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

		Page
Introduction		37
Financial Performance		38
Results of Operations - 2019 compared with 2018		40
Net Interest Income		40
Noninterest Income		44
Noninterest Expense		45
Provision for Credit Losses		46
Income Tax Expense		46
Business Operating Segments		47
Results of Operations - 2018 compared with 2017		48
Analysis of Financial Condition		49
Securities		49
Loans and Leases		50
Allowance for Credit Losses and Nonperforming Assets		52
Deposits		60
Borrowed Funds		61
Quarterly Results of Operations		62
Capital and Regulatory Matters		65
Liquidity		69
Contractual Obligations		72
Off-Balance Sheet Arrangements		72
Critical Accounting Estimates		72
Accounting and Reporting Developments		75
Risk Governance		76
Market Risk		78
Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations		85

		Citizens Financial Group, Inc. | 36

INTRODUCTION

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $165.7 billion in assets as of December 31, 2019. Our mission is to help customers, colleagues and communities each reach their potential by listening to them and understanding their needs in order to offer tailored advice, ideas and solutions. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center as well as the convenience of approximately 2,700 ATMs and 1,100 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.

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

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

As a banking institution, we manage and evaluate various aspects of our results of operations and our financial condition including the levels and trends of the line items included in our balance sheet and statement of operations, used in calculating various key performance metrics commonly used in our industry. The primary line items we use in calculating our key performance metrics to manage and evaluate our statement of operations include net interest income, noninterest income, total revenue, provision for credit losses, noninterest expense, net income and net income available to common stockholders. The primary line items we use in calculating our key performance metrics to manage and evaluate our balance sheet data include loans and leases, securities, allowance for credit losses, deposits, borrowed funds and derivatives. We analyze these key performance metrics 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.

We consider the following 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 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;

•	Efficiency ratio, which we define as the ratio of total noninterest expense to the sum of net interest income and total noninterest income. The efficiency ratio helps us to evaluate the efficiency of our operations as it helps us monitor how costs are changing compared to income. A decrease in the efficiency ratio represents improvement;

•	Operating leverage, which we define as the percent change in total revenue, less the percent change in noninterest expense; and

•	CET1 capital ratio, which represents CET1 capital divided by total risk-weighted assets as defined under the U.S. Basel III Standardized approach.

This document contains non-GAAP financial measures denoted as “Underlying” results. Underlying results for any given reporting period exclude certain items that may occur in that period which Management does not consider indicative of our on-going financial performance. We believe these non-GAAP financial measures provide useful information to investors because they are used by Management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and, accordingly, are useful to consider in addition to our GAAP financial results.

Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures

		Citizens Financial Group, Inc. | 37

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 our MD&A by the use of the term Underlying and where there is a reference to Underlying results in a paragraph, all measures that follow this reference are on the same basis when applicable. For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Key Performance Metrics, Non-GAAP Financial Measures and Reconciliations.”

FINANCIAL PERFORMANCE

2019 compared with 2018 - Key Highlights

Net income of $1.8 billion increased 4% from 2018, with earnings per diluted common share of $3.81, up 8% from $3.52 per diluted common share for 2018. ROTCE of 12.6% compares with 12.9% in 2018.

We recorded $17 million after-tax, or $0.03 per diluted common share, of notable items in 2019 tied to Acquisition integration costs, costs related to strategic initiatives, and income tax benefits associated with an operational restructure and legacy tax matters. In 2018 we recorded $16 million after-tax, or $0.04 per diluted common share, of notable items tied to Acquisition integration costs, efficiency initiatives and the impact of 2017 tax legislation.

	Year Ended December 31, 2019
(in millions)	Noninterest income				Noninterest expense				Income tax expense				Net Income
Reported results (GAAP)		$1,877				$3,847				$460				$1,791
Less: Notable items
Total integration costs	—				18				(4		)		(14		)
Other notable items(1)	—				50				(47		)		(3		)
Total notable items	—				68				(51		)		(17		)
Underlying results (non-GAAP)		$1,877				$3,779				$511				$1,808

(1) Other notable items include noninterest expense of $50 million related to our TOP programs and other efficiency initiatives and an income tax benefit of $34 million related to an operational restructure and legacy tax matters.

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

•	Net income available to common stockholders of $1.7 billion increased $26 million, or 2%, compared to 2018. Earnings per diluted common share increased $0.29, or 8%, from 2018.

◦	On an Underlying basis,* net income available to common stockholders of $1.7 billion increased by 2% led by 6% revenue growth reflecting 17% growth in noninterest income and 2% growth in net interest income, partially offset by 6% growth in noninterest expense and 21% increase in provision for credit losses.

◦	On an Underlying basis,* earnings per diluted common share of $3.84 increased $0.28, or 8%, from $3.56 for the year ended 2018.

		Citizens Financial Group, Inc. | 38

•	Total revenue of $6.5 billion increased $363 million, or 6%, from 2018, driven by a 2% increase in net interest income and an 18% increase in noninterest income.

◦	Net interest income of $4.6 billion increased $82 million, or 2%, compared to $4.5 billion in 2018, as the benefit of 4% growth in average interest-earning assets was partially offset by the impact of a reduction in net interest margin, given the challenging yield-curve environment.

◦

Net interest margin of 3.14% decreased 7 basis points from 3.21% in 2018, driven by higher funding costs tied to modestly higher short-term rates and growth, as well as higher securities premium amortization tied to significantly lower long-term rates. These results were partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates.

–	Net interest margin on a fully taxable-equivalent basis of 3.16% decreased by 6 basis points, compared to 3.22% in 2018 given the challenging yield-curve environment.

–	Average loans and leases of $117.9 billion increased $4.4 billion, or 4%, from $113.5 billion in 2018, reflecting a 5% increase in commercial loans and leases and a 3% increase in retail loans.

–	Average deposits of $123.3 billion increased $7.4 billion, or 6%, from $115.9 billion in 2018, largely reflecting growth in savings, term deposits and checking with interest.

◦	Noninterest income of $1.9 billion increased $281 million, or 18%, from 2018, with record results in mortgage banking, capital markets fees, and trust and investment services fees, which included the impact of Acquisitions, along with higher foreign exchange and interest rate products and card fees.

•	Noninterest expense of $3.8 billion increased $228 million, or 6%, compared to $3.6 billion in 2018, reflecting higher salaries and employee benefits, outside services, and equipment and software expense, driven by the impact of Acquisitions, partially offset by lower other operating expense largely tied to a reduction in FDIC insurance.

◦	On an Underlying basis,* noninterest expense increased 6% from 2018.

•	The efficiency ratio of 59.3% compared to 59.1% in 2018, and ROTCE of 12.6% compared to 12.9%.

◦	The Underlying efficiency ratio of 58.2% compared to 58.1% in 2018.

◦	Underlying ROTCE of 12.8% compares with 13.1% and reflected an approximate 50 basis point drag from higher tangible common equity value, given the positive impact of lower long-term rates on securities valuations.

•	Provision for credit losses of $393 million increased $67 million, or 21%, from $326 million in 2018, reflecting 4% average loan growth, stable credit quality, as well as a small number of uncorrelated losses in commercial, and continued seasoning in retail growth portfolios.

•	Tangible book value per common of $32.08 increased 12% from 2018. Fully diluted average common shares outstanding decreased by 29.2 million shares, or 6% over the same period.

		Citizens Financial Group, Inc. | 39

RESULTS OF OPERATIONS — 2019 compared with 2018

Net Interest Income

Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our interest-bearing 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.

		Citizens Financial Group, Inc. | 40

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

	Year Ended December 31,
2019									2018									Change
(dollars in millions)	Average Balances			Income/ Expense			Yields/ Rates			Average Balances			Income/ Expense			Yields/ Rates			Average Balances			Yields/ Rates (bps)
Assets
Interest-bearing cash and due from banks and deposits in banks		$1,544			$30		1.94	%			$1,579			$29		1.82	%			($35	)	12 bps
Taxable investment securities	25,425			642			2.51			25,233			672			2.66			192			(15)
Non-taxable investment securities	5			—			2.60			6			—			2.60			(1		)	—
Total investment securities	25,430			642			2.51			25,239			672			2.66			191			(15)
Commercial	41,702			1,797			4.25			39,363			1,621			4.06			2,339			19
Commercial real estate	13,160			628			4.71			12,299			557			4.47			861			24
Leases	2,694			77			2.84			3,038			82			2.71			(344		)	13
Total commercial loans and leases	57,556			2,502			4.29			54,700			2,260			4.08			2,856			21
Residential mortgages	19,308			687			3.56			17,883			644			3.60			1,425			(4)
Home equity loans	939			57			6.09			1,215			72			5.91			(276		)	18
Home equity lines of credit	12,276			611			4.98			13,043			592			4.54			(767		)	44
Home equity loans serviced by others	343			27			7.98			463			34			7.36			(120		)	62
Home equity lines of credit serviced by others	87			5			5.04			124			5			4.23			(37		)	81
Automobile	12,047			506			4.20			12,555			461			3.68			(508		)	52
Education	9,415			555			5.89			8,486			487			5.74			929			15
Credit cards	2,083			211			10.10			1,891			202			10.68			192			(58)
Other retail	3,846			280			7.27			3,113			253			8.09			733			(82)
Total retail loans	60,344			2,939			4.87			58,773			2,750			4.68			1,571			19
Total loans and leases (1)	117,900			5,441			4.59			113,473			5,010			4.39			4,427			20
Loans held for sale, at fair value	1,689			63			3.74			844			37			4.38			845			(64)
Other loans held for sale	251			13			5.10			164			10			6.18			87			(108)
Interest-earning assets	146,814			6,189			4.19			141,299			5,758			4.05			5,515			14
Allowance for loan and lease losses	(1,244		)							(1,245		)							1
Goodwill	7,036									6,912									124
Other noninterest-earning assets	9,570									7,587									1,983
Total assets		$162,176									$154,553									$7,623
Liabilities and Stockholders’ Equity
Checking with interest		$23,470			$203		0.87	%			$21,856			$138		0.63	%			$1,614		24 bps
Money market accounts	36,613			450			1.23			36,497			343			0.94			116			29
Regular savings	13,247			75			0.57			10,238			15			0.15			3,009			42
Term deposits	21,035			427			2.03			18,035			289			1.61			3,000			42
Total interest-bearing deposits	94,365			1,155			1.22			86,626			785			0.91			7,739			31
Federal funds purchased and securities sold under agreements to repurchase (2)	599			8			1.36			654			6			0.94			(55		)	42
Other short-term borrowed funds(3)	66			2			2.50			467			9			2.10			(401		)	40
Long-term borrowed funds(3)	13,014			410			3.14			14,796			426			2.86			(1,782		)	28
Total borrowed funds	13,679			420			3.06			15,917			441			2.76			(2,238		)	30
Total interest-bearing liabilities	108,044			1,575			1.46			102,543			1,226			1.19			5,501			27
Demand deposits	28,936									29,231									(295		)
Other liabilities	3,683									2,651									1,032
Total liabilities	140,663									134,425									6,238
Stockholders’ equity	21,513									20,128									1,385
Total liabilities and stockholders’ equity		$162,176									$154,553									$7,623
Interest rate spread							2.73	%								2.86	%					(13)
Net interest income and net interest margin					$4,614		3.14	%						$4,532		3.21	%					(7)
Net interest income and net interest margin, FTE(4)					$4,635		3.16	%						$4,554		3.22	%					(6) bps
Memo: Total deposits (interest-bearing and demand)		$123,301			$1,155		0.94	%			$115,857			$785		0.68	%			$7,444		26 bps

(1) Interest income and rates on loans include loan fees. Additionally, $778 million and $836 million of average nonaccrual loans were included in the average loan balances used to determine the average yield on loans for December 2019 and 2018, respectively.

