issued August 2018	• Requires implementation costs incurred in a cloud computing arrangement that is a service contract be deferred and recognized over the term of the arrangement if those costs would be capitalized in a software licensing arrangement. • Requires amortization expense be presented in the same income statement line item as the related hosting service arrangement expense. • Permits adoption prospectively for all implementation costs incurred after adoption or retrospectively through a cumulative-effect adjustment as of the beginning of the first period presented.	• Required effective date: January 1, 2020. Early adoption is permitted. The Company is evaluating whether it will adopt this guidance prior to the required effective date. • Adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Disclosure Requirements - Fair Value Measurements Issued August 2018	• Amends disclosure requirements on fair value measurements. • The guidance eliminates requirements for certain disclosures that are no longer considered relevant or cost beneficial, requires new disclosures and modifies existing disclosures that are expected to enhance the usefulness of the financial statements. • Prospective application is required for new disclosure requirements. • Retrospective application is required for all other amendments for all periods presented.	• Required effective date: January 1, 2020. Early adoption is permitted. The Company does not intend to adopt this guidance prior to the required effective date. • Adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.