(2) Balances are net of certain short-term receivables associated with reverse repurchase agreements, as applicable. Interest expense includes the full cost of the repurchase agreements and certain hedging costs.

(3) Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.

(4) Net interest income and net interest margin is presented on a fully taxable-equivalent (“FTE”) basis using the federal statutory tax rate of 21%. The FTE impact is predominantly attributable to commercial loans for the periods presented.

		Citizens Financial Group, Inc. | 41

Net interest income of $4.6 billion increased $82 million, reflecting 4% average interest-earning asset growth partially offset by a 7 basis point decrease in net interest margin given the challenging yield curve environment.

Net interest margin of 3.14% decreased 7 basis points compared to 3.21% in 2018, driven by higher funding costs tied to modestly higher short-term rates and higher securities premium amortization tied to significantly lower long-term rates. These results were partially offset by the benefit of higher interest-earning asset yields, given continued mix shift toward more attractive risk-adjusted return portfolios and modestly higher short-term rates. Net interest margin on an FTE basis of 3.16% decreased 6 basis points compared to 3.22% in 2018. Average interest-earning asset yields of 4.19% increased 14 basis points from 4.05% in 2018, while average interest-bearing liability costs of 1.46% increased 27 basis points from 1.19% in 2018.

Average interest-earning assets of $146.8 billion increased $5.5 billion, or 4%, from 2018, driven by a $2.9 billion increase in average commercial loans and leases, a $1.6 billion increase in average retail loans, a $932 million increase in average total loans held for sale, and a $156 million increase in total investment securities and interest-bearing cash and due from banks and deposits in banks. Total commercial loan and lease growth was driven by commercial and commercial real estate. Retail loan growth was driven by residential mortgage, education, credit cards and other retail.

Average deposits of $123.3 billion increased $7.4 billion from 2018, reflecting growth in savings, term deposits, checking with interest, and money market accounts, partially offset by a decline in demand deposits. Total interest-bearing deposit costs of $1.2 billion increased $370 million, or 47%, from $785 million in 2018, primarily due to higher short-term rates and average deposit growth.

Average total borrowed funds of $13.7 billion decreased $2.2 billion from 2018, reflecting a decrease in other short-term borrowed funds, a decrease in long-term borrowed funds, and a decrease in federal funds purchased and repurchase agreements. Total borrowed funds costs of $420 million decreased $21 million from 2018. The total borrowed funds cost of 3.06% increased 30 basis points from 2.76% in 2018 due to an increase in short-term rates and a mix shift to long-term senior debt.

		Citizens Financial Group, Inc. | 42

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

	Year Ended December 31,
	2019 Versus 2018
(in millions)	Average Volume			Average Rate			Net Change
Interest Income
Interest-bearing cash and due from banks and deposits in banks		($1	)		$2			$1
Taxable investment securities	5			(35		)	(30		)
Total investment securities	5			(35		)	(30		)
Commercial	95			81			176
Commercial real estate	38			33			71
Leases	(9		)	4			(5		)
Total commercial loans and leases	124			118			242
Residential mortgages	51			(8		)	43
Home equity loans	(16		)	1			(15		)
Home equity lines of credit	(35		)	54			19
Home equity loans serviced by others	(9		)	2			(7		)
Home equity lines of credit serviced by others	(2		)	2			—
Automobile	(19		)	64			45
Education	53			15			68
Credit cards	21			(12		)	9
Other retail	59			(32		)	27
Total retail loans	103			86			189
Total loans and leases	227			204			431
Loans held for sale, at fair value	37			(11		)	26
Other loans held for sale	5			(2		)	3
Total interest income		$273			$158			$431
Interest Expense
Checking with interest		$10			$55			$65
Money market accounts	1			106			107
Regular savings	5			55			60
Term deposits	48			90			138
Total interest-bearing deposits	64			306			370
Federal funds purchased and securities sold under agreements to repurchase	(1		)	3			2
Other short-term borrowed funds	(8		)	1			(7		)
Long-term borrowed funds	(51		)	35			(16		)
Total borrowed funds	(60		)	39			(21		)
Total interest expense	4			345			349
Net interest income		$269			($187	)		$82

		Citizens Financial Group, Inc. | 43

Noninterest Income

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

	Year Ended December 31,
(in millions)	2019				2018				Change				Percent
Service charges and fees		$505				$513				($8	)		(2	%)
Mortgage banking fees	302				152				150				99
Card fees	254				244				10				4
Capital markets fees	216				179				37				21
Trust and investment services fees	202				171				31				18
Foreign exchange and interest rate products	155				126				29				23
Letter of credit and loan fees	135				128				7				5
Securities gains, net	19				19				—				—
Other income(1)	89				64				25				39
Noninterest income		$1,877				$1,596				$281			18	%

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

Noninterest income increased $281 million, from 2018, reflecting record mortgage banking fees, capital markets fees, and trust investment services fees, which included the impact of Acquisitions and, along with higher foreign exchange and interest rate products revenue, reflected the benefit of investments to broaden and enhance our capabilities. Results also reflected increased other income due to higher leasing income, including $7 million associated with a lease restructuring transaction, and asset dispositions tied to balance sheet optimization and efficiency initiatives.

		Citizens Financial Group, Inc. | 44

Noninterest Expense

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

	Year Ended December 31,
(in millions)	2019				2018				Change				Percent
Salaries and employee benefits		$2,026				$1,880				$146			8	%
Equipment and software expense(1)	514				464				50				11
Outside services	498				447				51				11
Occupancy	333				333				0				—
Other operating expense	476				495				(19		)		(4	)
Noninterest expense		$3,847				$3,619				$228			6	%

(1) In 2019, we combined our presentation of equipment and expense and amortization of software into equipment and software expense. Prior periods have been adjusted to conform with the current period presentation.

Noninterest expense of $3.8 billion in 2019 increased $228 million, or 6%, compared to 2018, reflecting higher salaries and employee benefits, outside services, and equipment and software expense, and included the impact of Acquisitions as well as continued investments to diversify our platform and drive future revenue growth. These results were partially offset by lower other operating expense largely tied to a reduction in FDIC insurance premiums. Underlying noninterest expense increased $214 million, or 6%, due to the reasons listed above.

		Citizens Financial Group, Inc. | 45

Provision for Credit Losses

The provision for loan and lease losses is the result of a detailed analysis performed to estimate an appropriate and adequate ACL. The total provision for credit losses includes the provision for loan and lease losses as well as the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets” for more information.

Provision for credit losses of $393 million increased $67 million, or 21%, from $326 million in 2018, which reflected a small number of uncorrelated losses in commercial, the impact of continued seasoning in retail growth portfolios and loan growth. Full year 2019 results reflected a $37 million ACL release, compared to $9 million ACL build in 2018. Net charge-offs in 2019 of $430 million increased $113 million compared to 2018.

Income Tax Expense

Income tax expense of $460 million decreased $2 million from $462 million in 2018. The 2019 effective tax rate of 20.4% decreased from 21.2% in 2018, largely reflecting legacy tax matters, a benefit from an operational restructure, a reduction in non-deductible FDIC insurance premiums and an increase in benefits from tax advantaged investments, partially offset by a benefit related to 2017 Tax Legislation in 2018. On an Underlying basis, the effective income tax rate decreased to 22.0% from 22.5% in 2018, primarily attributable to the reduction in non-deductible FDIC insurance premiums and an increase in benefits from tax advantaged investments.

		Citizens Financial Group, Inc. | 46

Business Operating Segments

We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and related revenues, provision for credit losses, income taxes and expenses. Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets not directly allocated to a business operating segment, community development, non-core assets, and other unallocated assets, liabilities, capital, revenues, expenses, and residual provision for credit losses and income tax expense. For a description of non-core assets, see “—Analysis of Financial Condition — Allowance for Credit Losses and Nonperforming Assets — Non-Core Assets.” In addition, Other includes goodwill not directly assigned to a business operating segment and any associated goodwill impairment charges. For impairment testing purposes, we assign all goodwill to our Consumer and Commercial Banking reporting units.

Our capital levels are evaluated and managed centrally; however, capital is allocated on a risk-adjusted basis to the business operating segments to support evaluation of business performance. Because funding and asset liability management is a central function, funds transfer-pricing (“FTP”) methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business operating segment assets, liabilities and capital, respectively, using a matched-funding concept. The residual effect on net interest income of asset/liability management, including the residual net interest income related to the FTP process, is included in Other. We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments.

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

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

Income tax expense is assessed to each business operating segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other.

Developing and applying methodologies used to allocate items among the business operating segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines are updated, or our organizational structure changes.

		Citizens Financial Group, Inc. | 47

The following table presents certain financial data of our business operating segments. Total business operating segment financial results differ from total consolidated net income. These differences are reflected in Other non-segment operations. See Note 25 in Item 8 for further information.

	As of and for the Year Ended December 31,								As of and for the Year Ended December 31,
	2019				2018				2019				2018
(dollars in millions)	Consumer Banking								Commercial Banking
Net interest income		$3,182				$3,064				$1,466				$1,497
Noninterest income	1,156				973				607				545
Total revenue	4,338				4,037				2,073				2,042
Noninterest expense	2,851				2,723				858				813
Profit before provision for credit losses	1,487				1,314				1,215				1,229
Provision for credit losses	325				289				97				26
Income before income tax expense	1,162				1,025				1,118				1,203
Income tax expense	287				258				248				276
Net income		$875				$767				$870				$927
Average Balances:
Total assets		$66,240				$62,444				$55,947				$52,362
Total loans and leases(1)	63,396				60,691				54,355				51,344
Deposits	84,835				77,542				31,085				30,704
Interest-earning assets	63,449				60,743				54,666				51,572

(1) Includes LHFS.

Consumer Banking

Net interest income increased $118 million, or 4%, from 2018, driven by the benefit of a $2.7 billion increase in average loans led by residential, education and unsecured personal loans. Noninterest income increased $183 million, or 19%, from 2018, driven by higher mortgage banking, trust and investment services fees, card fees and included the impact of Acquisitions. Noninterest expense increased $128 million, or 5%, from 2018, reflecting higher salaries and benefits and outside services and included the impact of Acquisitions. Provision for credit losses of $325 million increased $36 million, or 12%, reflecting higher net charge-offs given expected seasoning in growth portfolios.

Commercial Banking

Net interest income of $1.5 billion decreased $31 million, or 2%, from 2018, reflecting the impact of higher deposit costs, partially offset by loan growth. Noninterest income of $607 million increased $62 million, or 11%, from $545 million in 2018, driven by an increase in capital market and foreign exchange and interest rate product fees. Noninterest expense of $858 million increased $45 million, from $813 million in 2018, driven by higher salaries and employee benefits expense. Provision for credit losses of $97 million increased $71 million from 2018, driven by higher net charge-offs from a small number of uncorrelated losses.

RESULTS OF OPERATIONS — 2018 compared with 2017

For a description of our results of operations for 2018, see the “Results of Operations — 2018 compared with 2017” section of Item 7 in our 2018 Form 10-K.

		Citizens Financial Group, Inc. | 48

ANALYSIS OF FINANCIAL CONDITION

Securities

The following table presents our AFS and HTM securities:

	December 31, 2019							December 31, 2018							December 31, 2017							Changes in Fair Value from 2019-2018
(in millions)	Amortized Cost			Fair Value				Amortized Cost			Fair Value				Amortized Cost			Fair Value
U.S. Treasury and other		$71			$71				$24			$24				$12			$12				$47		196	%
State and political subdivisions	5			5				5			5				6			6				—			—
Mortgage-backed securities, at fair value:
Federal agencies and U.S. government sponsored entities	19,803			19,875				20,211			19,634				20,065			19,828				241			1
Other/non-agency	638			662				236			232				311			311				430			185
Total mortgage-backed securities, at fair value	20,441			20,537				20,447			19,866				20,376			20,139				671			3
Total debt securities available for sale, at fair value		$20,517			$20,613				$20,476			$19,895				$20,394			$20,157				$718		4	%
Mortgage-backed securities, at cost:
Federal agencies and U.S. government sponsored entities		$3,202			$3,242				$3,425			$3,293				$3,853			$3,814				($51	)	(2	%)
Other/non-agency	—			—				740			748				832			854				(748		)	(100	)
Total mortgage-backed securities, at cost		$3,202			$3,242				$4,165			$4,041				$4,685			$4,668				($799	)	(20	%)
Total debt securities held to maturity		$3,202			$3,242				$4,165			$4,041				$4,685			$4,668				($799	)	(20	%)
Total debt securities available for sale and held to maturity		$23,719			$23,855				$24,641			$23,936				$25,079			$24,825				($81	)	—	%
Equity securities, at fair value		$47			$47				$181			$181				$169			$169				($134	)	(74	%)
Equity securities, at cost	807			807				834			834				722			722				(27		)	(3	)
Total equity securities		$854			$854				$1,015			$1,015				$891			$891				($161	)	(16	%)

Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns that align with our overall portfolio management strategy. The portfolio includes high quality, highly liquid investments reflecting our ongoing commitment to appropriate contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 97% of the fair value of our debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge those securities to the FHLB for collateral purposes.

The fair value of the AFS debt securities portfolio of $20.6 billion at December 31, 2019 increased $718 million from $19.9 billion at December 31, 2018 largely reflecting the impact of the transfer of a net $740 million in securities from HTM to AFS upon the adoption of ASU 2017–12, Targeted Improvements to Accounting for Hedging Activities, and lower long-term rates. The fair value of the HTM debt securities portfolio decreased $799 million largely reflecting the net impact of the transfer discussed above. For further information, see Note 1 in Item 8.

As of December 31, 2019, the portfolio’s average effective duration was 3.7 years compared with 4.4 years as of December 31, 2018, as lower long-term rates drove an increase in both actual and projected securities prepayment speeds. We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetite in the context of the broader interest rate risk in the banking book framework and limits.

		Citizens Financial Group, Inc. | 49

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

	As of December 31, 2019
	Distribution of Maturities
(dollars in millions)	Due in 1 Year or Less			Due After 1 Through 5 Years			Due After 5 Through 10 Years			Due After 10 Years			Total
Amortized cost:
U.S. Treasury and other		$71			$—			$—			$—			$71
State and political subdivisions	—			—			—			5			5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—			215			1,534			18,054			19,803
Other/non-agency	—			—			—			638			638
Total debt securities available for sale	71			215			1,534			18,697			20,517
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—			—			—			3,202			3,202
Other/non-agency	—			—			—			—			—
Total debt securities held to maturity	—			—			—			3,202			3,202
Total amortized cost of debt securities (1)		$71			$215			$1,534			$21,899			$23,719
Weighted-average yield (2)(3)	2.03		%	1.95		%	2.38		%	2.61		%	2.59		%

(1) As of December 31, 2019, no investment exceeded 10% of Stockholders’ Equity.

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

(3) Yields exclude the impact of hedging activity.

Loans and Leases

The following table presents the composition of loans and leases:

	December 31,																				Changes from 2019-2018
(in millions)	2019				2018				2017				2016				2015				$				%
Commercial		$41,479				$40,857				$37,562				$37,274				$33,264				$622			2	%
Commercial real estate	13,522				13,023				11,308				10,624				8,971				499				4
Leases	2,537				2,903				3,161				3,753				3,979				(366		)		(13	)
Total commercial loans and leases	57,538				56,783				52,031				51,651				46,214				755				1
Residential mortgages	19,083				18,978				17,045				15,115				13,318				105				1
Home equity loans	812				1,073				1,392				1,858				2,557				(261		)		(24	)
Home equity lines of credit	11,979				12,710				13,483				14,100				14,674				(731		)		(6	)
Home equity loans serviced by others	289				399				542				750				986				(110		)		(28	)
Home equity lines of credit serviced by others	74				104				149				219				389				(30		)		(29	)
Automobile	12,120				12,106				13,204				13,938				13,828				14				—
Education	10,347				8,900				8,134				6,610				4,359				1,447				16
Credit cards	2,198				1,991				1,848				1,691				1,634				207				10
Other retail	4,648				3,616				2,789				1,737				1,083				1,032				29
Total retail loans	61,550				59,877				58,586				56,018				52,828				1,673				3
Total loans and leases		$119,088				$116,660				$110,617				$107,669				$99,042				$2,428			2	%

Total loans and leases increased $2.4 billion, or 2%, from $116.7 billion as of December 31, 2018, driven by growth in both retail and commercial. Retail loan growth was driven by education, other retail, credit cards and residential mortgages, partially offset by run off in the home equity portfolio. Commercial loans and leases growth was driven by geographic, product and client-focused expansion strategies as well as strength in commercial real estate, partially offset by planned reductions in leases.

		Citizens Financial Group, Inc. | 50

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

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

	December 31, 2019
(in millions)	Due in 1 Year or Less			Due After 1 Year Through 5 Years			Due After 5 Years			Total Loans and Leases
Commercial(1)		$37,374			$2,471			$1,634			$41,479
Commercial real estate(1)	13,015			217			290			13,522
Leases	573			1,607			357			2,537
Total commercial loans and leases	50,962			4,295			2,281			57,538
Residential mortgages	953			2,500			15,630			19,083
Home equity loans	13			234			565			812
Home equity lines of credit	11,782			51			146			11,979
Home equity loans serviced by others	26			245			18			289
Home equity lines of credit serviced by others	74			—			—			74
Automobile	203			6,995			4,922			12,120
Education	21			860			9,466			10,347
Credit cards	1,747			451			—			2,198
Other retail	453			3,616			579			4,648
Total retail loans	15,272			14,952			31,326			61,550
Total loans and leases		$66,234			$19,247			$33,607			$119,088
Loans and leases due after one year at fixed interest rates					$15,882			$21,776			$37,658
Loans and leases due after one year at variable interest rates				3,365			11,831			15,196

(1) On a maturity basis only, the commercial and commercial real estate loan portfolios maturing in one year or less were $7.4 billion and $2.6 billion, respectively, maturing after one year through five years were $27.8 billion and $9.8 billion, respectively, and maturing after five years were $6.3 billion and $1.1 billion, respectively, as of December 31, 2019.

Loan and Lease Concentrations

At December 31, 2019, we did not identify any concentration of loans and leases exceeding 10% of total loans and leases that were not otherwise disclosed as a category of loans and leases. For further information on how we manage concentration exposures, see Note 5 in Item 8.

		Citizens Financial Group, Inc. | 51

Allowance for Credit Losses and Nonperforming Assets

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

Summary of Loan and Lease Loss Experience

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

	As of and for the Year Ended December 31,
(dollars in millions)	2019				2018				2017				2016				2015
Allowance for Loan and Lease Losses — Beginning:
Commercial		$530				$541				$516				$376				$388
Commercial real estate	138				121				99				111				61
Leases	22				23				48				23				23
Qualitative (1)	—				—				—				86				72
Total commercial loans and leases	690				685				663				596				544
Residential mortgages	36				44				55				46				63
Home equity loans	10				19				24				39				50
Home equity lines of credit	85				87				139				132				152
Home equity loans serviced by others	10				12				15				29				47
Home equity lines of credit serviced by others	3				4				4				3				11
Automobile	127				139				127				106				58
Education	101				120				102				96				93
Credit cards	83				72				74				60				68
Other retail	97				54				33				28				32
Qualitative (1)	—				—				—				81				77
Total retail loans	552				551				573				620				651
Total allowance for loan and lease losses — beginning		$1,242				$1,236				$1,236				$1,216				$1,195

		Citizens Financial Group, Inc. | 52

	As of and for the Year Ended December 31,
(dollars in millions)	2019				2018				2017				2016				2015
Gross Charge-offs:
Commercial		($87	)			($48	)			($62	)			($56	)			($30	)
Commercial real estate	(39		)		(4		)		(13		)		(14		)		(6		)
Leases	(14		)		—				—				(9		)		—
Total commercial loans and leases	(140		)		(52		)		(75		)		(79		)		(36		)
Residential mortgages	(8		)		(8		)		(11		)		(21		)		(22		)
Home equity loans	(5		)		(6		)		(11		)		(16		)		(34		)
Home equity lines of credit	(26		)		(26		)		(34		)		(43		)		(59		)
Home equity loans serviced by others	(6		)		(9		)		(15		)		(38		)		(32		)
Home equity lines of credit serviced by others	(2		)		(4		)		(5		)		(12		)		(14		)
Automobile	(143		)		(158		)		(181		)		(160		)		(117		)
Education	(72		)		(68		)		(59		)		(52		)		(51		)
Credit cards	(81		)		(68		)		(61		)		(58		)		(59		)
Other retail	(132		)		(95		)		(60		)		(57		)		(56		)
Total retail loans	(475		)		(442		)		(437		)		(457		)		(444		)
Total gross charge-offs		($615	)			($494	)			($512	)			($536	)			($480	)
Gross Recoveries:
Commercial		$24				$15				$37				$21				$18
Commercial real estate	—				4				3				12				31
Leases	—				—				—				—				—
Total commercial loans and leases	24				19				40				33				49
Residential mortgages	9				5				6				9				12
Home equity loans	10				11				13				18				11
Home equity lines of credit	21				16				16				18				18
Home equity loans serviced by others	14				15				18				19				17
Home equity lines of credit serviced by others	4				7				7				6				8
Automobile	57				67				73				65				49
Education	16				16				15				11				12
Credit cards	9				8				7				8				8
Other retail	21				13				12				14				12
Total retail loans	161				158				167				168				147
Total gross recoveries		$185				$177				$207				$201				$196
Net (Charge-offs)/Recoveries:
Commercial		($63	)			($33	)			($25	)			($35	)			($12	)
Commercial real estate	(39		)		—				(10		)		(2		)		25
Leases	(14		)		—				—				(9		)		—
Total commercial loans and leases	(116		)		(33		)		(35		)		(46		)		13
Residential mortgages	1				(3		)		(5		)		(12		)		(10		)
Home equity loans	5				5				2				2				(23		)
Home equity lines of credit	(5		)		(10		)		(18		)		(25		)		(41		)
Home equity loans serviced by others	8				6				3				(19		)		(15		)
Home equity lines of credit serviced by others	2				3				2				(6		)		(6		)
Automobile	(86		)		(91		)		(108		)		(95		)		(68		)
Education	(56		)		(52		)		(44		)		(41		)		(39		)
Credit cards	(72		)		(60		)		(54		)		(50		)		(51		)
Other retail	(111		)		(82		)		(48		)		(43		)		(44		)
Total retail loans	(314		)		(284		)		(270		)		(289		)		(297		)
Total net charge-offs		($430	)			($317	)			($305	)			($335	)			($284	)
Ratio of net charge-offs to average loans and leases	(0.36		%)		(0.28		%)		(0.28		%)		(0.32		%)		(0.30		%)

		Citizens Financial Group, Inc. | 53

	As of and for the Year Ended December 31,
(dollars in millions)	2019				2018				2017				2016				2015
Provision for Loan and Lease Losses**(2)****:**
Commercial		$81				$22				$50				$117				$—
Commercial real estate	8				17				32				(17		)		25
Leases	11				(1		)		(25		)		34				—
Qualitative (1)	—				—				—				(21		)		14
Total commercial loans and leases	100				38				57				113				39
Residential mortgages	(2		)		(5		)		(6		)		8				(7		)
Home equity loans	(9		)		(14		)		(7		)		(22		)		12
Home equity lines of credit	(8		)		8				(34		)		9				21
Home equity loans serviced by others	(15		)		(8		)		(6		)		(1		)		(3		)
Home equity lines of credit serviced by others	(3		)		(4		)		(2		)		6				(2		)
Automobile	82				79				120				99				116
Education	71				33				62				21				42
Credit cards	90				71				52				53				43
Other retail	134				125				69				42				40
Qualitative (1)	—				—				—				27				4
Total retail loans	340				285				248				242				266
Total provision for loan and lease losses		$440				$323				$305				$355				$305
Total Allowance for Loan and Lease Losses — Ending:
Commercial	548				530					$541				$458				$376
Commercial real estate	107				138				121				92				111
Leases	19				22				23				48				23
Qualitative (1)	—				—				—				65				86
Total commercial loans and leases	674				690				685				663				596
Residential mortgages	35				36				44				42				46
Home equity loans	6				10				19				19				39
Home equity lines of credit	72				85				87				116				132
Home equity loans serviced by others	3				10				12				9				29
Home equity lines of credit serviced by others	2				3				4				3				3
Automobile	123				127				139				110				106
Education	116				101				120				76				96
Credit cards	101				83				72				63				60
Other retail	120				97				54				27				28
Qualitative (1)	—				—				—				108				81
Total retail loans	578				552				551				573				620
Total allowance for loan and lease losses — ending		$1,252				$1,242				$1,236				$1,236				$1,216
Reserve for Unfunded Lending Commitments — Beginning		$91				$88				$72				$58				$61
Provision for unfunded lending commitments	(47		)		3				16				14				(3		)
Reserve for unfunded lending commitments — ending		$44				$91				$88				$72				$58
Total Allowance for Credit Losses — Ending		$1,296				$1,333				$1,324				$1,308				$1,274

(1) As of December 31, 2017, we enhanced the method for assessing various qualitative risks, factors and events that may not be measured in the modeled results. The qualitative allowance was presented within each loan class beginning in 2017 and prior periods were not reclassified to conform to the current presentation.

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

		Citizens Financial Group, Inc. | 54

Allocation of the Allowance for Loan and Lease Losses

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

	December 31,
(dollars in millions)	2019						2018						2017						2016						2015
Commercial		$548		35	%			$530		35	%			$541		34	%			$458		35	%			$376		34	%
Commercial real estate	107			11			138			11			121			10			92			10			111			9
Leases	19			2			22			3			23			3			48			3			23			4
Qualitative(1)	—			N/A			—			N/A			—			N/A			65			N/A			86			N/A
Total commercial loans and leases	674			48			690			49			685			47			663			48			596			47
Residential mortgages	35			16			36			16			44			15			42			14			46			13
Home equity loans	6			1			10			1			19			1			19			2			39			3
Home equity lines of credit	72			10			85			11			87			12			116			13			132			15
Home equity loans serviced by others	3			—			10			—			12			1			9			1			29			1
Home equity lines of credit serviced by others	2			—			3			—			4			—			3			—			3			—
Automobile	123			10			127			10			139			12			110			13			106			14
Education	116			9			101			8			120			7			76			6			96			4
Credit cards	101			2			83			2			72			2			63			1			60			2
Other retail	120			4			97			3			54			3			27			2			28			1
Qualitative(1)	—			N/A			—			N/A			—			N/A			108			N/A			81			N/A
Total retail loans	578			52			552			51			551			53			573			52			620			53
Total loans and leases		$1,252		100	%			$1,242		100	%			$1,236		100	%			$1,236		100	%			$1,216		100	%

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

The ALLL represented 1.05% of total loans and leases and 178% of nonperforming loans and leases as of December 31, 2019 compared with 1.06% and 162%, respectively, as of December 31, 2018.

		Citizens Financial Group, Inc. | 55

Risk Elements

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

	December 31,
(in millions)	2019				2018				2017				2016				2015
Nonperforming loans and leases
Commercial		$240				$194				$238				$322				$70
Commercial real estate	2				7				27				50				77
Leases	3				—				—				15				—
Total commercial loans and leases	245				201				265				387				147
Residential mortgages (1)	93				105				125				139				295
Home equity loans	33				50				72				98				135
Home equity lines of credit	187				231				233				243				272
Home equity loans serviced by others	14				17				25				32				38
Home equity lines of credit serviced by others	12				15				18				33				32
Automobile	67				81				70				50				42
Education	18				38				38				38				35
Credit cards	22				20				17				16				16
Other retail	12				8				5				4				3
Total retail loans	458				565				603				653				868
Total nonperforming loans and leases		$703				$766				$868				$1,040				$1,015
Loans and leases that are accruing and 90 days or more delinquent
Commercial	2				1				5				2				1
Commercial real estate	—				—				3				—				—
Leases	—				—				—				—				—
Total commercial loans and leases	2				1				8				2				1
Residential mortgages	13				15				16				18				—
Home equity loans	—				—				—				—				—
Home equity lines of credit	—				—				—				—				—
Home equity loans serviced by others	—				—				—				—				—
Home equity lines of credit serviced by others	—				—				—				—				—
Automobile	—				—				—				—				—
Education	2				2				3				5				6
Credit cards	—				—				—				—				—
Other retail	8				7				5				1				2
Total retail loans	23				24				24				24				8
Total accruing and 90 days or more delinquent	25				25				32				26				9
Total		$728				$791				$900				$1,066				$1,024
Troubled debt restructurings (2)		$692				$723				$629				$633				$909

(1) Beginning in the fourth quarter of 2019, nonperforming balances exclude both fully and partially guaranteed residential mortgage loans sold to Ginnie Mae for which we have the right, but not the obligation, to repurchase. Prior periods have been adjusted to exclude partially guaranteed amounts to conform with the current period presentation.

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

Overall credit quality remained strong across retail and commercial. Nonperforming loans and leases of $703 million as of December 31, 2019 decreased $63 million from December 31, 2018, driven by a $107 million decrease in retail, reflecting improvements in home equity, education and auto that was partially offset by $44 million increase in commercial nonperforming loans. Net charge-offs of $430 million increased $113 million, or 36%, from $317 million in 2018 reflecting a small number of uncorrelated losses in commercial and expected seasoning in the other retail loan portfolio. Net charge-offs as a percentage of total average loans of 0.36% increased 8 basis points compared to 0.28% in 2018.

		Citizens Financial Group, Inc. | 56

Potential Problem Loans and Leases

At December 31, 2019, we did not identify any potential problem loans or leases within the portfolio that were not already disclosed in “—Risk Elements” and “—Commercial Loan Asset Quality.” Potential problem loans or leases consist of loans and leases where information about a borrower’s possible credit problems cause management to have serious doubts as to the ability of a borrower to comply with the present repayment terms.

Commercial Loan Asset Quality

Our commercial loan and lease portfolio consists of traditional commercial loans, commercial leases and commercial real estate loans. The portfolio is largely comprised of customers in our footprint and adjacent states in which we have a physical presence where our local delivery model provides for strong client connectivity. We also lend nationally to companies that fall within targeted client, industry, and geographic expansion strategies.

For commercial loans and leases, we utilize regulatory classification ratings to monitor credit quality. For more information on regulatory classification ratings, see Note 5 in Item 8. The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:

	December 31, 2019
				Criticized
(in millions)	Pass			Special Mention			Substandard			Doubtful			Total
Commercial		$38,950			$1,351			$934			$244			$41,479
Commercial real estate	13,169			318			33			2			13,522
Leases	2,383			109			42			3			2,537
Total commercial loans and leases		$54,502			$1,778			$1,009			$249			$57,538

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

Total commercial criticized loans and leases of $3.0 billion as of December 31, 2019 increased $199 million compared with December 31, 2018. Commercial criticized loans and leases as a percent of total commercial loans and leases of 5.3% at December 31, 2019 increased from 5.0% at December 31, 2018. Commercial criticized balances of $2.5 billion, or 6.1% of the commercial loan portfolio as of December 31, 2019, increased from $2.3 billion, or 5.5%, as of December 31, 2018. Commercial real estate criticized balances of $353 million, or 2.6% of the commercial real estate portfolio, decreased from $500 million, or 3.8%, as of December 31, 2018. Commercial criticized loans represented 83% of total criticized loans as of December 31, 2019 compared to 80% as of December 31, 2018. Commercial real estate accounted for 12% of total criticized loans as of December 31, 2019 compared to 18% as of December 31, 2018.

Nonperforming commercial loans and leases increased $44 million to $245 million as of December 31, 2019 from $201 million as of December 31, 2018. As of December 31, 2019, total commercial nonperforming loans were 0.4% of the commercial loans and leases portfolio and remained stable to December 31, 2018. Total 2019 commercial loan and lease portfolio net charge-offs of $116 million increased from $33 million in 2018. For the year ended December 31, 2019, the commercial loan and lease portfolio annualized net charge-off ratio of 0.20% increased from 0.06% for the year ended December 31, 2018, reflecting the impact of several uncorrelated losses.

Retail Loan Asset Quality

For retail loans, we primarily utilize payment and delinquency status to regularly review and monitor credit quality trends. Historical experience indicates that the longer a loan is past due, the greater the likelihood of future credit loss. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-

		Citizens Financial Group, Inc. | 57

Atlantic and Midwest regions, although we lend selectively in areas outside the footprint primarily in the auto finance, education lending and unsecured portfolios.

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

	December 31, 2019			December 31, 2018
Average refreshed FICO for total portfolio	764			763
CLTV ratio for secured real estate(1)	59	%		58	%
Nonperforming retail loans as a percentage of total retail (2)	0.74	%		0.94	%

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

(2) Beginning in the fourth quarter of 2019, nonperforming balances exclude both fully and partially guaranteed residential mortgage loans sold to Ginnie Mae for which we have the right, but not the obligation, to repurchase. Prior periods have been adjusted to exclude partially guaranteed amounts to conform with the current period presentation.

	Year Ended December 31,
(dollars in millions)	2019				2018				Change				Percent
Net charge-offs		$314				$284				$30			11	%
Annualized net charge-off rate	0.52		%		0.48		%		4 bps

Retail asset quality remained relatively stable with December 31, 2018. The net charge-off rate of 0.52% for the year ended December 31, 2019 reflected an increase of 4 basis points from the year ended December 31, 2018, driven by expected seasoning in retail growth portfolios including personal and education refinance loans.

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 December 31, 2019, $667 million of retail loans were classified as TDRs, compared with $723 million as of December 31, 2018. As of December 31, 2019, $143 million of retail TDRs were in nonaccrual status with 38% current with payments, compared to $181 million in nonaccrual status with 49% current on payments at December 31, 2018. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated for impairment and loans, once classified as TDRs, remain classified as TDRs until paid off, sold or refinanced at market terms. For additional information regarding TDRs, see “—Critical Accounting Estimates — Allowance for Credit Losses” and Note 5 in Item 8.

		Citizens Financial Group, Inc. | 58

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

	December 31, 2019
					As a % of Accruing Retail TDRs
(dollars in millions)	Accruing				30-89 Days Past Due			90+ Days Past Due			Nonaccruing				Total
Residential mortgages		$113			3.8	%		2.1	%			$41				$154
Home equity loans	68				0.7			—			19				87
Home equity lines of credit	147				0.9			—			53				200
Home equity loans serviced by others	22				0.3			—			9				31
Home equity lines of credit serviced by others	3				—			—			3				6
Automobile	13				0.2			—			8				21
Education	127				0.9			0.3			7				134
Credit cards	26				0.6			—			2				28
Other retail	5				—			—			1				6
Total		$524			7.4	%		2.4	%			$143				$667

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

Impact of Nonperforming Loans and Leases on Interest Income

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

(in millions)	For the Year Ended December 31, 2019
Gross amount of interest income that would have been recorded (1)		$122
Interest income actually recognized	12
Total interest income foregone		$110

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

Cross-Border Outstandings

Cross-border outstandings can include loans, receivables, interest-bearing deposits with other banks, other interest-bearing investments and other monetary assets that are denominated in either dollars or non-local currency. As of December 31, 2019, 2018 and 2017, there were no aggregate cross-border outstandings from borrowers or counterparties in any country that exceeded 1%, or were between 0.75% and 1% of consolidated total assets.

		Citizens Financial Group, Inc. | 59

Non-Core Assets

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

	December 31,
(in millions)	2019				2018				Change				Percent
Commercial		$6				$72				($66	)		(92	%)
Commercial real estate	11				14				(3		)		(21	)
Leases	444				670				(226		)		(34	)
Total commercial loans and leases	461				756				(295		)		(39	)
Residential mortgages	91				110				(19		)		(17	)
Home equity loans	23				31				(8		)		(26	)
Home equity lines of credit	14				21				(7		)		(33	)
Home equity loans serviced by others	289				399				(110		)		(28	)
Home equity lines of credit serviced by others	74				104				(30		)		(29	)
Education	166				210				(44		)		(21	)
Total retail loans	657				875				(218		)		(25	)
Total non-core loans	1,118				1,631				(513		)		(31	)
Other assets	122				96				26				27
Total non-core assets		$1,240				$1,727				($487	)		(28	%)

Non-core assets are primarily liquidating loan and lease portfolios inconsistent with our strategic priorities, generally as a result of geographic location, industry, product type or risk level and are included in Other.

Deposits

The following table presents the major components of our deposits:

	December 31,
(in millions)	2019				2018				Change				Percent
Demand		$29,233				$29,458				($225	)		(1	%)
Checking with interest	24,840				23,067				1,773				8
Regular savings	13,779				12,007				1,772				15
Money market accounts	38,725				35,701				3,024				8
Term deposits	18,736				19,342				(606		)		(3	)
Total deposits		$125,313				$119,575				$5,738			5	%

Total deposits as of December 31, 2019, increased $5.7 billion, or 5%, to $125.3 billion compared to $119.6 billion, driven by growth in money market accounts, checking with interest and savings, partially offset by a decrease in term deposits and demand deposits. Citizens Access®, our national digital platform, attracted $5.8 billion of deposits through December 31, 2019, up from $3.0 billion as of December 31, 2018.

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

	For the Year Ended December 31,
	2019						2018						2017
(dollars in millions)	Average Balances			Yields/ Rates			Average Balances			Yields/ Rates			Average Balances			Yields/ Rates
Noninterest-bearing demand deposits (1)		$28,936		—				$29,231		—				$28,134		—
Checking with interest		$23,470		0.87	%			$21,856		0.63	%			$21,458		0.37	%
Money market accounts	36,613			1.23			36,497			0.94			37,450			0.53
Regular savings	13,247			0.57			10,238			0.15			9,384			0.04
Term deposits	21,035			2.03			18,035			1.61			15,448			1.04
Total interest-bearing deposits (1)		$94,365		1.22	%			$86,626		0.91	%			$83,740		0.53	%

(1) The aggregate amount of deposits by foreign depositors in domestic offices was $1.7 billion, $1.2 billion and $1.0 billion as of December 31, 2019, 2018 and 2017, respectively.

		Citizens Financial Group, Inc. | 60

Borrowed Funds

Short-term borrowed funds

The following table presents a summary of our short-term borrowed funds:

	December 31,
(in millions)	2019				2018				Change				Percent
Securities sold under agreements to repurchase		$265				$336				($71	)		(21	%)
Federal funds purchased	—				820					($820	)		(100	%)
Other short-term borrowed funds(1)	9				161				(152		)		(94	)
Total short-term borrowed funds		$274				$1,317				($1,043	)		(79	%)

(1) Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.

The net decrease in other short-term borrowed funds of $152 million resulted primarily from a decrease in short-term FHLB advances.

Our advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $9.8 billion and $13.0 billion at December 31, 2019 and 2018, respectively. Our remaining available FHLB borrowing capacity was $7.2 billion and $4.8 billion at December 31, 2019 and 2018, respectively. We can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At December 31, 2019, our unused secured borrowing capacity was approximately $38.9 billion, which included unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

The following table presents key data related to our short-term borrowed funds:

	As of and for the Year Ended December 31,
(dollars in millions)	2019				2018				2017
Weighted-average interest rate at year-end: (1)
Federal funds purchased and securities sold under agreements to repurchase	0.41		%		1.72		%		0.74		%
Other short-term borrowed funds	3.85				2.73				1.33
Maximum amount outstanding at any month-end during the year:
Federal funds purchased and securities sold under agreements to repurchase (2)		$1,499				$1,282				$1,174
Other short-term borrowed funds	511				1,110				2,759
Average amount outstanding during the year:
Federal funds purchased and securities sold under agreements to repurchase (2)		$599				$654				$776
Other short-term borrowed funds	66				467				1,571
Weighted-average interest rate during the year: (1)
Federal funds purchased and securities sold under agreements to repurchase	1.36		%		0.92		%		0.36		%
Other short-term borrowed funds	2.50				2.10				1.09

(1) Rates exclude certain hedging costs.

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

		Citizens Financial Group, Inc. | 61

Long-term borrowed funds

The following table presents a summary of our long-term borrowed funds:

	December 31,
(in millions)	2019				2018
Parent Company:
2.375% fixed-rate senior unsecured debt, due July 2021		$349				$349
4.150% fixed-rate subordinated debt, due September 2022	348				348
3.750% fixed-rate subordinated debt, due July 2024	250				250
4.023% fixed-rate subordinated debt, due October 2024	42				42
4.350% fixed-rate subordinated debt, due August 2025	249				249
4.300% fixed-rate subordinated debt, due December 2025	750				749
2.850% fixed-rate senior unsecured notes, due July 2026	496				—
CBNA’s Global Note Program:
2.500% senior unsecured notes, due March 2019		$—				$748
2.450% senior unsecured notes, due December 2019	—				744
2.250% senior unsecured notes, due March 2020	700				691
2.447% floating-rate senior unsecured notes, due March 2020 (1)	300				300
2.487% floating-rate senior unsecured notes, due May 2020 (1)	250				250
2.200% senior unsecured notes, due May 2020	500				499
2.250% senior unsecured notes, due October 2020	750				738
2.550% senior unsecured notes, due May 2021	991				964
3.250% senior unsecured notes, due February 2022	711				—
2.629% floating-rate senior unsecured notes, due February 2022 (1)	299				—
2.727% floating-rate senior unsecured notes, due May 2022 (1)	250				249
2.650% senior unsecured notes, due May 2022	501				487
3.700% senior unsecured notes, due March 2023	515				502
2.911% floating-rate senior unsecured notes, due March 2023 (1)	249				249
3.750% senior unsecured notes, due February 2026	521				—
Additional Borrowings by CBNA and Other Subsidiaries:
Federal Home Loan Bank advances, 2.006% weighted average rate, due through 2038	5,008				7,508
Other	18				9
Total long-term borrowed funds(2)		$14,047				$15,925

(1) Rate disclosed reflects the floating rate as of December 31, 2019.

(2) Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.

Long-term borrowed funds of $14.0 billion as of December 31, 2019 decreased $1.9 billion from December 31, 2018, reflecting a decrease of $2.5 billion in FHLB borrowings, partially offset by an increase of $613 million in subordinated debt and unsecured notes.

The Parent Company’s long-term borrowed funds as of December 31, 2019 and 2018 included principal balances of $2.5 billion and $2.0 billion, respectively, and unamortized deferred issuance costs and/or discounts of ($8) million and ($5) million, respectively. CBNA and other subsidiaries’ long-term borrowed funds as of December 31, 2019 and 2018 included principal balances of $11.5 billion and $14.0 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($13) million and ($14) million, respectively, and hedging basis adjustments of $50 million and ($66) million, respectively. See Note 13 in Item 8 for further information about our hedging of certain long-term borrowed funds.

QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly Consolidated Statements of Operations data and Consolidated Balance Sheet data as of and for the four quarters of 2019 and 2018, respectively. We have prepared the Consolidated Statements of Operations data and Balance Sheet data on the same basis as our Consolidated Financial Statements in Item 8 and, in the opinion of management, each Consolidated Statement of Operations and Balance Sheet includes

		Citizens Financial Group, Inc. | 62

all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations and balance sheet data as of and for these periods. This information should be read in conjunction with our Consolidated Financial Statements and Notes in Item 8.

Supplementary Summary Consolidated Financial and Other Data (unaudited)

	For the Three Months Ended
(dollars in millions, except per share amounts)	December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019				December 31, 2018				September 30, 2018				June 30, 2018				March 31, 2018
Operating Data:
Net interest income		$1,143				$1,145				$1,166				$1,160				$1,172				$1,148				$1,121				$1,091
Noninterest income (7)	494				493				462				428				421				416				388				371
Total revenue	1,637				1,638				1,628				1,588				1,593				1,564				1,509				1,462
Provision for credit losses	110				101				97				85				85				78				85				78
Noninterest expense (1) (4) (5) (6) (7) (8)	986				973				951				937				951				910				875				883
Income before income tax expense (benefit)	541				564				580				566				557				576				549				501
Income tax expense (2) (4) (5) (6) (7) (8)	91				115				127				127				92				133				124				113
Net income (3) (4) (5) (6) (7) (8)		$450				$449				$453				$439				$465				$443				$425				$388
Net income available to common stockholders (3) (4) (5) (6) (7) (8)		$427				$432				$435				$424				$450				$436				$425				$381
Net income per average common share- basic (3) (4) (5) (6) (7) (8)		$0.98				$0.97				$0.95				$0.92				$0.96				$0.92				$0.88				$0.78
Net income per average common share- diluted (4) (5) (6) (7) (8)	0.98				0.97				0.95				0.92				0.96				0.91				0.88				0.78
Other Operating Data:
Return on average common equity (9)	8.30		%		8.35		%		8.54		%		8.62		%		9.16		%		8.82		%		8.65		%		7.83		%
Return on average tangible common equity (9)	12.39				12.44				12.75				13.00				13.85				13.29				12.93				11.71
Return on average total assets (9)	1.08				1.10				1.13				1.11				1.17				1.13				1.11				1.04
Return on average total tangible assets (9)	1.13				1.15				1.17				1.16				1.22				1.18				1.16				1.08
Efficiency ratio (9)	60.28				59.40				58.41				59.00				59.69				58.20				57.95				60.43
Net interest margin (9) (10)	3.04				3.10				3.20				3.23				3.23				3.20				3.20				3.19
Net interest margin, FTE (9) (11)	3.06				3.12				3.21				3.25				3.25				3.22				3.22				3.21
Share Data:
Cash dividends declared and paid per common share		$0.36				$0.36				$0.32				$0.32				$0.27				$0.27				$0.22				$0.22
Dividend payout ratio	37		%		37		%		34		%		35		%		28		%		29		%		25		%		28		%

		Citizens Financial Group, Inc. | 63

	As of
(dollars in millions)	December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019				December 31, 2018				September 30, 2018				June 30, 2018				March 31, 2018
Balance Sheet Data:
Total assets		$165,733				$164,362				$162,749				$161,342				$160,518				$158,598				$155,431				$153,453
Loans and leases (12)	119,088				117,880				116,838				117,615				116,660				114,720				113,407				111,425
Allowance for loan and lease losses	1,252				1,263				1,227				1,245				1,242				1,242				1,253				1,246
Total securities	24,669				25,602				25,898				25,651				25,075				25,485				25,513				25,433
Goodwill	7,044				7,044				7,040				7,040				6,923				6,946				6,887				6,887
Total liabilities	143,532				142,511				140,732				139,811				139,701				138,322				134,964				133,394
Deposits	125,313				124,714				124,004				123,916				119,575				117,075				117,073				115,730
Federal funds purchased and securities sold under agreements to repurchase	265				867				1,132				668				1,156				374				326				315
Other short-term borrowed funds(13)	9				210				309				11				161				512				10				10
Long-term borrowed funds (13)	14,047				12,806				11,538				11,725				15,925				17,133				15,130				14,970
Total stockholders’ equity	22,201				21,851				22,017				21,531				20,817				20,276				20,467				20,059
Asset Quality Ratios:
Allowance for loan and lease losses as a percentage of total loans and leases	1.05		%		1.07		%		1.05		%		1.06		%		1.06		%		1.08		%		1.10		%		1.12		%
Allowance for loan and lease losses as a percentage of nonperforming loans and leases (14)	178				171				169				167				162				154				149				144
Nonperforming loans and leases as a percentage of total loans and leases (14)	0.59				0.63				0.62				0.63				0.66				0.70				0.74				0.79
Capital ratios:****(15)
CET1 capital ratio	10.0				10.3				10.5				10.5				10.6				10.8				11.2				11.2
Tier 1 capital ratio	11.1				11.1				11.3				11.3				11.3				11.2				11.6				11.4
Total capital ratio	13.0				13.0				13.4				13.4				13.3				13.4				13.8				13.9
Tier 1 leverage ratio	10.0				9.9				10.1				10.0				10.0				9.9				10.2				10.0

(1) Fourth quarter 2019 noninterest expense included $37 million of pre-tax notable items consisting of $35 million in other notable items ($35 million in TOP programs and other efficiency initiatives) and $2 million of integration costs associated with acquisitions.

(2) Fourth quarter 2019 income tax expense included $33 million of benefits associated with other notable items ($24 million largely tied to legacy tax matters and $9 million in TOP programs and other efficiency initiatives).

(3) Fourth quarter 2019 net income included $4 million of after-tax notable items consisting of $2 million in total integration costs associated with acquisitions and $2 million in other notable items (including $24 million largely tied to legacy tax matters offset by $26 million in after-tax TOP programs and other efficiency initiatives).

(4) Third quarter 2019 noninterest expense included $19 million of pre-tax notable items consisting of $15 million in other notable items ($15 million in TOP programs and other efficiency initiatives) and $4 million of integration costs associated with acquisitions. Income tax expense included $15 million of benefits associated with notable items ($14 million in other notable items, consisting of $10 million related to an operational restructure and $4 million in TOP programs and other efficiency initiatives, and $1 million for integration costs associated with acquisitions). Net income included $4 million of after-tax notable items consisting of $3 million of total integration costs associated with acquisitions and $1 million in other notable items (including $10 million related to an operational restructure offset by $11 million in after-tax TOP programs and other efficiency initiatives).

(5) Second quarter 2019 noninterest expense included $7 million of pre-tax notable items for total integration costs associated with acquisitions. Income tax expense and net income included $2 million and $5 million, respectively, related these notable items.

(6) First quarter 2019 noninterest expense included $5 million of pre-tax notable items for total integration costs associated with acquisitions. Income tax expense and net income included $1 million and $4 million, respectively, related to these notable items.

(7) Fourth quarter 2018 noninterest income included $5 million of pre-tax notable items ($4 million in FAMC integration costs and $1 million in other pre-tax notable items). Noninterest expense included $45 million of pre-tax notable items consisting of $33 million in other notable items ($33 million in TOP efficiency initiatives) and $12 million of FAMC integration costs. Income tax expense included $41 million of benefit associated with notable items ($37 million in other notable items consisting of $8 million in TOP efficiency initiatives and $29 million of net deferred tax liability adjustment) and $4 million in FAMC integration costs. Net income included $9 million of after-tax notable items consisting of $12 million of FAMC integration costs offset by $3 million other notable items (including $29 million of net deferred tax liability adjustment offset by $25 million in after-tax TOP efficiency initiatives and $1 million of noninterest income notable items).

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

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

(10) Beginning in the first quarter of 2019, we changed the method of calculating our net interest margin to equal net interest income, annualized based on the number of days in the period, divided by average total interest-earning assets. Prior periods have been adjusted to conform with the current period presentation.

(11) Net interest margin is presented on a FTE basis using the federal statutory tax rate of 21%.

(12) Excludes LHFS of $3.3 billion, $2.0 billion, $2.2 billion, $1.3 billion, $1.3 billion, $1.3 billion, $710 million, and $800 million as of December 31, 2019, September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018, respectively.

(13) Beginning in the first quarter of 2019, borrowed funds balances and the associated interest expense are classified based on original maturity. Prior periods have been adjusted to conform with the current period presentation.

(14) Beginning in the fourth quarter of 2019, nonperforming balances exclude both fully and partially guaranteed residential mortgage loans sold to Ginnie Mae for which we have the right, but not the obligation, to repurchase. Prior periods have been adjusted to exclude partially guaranteed amounts to conform with the current period presentation.

(15) The capital ratios and associated components are prepared using the U.S. Basel III Standardized transitional approach.

		Citizens Financial Group, Inc. | 64

CAPITAL AND REGULATORY MATTERS

As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. The current operating environment reflects heightened regulatory expectations around consumer compliance, the Bank Secrecy Act, anti-money laundering compliance, and increased internal audit activities, among other factors. For more information, see the “Regulation and Supervision” section in Item 1.

Dodd-Frank Act

The Dodd-Frank Act regulates many aspects of the financial services industry and addresses among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, derivatives and securities markets, restrictions on an insured bank’s transactions with its affiliates, lending limits and mortgage lending practices.

In October 2019, the FRB and the other banking regulators finalized rules that tailor the application of the enhanced prudential standards to bank holding companies and depository institutions to implement the EGRRCPA amendments to the Dodd-Frank Act (“Tailoring Rules”). Concurrently, the FRB and other banking regulators finalized the regulatory capital, liquidity and resolution plan requirements to firms with more than $100 billion in total assets. Category IV firms with $100 billion to $250 billion in total assets, such as us, will, among other things, be subject to biennial supervisory stress-testing and will be exempt from company-run stress testing and related disclosure requirements. The FRB will continue to supervise Category IV firms on an ongoing basis, including evaluation of the capital adequacy and capital planning processes during off-cycle years. Category IV firms are also no longer required to submit resolution plans. For more information, see the “Tailoring of Prudential Requirements” and “Resolution Planning” sections in Item 1.

In light of the Tailoring Rules, the FRB provided us relief in February 2019 from certain regulatory requirements related to supervisory stress testing, company-run stress testing, and related disclosure requirements for the 2019 stress test cycle. As a result, we were not required to participate in the supervisory stress test of CCAR, conduct company-run stress tests, or submit a capital plan to the FRB for 2019. We remain subject to the requirement to develop and maintain an annual capital plan that is reviewed and approved by our Board of Directors (or one of its committees), as well as FR Y-14 reporting requirements. The FRB has not objected to our maximum planned capital actions for the period beginning July 1, 2019 and ending June 30, 2020, which are largely based on the results for our 2018 supervisory stress test, adjusted for any changes in our regulatory capital ratios since the FRB acted on our 2018 capital plan. On June 27, 2019, our Board of Directors authorized common share repurchases of up to $1.275 billion over the four-quarter period beginning July 1, 2019. The timing and exact amount of future share repurchases will depend on various factors, including capital position, financial performance and market conditions.

		Citizens Financial Group, Inc. | 65

Capital Framework

Under the current U.S. Basel III capital framework, we and our banking subsidiary must meet the following specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and tier 1 leverage ratio of 4.0%. A capital conservation buffer (“CCB”) of 2.5% is imposed on top of the three minimum risk-based capital ratios listed above.

In July 2019, the FRB and the other federal banking regulators issued a final rule to simplify regulatory capital treatment for MSRs, certain DTAs and significant investments in the capital of unconsolidated financial institutions, pursuant to EGRRCPA. Effective for us on April 1, 2020, the final rule will change the individual CET1 deduction threshold for these assets from 10% to 25%, eliminate the aggregate deduction threshold for these assets of 15%, assign a 250% risk weight for any MSRs or DTAs not deducted from CET1 capital, and assign an exposure category risk weight for investments in the capital of unconsolidated financial institutions not deducted from CET1 capital.

The table below presents our actual regulatory capital ratios under the U.S. Basel III Standardized rules:

	Actual					Required Minimum plus Required CCB for Non-Leverage Ratios**(1)(2)**
(in millions, except ratio data)	Amount			Ratio
December 31, 2019
CET1 capital		$14,304		10.0	%	7.0
Tier 1 capital	15,874			11.1		8.5
Total capital	18,542			13.0		10.5
Tier 1 leverage	15,874			10.0		4.0
Risk-weighted assets	142,915
Quarterly adjusted average assets	158,782
December 31, 2018
CET1 capital		$14,485		10.6	%	6.4	%
Tier 1 capital	15,325			11.3		7.9
Total capital	18,157			13.3		9.9
Tier 1 leverage	15,325			10.0		4.0
Risk-weighted assets	136,202
Quarterly adjusted average assets	153,026

(1) Required “Minimum Capital ratio” for 2019 and 2018 are: Common equity tier 1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%.

(2) “Minimum Capital ratio” includes capital conservation buffer of 2.500% for 2019 and 1.875% for 2018; N/A to Tier 1 leverage.

At December 31, 2019, our CET1 capital, tier 1 capital and total capital ratios were 10.0%, 11.1% and 13.0%, respectively, as compared with 10.6%, 11.3% and 13.3%, respectively, as of December 31, 2018. The CET1 capital ratio decreased as $6.7 billion of risk-weighted asset (“RWA”) growth, the impact of the capital actions described in “—Capital Transactions” below, and an increase in goodwill and intangibles related to Acquisitions, were partially offset by net income for the year ended December 31, 2019. The tier 1 capital ratio decreased as the changes in the CET1 capital ratio were partially offset by the issuance of preferred stock as described further in “—Capital Transactions” below. The total capital ratio decreased due to the changes in CET1 and tier 1 capital ratios and an increase in non-qualifying subordinated debt. At December 31, 2019, our CET1 capital, tier 1 capital and total capital ratios were approximately 300 basis points, 260 basis points and 250 basis points, respectively, above their regulatory minimums plus the capital conservation buffer. All ratios remained well above the U.S. Basel III minima.

Regulatory Capital Ratios and Capital Composition

CET1 capital under U.S. Basel III Standardized rules totaled $14.3 billion at December 31, 2019, and decreased $181 million from $14.5 billion at December 31, 2018, as common share repurchases, dividends and an increase in goodwill and intangibles related to Acquisitions were partially offset by net income for the year ended December 31, 2019. Tier 1 capital at December 31, 2019 totaled $15.9 billion, reflecting a $549 million increase from $15.3 billion at December 31, 2018, driven by the changes in CET1 capital and the issuance of preferred stock. At December 31, 2019, we had $1.6 billion of non-cumulative perpetual preferred stock issued and outstanding, an increase of $730 million from $840 million at December 31, 2018, given the first quarter 2019 issuance of 300,000 shares of Series D Preferred Stock and the fourth quarter 2019 issuance of 450,000 shares of Series E Preferred

		Citizens Financial Group, Inc. | 66

Stock that qualified as additional tier 1 capital. Total capital of $18.5 billion at December 31, 2019, increased $385 million from December 31, 2018, driven by the changes in CET1 and tier 1 capital and an increase in non-qualifying subordinated debt.

RWA totaled $142.9 billion at December 31, 2019, based on U.S. Basel III Standardized rules, up $6.7 billion from December 31, 2018. This increase was driven by growth in retail loans, including education, residential mortgages and unsecured retail portfolios, as well as higher commercial loans and commitments, higher derivative valuations and multi-family loans. The increase in RWA was also driven by the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842) and market risk RWA, as we met the reporting threshold prescribed by Market Risk Capital Guidelines. These increases were partially offset by run-off in the home equity portfolio and lower investment securities.

As of December 31, 2019, the tier 1 leverage ratio was 10.0% and was stable with December 31, 2018 as the $5.8 billion increase in quarterly adjusted average assets was offset by the increase in tier 1 capital.

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

(in millions)	December 31, 2019				December 31, 2018
Total common stockholders’ equity		$20,631				$19,977
Exclusions:****(1)
Net unrealized losses recorded in accumulated other comprehensive income, net of tax:
Debt and equity securities	(1		)		490
Derivatives	(3		)		143
Unamortized net periodic benefit costs	415				463
Deductions:
Goodwill	(7,044		)		(6,923		)
Deferred tax liability associated with goodwill	374				366
Other intangible assets	(68		)		(31		)
Total common equity tier 1	14,304				14,485
Qualifying preferred stock	1,570				840
Total tier 1 capital	15,874				15,325
Qualifying subordinated debt(2)	1,372				1,499
Allowance for loan and lease losses	1,252				1,242
Allowance for credit losses for off-balance sheet exposure	44				91
Total capital		$18,542				$18,157

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

(2) As of December 31, 2019 and 2018, the amount of non-qualifying subordinated debt excluded from regulatory capital was $267 million and $139 million, respectively.

Capital Adequacy Process

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

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

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

		Citizens Financial Group, Inc. | 67

Capital Transactions

We completed the following capital actions during 2019:

•	Declared quarterly common stock dividends of $0.32 per share for the first and second quarters of 2019, and $0.36 per share for the third and fourth quarters of 2019, aggregating to $617 million;

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

•	Declared semi-annual dividends of $30.00 per share on the 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, aggregating to $18 million;

•	Declared quarterly dividends of $15.94 per share on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $19 million;

•	Issued $300 million, or 12,000,000 depository shares, of 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock (the “Series D Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, with net proceeds of $293 million;

•	Declared quarterly dividends of $11.82 per share in the first quarter of 2019 and $15.88 per share in the second, third, and fourth quarters of 2019 on the Series D Preferred Stock, aggregating to $18 million;

•	Issued $450 million, or 18,000,000 depository shares, of 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock (the “Series E Preferred Stock”), par value of $25.00 per share with a liquidation preference of $1,000 per share, with net proceeds of $437 million;

•	Declared a quarterly dividend of $9.44 per share in fourth quarter 2019 on the Series E Preferred Stock, aggregating to $4 million; and

•	Repurchased $1.2 billion of our outstanding common stock

Banking Subsidiary’s Capital

The following table presents CBNA’s capital ratios under U.S. Basel III Standardized rules:

	December 31, 2019						December 31, 2018
(dollars in millions, except ratio data)	Amount			Ratio			Amount			Ratio
CET1 capital		$15,610		11.0	%			$11,994		10.6	%
Tier 1 capital	15,610			11.0			11,994			10.6
Total capital	17,937			12.6			14,252			12.5
Tier 1 leverage	15,610			9.9			11,994			9.9
Risk-weighted assets	142,555						113,610
Quarterly adjusted average assets	158,391						121,686

CBNA CET1 capital totaled $15.6 billion at December 31, 2019, up $3.6 billion from $12.0 billion at December 31, 2018. The increase was primarily driven by the net impact of the merger of CBPA into CBNA effective January 2, 2019, and net income for the year ended December 31, 2019. The increase was partially offset by dividend payments to the Parent Company and an increase in goodwill and intangibles related Acquisitions. Total capital was $17.9 billion at December 31, 2019, an increase of $3.7 billion from December 31, 2018, driven by the change in CET1 capital, an increase in the ACL, primarily attributable to the merger and slightly offset by an increase in non-qualifying subordinated debt.

CBNA had RWA of $142.6 billion at December 31, 2019, an increase of $28.9 billion from December 31, 2018 driven primarily by the merger of CBPA into CBNA, in addition to growth in retail loans, commercial loans and commitments and higher derivative valuations. RWA was also increased by the creation of a right-of-use asset in conjunction with the adoption of ASU 2016-02, Leases (Topic 842) and market risk RWA, as we met the reporting threshold prescribed by Market Risk Capital Guidelines. These increases were partially offset by run-off in the home equity portfolio and certain sales of investment securities.

As of December 31, 2019, the CBNA tier 1 leverage ratio was 9.9% and was stable with December 31, 2018 as the $36.7 billion increase in quarterly adjusted average assets was offset by the increase in tier 1 capital.

		Citizens Financial Group, Inc. | 68

LIQUIDITY

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

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

Parent Company Liquidity

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

On January 29, 2019, the Parent Company issued $300 million, or 12,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). For further information, see Note 16 in Item 8.

On July 25, 2019, the Parent Company issued $500 million in seven-year 2.850% fixed-rate senior notes.

On October 28, 2019, the Parent Company issued $450 million, or 18,000,000 depositary shares, each representing a 1/40th interest in a share of its 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). For further information, see Note 16 in Item 8.

On February 6, 2020, the Parent Company issued $300 million in ten-year 2.500% fixed-rate senior notes.

For further information on outstanding debt and preferred stock, see Note 12 and Note 16 in Item 8.

During the years ended December 31, 2019 and 2018, the Parent Company declared and paid dividends on common stock of $617 million and $471 million, respectively, and declared dividends on preferred stock of $73 million and $29 million, respectively. In addition, the Parent Company repurchased $1.220 billion and $1.025 billion of its outstanding common stock, respectively.

Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $1.4 billion as of December 31, 2019 compared with $911 million as of December 31, 2018. The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At December 31, 2019, the Parent Company’s double-leverage ratio was 99%.

CBNA Liquidity

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

As CBNA’s major businesses involve taking deposits and making loans, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and for loans. Liquidity management also involves

		Citizens Financial Group, Inc. | 69

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

On February 14, 2019, CBNA issued $1.5 billion in senior notes, consisting of $700 million in three-year 3.250% fixed-rate notes, $300 million in three-year floating-rate notes, and $500 million in seven-year 3.750% fixed-rate notes.

Liquidity Risk

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

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

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

Factors Affecting Liquidity

Given the composition of assets and borrowing sources, contingent liquidity risk at CBNA would be materially affected by events such 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 a lender of last resort in systemic stress.

Similarly, given the structure of its balance sheet, the funding liquidity risk of CBNA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both. 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.

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

		December 31, 2019
		Moody’s		Standard and Poor’s		Fitch
	Citizens Financial Group, Inc.:
	Long-term issuer	NR		BBB+		BBB+
	Short-term issuer	NR		A-2		F1
	Subordinated debt	NR		BBB		BBB
	Preferred Stock	NR		BB+		BB-
	Citizens Bank, National Association:
	Long-term issuer	Baa1		A-		BBB+
	Short-term issuer	NR		A-2		F1
	Long-term deposits	A1		NR		A-
	Short-term deposits	P-1		NR		F1

NR = Not Rated

Changes in our public credit ratings could affect both the cost and availability of our wholesale funding. As a result and in order to maintain a conservative funding profile, CBNA continues to minimize reliance on unsecured wholesale funding. At December 31, 2019, our wholesale funding consisted primarily of secured borrowings from the FHLBs collateralized by high-quality residential mortgages and term debt issued by the Parent Company and CBNA.

Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB, the OCC and the FDIC regularly evaluate our liquidity as part of the overall supervisory process. In addition we are subject to existing and evolving regulatory liquidity requirements, some of which are subject to further rulemaking, guidance and interpretation by the applicable

		Citizens Financial Group, Inc. | 70

federal regulators. For further discussion, see the “Regulation and Supervision — Financial Regulatory Reform” and “—Liquidity Requirements” sections in Item 1.

The LCR was developed by the U.S. federal banking regulators to ensure banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. In accordance with the October 2019 Final Rules, Category IV institutions with less than $50 billion in weighted short-term wholesale funding, such as us, are no longer subject to the requirements of the LCR rule as of December 31, 2019.

Liquidity Risk Management and Governance

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

Our Funding and Liquidity unit’s primary goal is to deliver and otherwise maintain prudent levels of operating liquidity (to support expected and projected funding requirements), and contingent liquidity (to support unexpected funding requirements resulting from idiosyncratic, systemic, and combination stress events, and regulatory liquidity requirements) in a timely manner from stable and cost-efficient funding sources.

We seek to accomplish this goal by funding loans with stable deposits; by prudently controlling dependence on wholesale funding, particularly short-term unsecured funding; and by maintaining ample available liquidity, including a contingent liquidity buffer of unencumbered high-quality loans and securities. As of December 31, 2019:

•	Core deposits continued to be our primary source of funding and our consolidated year-end loans-to-deposits ratio, which excludes LHFS, was 95.0%;

•	Our cash position (which is defined as cash balance held at the FRB) totaled $2.1 billion;

•	Contingent liquidity was $28.5 billion, consisting of unencumbered high-quality liquid securities of $19.2 billion, unused FHLB capacity of $7.2 billion, and our cash position of $2.1 billion. Asset liquidity (a component of contingent liquidity) was $21.3 billion, consisting of our cash position of $2.1 billion and unencumbered high-quality liquid securities of $19.2 billion;

•	Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $12.4 billion. Use of this borrowing capacity would be considered only during exigent circumstances; and

•	For a summary of our sources and uses of cash by type of activity for the years ended December 31, 2019 and 2018, see the Consolidated Statements of Cash Flows in Item 8.

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

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

•	Liquidity stress sources, including idiosyncratic, systemic and combined stresses, in addition to evolving regulatory requirements; and

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

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

		Citizens Financial Group, Inc. | 71

CONTRACTUAL OBLIGATIONS

The following table presents our outstanding contractual obligations as of December 31, 2019:

(in millions)	Total			Less than 1 year			1 to 3 years			3 to 5 years			More than 5 years
Deposits with a stated maturity of less than one year (1) (2)		$106,577			$106,577			$—			$—			$—
Term deposits (1)	18,736			16,151			2,311			270			4
Long-term borrowed funds (1) (3)	14,047			2,504			8,462			1,058			2,023
Contractual interest payments (4)	895			324			329			155			87
Lease liabilities maturing under non-cancelable operating leases	806			150			275			182			199
Purchase obligations (5)	822			317			320			148			37
Total outstanding contractual obligations		$141,883			$126,023			$11,697			$1,813			$2,350

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

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

(3) Includes obligations under capital leases.

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

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

OFF-BALANCE SHEET ARRANGEMENTS

The following table presents our outstanding off-balance sheet arrangements. For further information, see Note 18 in Item 8:

	December 31,
(in millions)	2019				2018				Change				Percent
Commitments to extend credit		$72,743				$69,553				$3,190			5	%
Letters of credit	2,190				2,125				65				3
Risk participation agreements	37				19				18				95
Loans sold with recourse	37				5				32				NM
Marketing rights	33				37				(4		)		(11	)
Total		$75,040				$71,739				$3,301			5	%

CRITICAL ACCOUNTING ESTIMATES

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

An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on our audited Consolidated Financial Statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. Our most significant accounting policies and estimates and their related application are discussed below. See Note 1 in Item 8, for further discussion of our significant accounting policies.

Allowance for Credit Losses

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

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

		Citizens Financial Group, Inc. | 72

a specific commercial credit such as competition, business and management performance. The ALLL may be adjusted to reflect our current assessment of various qualitative risks, factors and events that may not be measured in our statistical procedures. There is no certainty that the ALLL and reserve for unfunded lending commitments will be appropriate over time to cover losses because of unanticipated adverse changes in any of these internal, external or qualitative factors. There were no material changes in assumptions or estimation techniques compared with prior years that impacted the determination of the current year’s ALLL and the reserve for unfunded lending commitments.

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

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

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

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

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

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

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

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

		Citizens Financial Group, Inc. | 73

value of the collateral less costs to sell. The fair value of collateral is periodically monitored subsequent to the modification.

Changes in the levels of estimated losses can significantly affect management’s determination of an appropriate ALLL. For retail loans, losses are affected by such factors as loss severity, collateral values, economic conditions, and other factors. A one basis point and five basis point increase in the estimated loss rate for retail loans at December 31, 2019 would have increased the ALLL by $6 million and $31 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, 2019 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 $66 million and $126 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 and Note 5 in Item 8.

Fair Value

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

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

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

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

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

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

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

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

The fair value of assets under operating leases is determined using collateral specific pricing digests, external appraisals, broker opinions, recent sales data from industry equipment dealers, and the discounted cash flows

		Citizens Financial Group, Inc. | 74

derived from the underlying lease agreement. As market data for similar assets and lease agreements is available and used in the valuation, these assets are classified as Level 2.

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

For additional information regarding our fair value measurements, see Note 1, Note 3, Note 8, Note 13, and Note 19 in Item 8.

ACCOUNTING AND REPORTING DEVELOPMENTS

Accounting standards issued but not adopted as of December 31, 2019

Pronouncement	Summary of Guidance	Effects on Financial Statements
Simplifying the Accounting for Income Taxes Issued December 2019	• The guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. • Simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. • Clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.	• Required effective date: January 1, 2021. Early adoption is permitted. The Company adopted this guidance effective January 1, 2020. • Adoption did not have an impact on our 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. We did not adopt this guidance prior to the required effective date. • Adoption is not expected to have a material impact on our Consolidated Financial Statements.

		Citizens Financial Group, Inc. | 75

RISK GOVERNANCE

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

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

Risk Framework

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

First Line of Defense

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

Second Line of Defense

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

Third Line of Defense

Our Internal Audit function is the third line of defense providing independent assurance with a view of the effectiveness of our 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 of our records, physical properties and personnel. Internal Audit issues a report following each internal review and provides an audit opinion to the Board’s Audit Committee on a quarterly basis.

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

Risk Appetite

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

Our principal non-market risks include credit, operational, regulatory, reputational, liquidity and strategic risks. We are also subject to certain market risks which include potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Market risk in our business arises from trading activities that serve customer needs, including hedging of interest rates, foreign exchange risk and non-trading activities within capital markets. We have established enterprise-wide policies

		Citizens Financial Group, Inc. | 76

and methodologies to identify, measure, monitor and report on market risk. We actively manage both trading and non-trading market risks. See “—Market Risk” for further information. Our risk appetite is reviewed and approved annually by the Board Risk Committee.

Credit Risk

Overview

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

Objective

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

Organizational Structure

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

Governance

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

Key Management Processes

We employ a comprehensive and integrated risk control program to proactively identify, measure, monitor, and mitigate existing and emerging credit risks across the credit life cycle (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 life cycle of the loan. Starting at origination, credit scoring models are used to forecast the probability of default of an applicant. When approving customers for a new loan or extension of an existing credit line, credit scores are used in conjunction with other credit risk variables such as affordability, length of term, collateral value, collateral type, and lien subordination.

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

		Citizens Financial Group, Inc. | 77

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

Commercial

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

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

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

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

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

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

MARKET RISK

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

Non-Trading Risk

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

Interest Rate Risk

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

		Citizens Financial Group, Inc. | 78

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

Another important source of structural interest rate risk relates to the potential exercise of explicit or embedded options. For example, most consumer loans can be prepaid without penalty and most consumer deposits can also 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 retail deposit funding. This source of asset sensitivity is more biased toward the short end of the yield curve. After a period of slowly raising short-term rates to a more neutral stance, the FRB adjusted their policy stance with a mid-cycle adjustment, reducing short term rates by 75 basis points in 2019. As this shift occurred, we reduced our asset sensitivity to a more moderate level to account for the less certain outlook for policy rates.

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 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 our 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 our risk appetite, we must measure the exposure and hedge it, as necessary. The Treasury Asset and Liability Management team is responsible for measuring, monitoring and reporting on our structural interest rate risk position. These exposures are reported on a monthly basis to the Asset Liability Committee and at Board meetings.

We measure structural interest rate risk through a variety of metrics intended to quantify both short-term and long-term exposures. The primary method 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 the 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 analyses to determine the impact of key assumptions. The results of these analyses are reported to the Asset Liability Committee.

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

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

		Citizens Financial Group, Inc. | 79

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

	Estimated % Change in Net Interest Income over 12 Months
	December 31,
Basis points	2019			2018
Instantaneous Change in Interest Rates
+200	6.9	%		9.5	%
+100	3.6			4.8
-100	(3.8	)		(4.5	)
Gradual Change in Interest Rates
+200	3.2	%		4.9	%
+100	1.5			2.5
-100	(1.9	)		(1.1	)

Given broad expectations that the FRB will maintain its current policy stance, we continue to manage asset sensitivity within the scope of our policy and changing market conditions. Asset sensitivity against a 200 basis point gradual increase in rates was 3.2% at December 31, 2019, compared with 4.9% at December 31, 2018. Additionally, approximately 75% to 80% of this asset sensitivity is tied to long-term interest rate exposure (greater than six months). The risk position can be affected by changes in interest rates which impact the repricing sensitivity or beta of the deposit base as well as the cash flows on assets that allow for early payoff without a penalty. The risk position is managed within our risk limits, and long term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding.

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

We use interest rate swap contracts to manage the interest rate exposure to variability in the interest cash flows on our floating-rate assets and floating-rate wholesale funding, and to hedge market risk on fixed-rate capital markets debt issuances. The table below summarizes the related hedging activities.

	December 31, 2019													December 31, 2018
							Weighted Average													Weighted Average
(dollars in millions)	Notional Amount			Fair Value			Maturity (Years)		Receive Rate		Pay Rate			Notional Amount			Fair Value			Maturity (Years)		Receive Rate		Pay Rate
Cash flow - receive-fixed/pay-variable - conventional ALM(1)		$19,350			($2	)	1.5		1.7	%	1.7	%			$8,100			$3		2.2		1.7	%	2.5	%
Fair value - receive-fixed/pay-variable - conventional debt	4,650			(1		)	2.0		2.0		1.9			3,450			2			2.4		1.8		2.7
Cash flow - pay-fixed/receive-variable - conventional ALM	3,000			2			4.5		1.7		1.7			500			—			—		2.4		1.3
Fair value - pay-fixed/receive-variable - conventional ALM(2)	2,846			2			4.5		1.8		1.8			—			—			—		—		—
Total portfolio swaps		$29,846			$1		2.2		1.8	%	1.8	%			$12,050			$5		2.2		1.8	%	2.5	%
Floors - conventional ALM		$—			$—		—		—		—				$7,000			$—		0.5

(1) In 2019, we reduced asset sensitivity over the December 2019 to December 2021 period with the addition of $1.8 billion of December 2019 forward starting

receive-fixed interest rate swaps as part of an ongoing program to manage interest rate risk.

(2) In 2019, we executed a last-of-layer hedge utilizing pay-fixed interest rate swap agreements to manage the interest rate exposure on mortgage-backed

securities held in our available for sale debt securities portfolio. As of December 31, 2019, the notional and fair value of these hedges was $2.0 billion and

$2 million, respectively.

		Citizens Financial Group, Inc. | 80

Capital Markets

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

Mortgage Servicing Rights

We have market risk associated with the value of residential MSRs, which are impacted by various types of inherent risks, including risks related to duration, basis, convexity, volatility and yield curve. Through December 31, 2019, we had elected to account for the MSRs acquired from FAMC at fair value while maintaining a lower of cost or market approach on our MSRs held before the FAMC acquisition. On January 1, 2020, we elected to change our accounting treatment such that all MSRs will be accounted for at fair value.

As part of our overall risk management strategy relative to the fair market value of the MSRs we enter into various free-standing derivatives, such as interest rate swaps, interest rate swaptions, interest rate futures, and forward contracts to purchase mortgage-backed securities to economically hedge the changes in fair value. As of December 31, 2019 and 2018, the fair value of the FAMC MSRs was $642 million and $600 million, respectively, and the total notional amount of related derivative contracts was $8.6 billion and $4.6 billion, respectively. Gains and losses on MSRs and the related derivatives used for hedging are included in mortgage banking fees on the Consolidated Statements of Operations.

As of December 31, 2019 and 2018, our MSRs held before the FAMC acquisition had a book value of $182 million and $221 million, respectively, and were carried at the lower of cost or market. As of December 31, 2019 and 2018, these MSRs had a fair value of $193 million and $243 million, respectively, which exceeded the carrying value at those dates.

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

Trading Risk

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

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

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

Market Risk Governance

The market risk limit setting process is established in-line with the formal enterprise risk appetite process and policy. This appetite reflects the strategic and enterprise level articulation of opportunities for creating franchise value set to the boundaries of how much market risk to assume. Dealing authorities represent the key control tool in the management of market risk that allows the cascading of the risk appetite throughout the enterprise. A dealing authority sets the operational scope and tolerances within which a business and/or trading desk is permitted to operate, which is reviewed at least annually. Dealing authorities are structured to accommodate client facing trades and hedges needed to manage the risk profile. Primary responsibility for keeping within established tolerances

		Citizens Financial Group, Inc. | 81

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. In addition 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 capture correlation effects across all our “covered positions” and allow for aggregation of market risk across products, risk types, business lines and legal entities. We measure, monitor and report market risk for both management and regulatory capital purposes.

VaR Overview

The market risk measurement model is based on historical simulation. The VaR measure estimates the extent of any fair value losses on trading positions that may occur due to broad market movements (General VaR) such as changes in the level of interest rates, foreign exchange rates, equity prices and commodity prices. It is calculated on the basis that current positions remain broadly unaltered over the course of a given holding period. It is assumed that markets are sufficiently liquid to allow the business to close its positions, if required, within this holding period. VaR’s benefit is that it captures the historic correlations of a portfolio. Based on the composition of our “covered positions,” we also use a standardized add-on approach for the loan trading desk’s Specific Risk capital which estimates the extent of any losses that may occur from factors other than broad market movements. The General VaR approach is expressed in terms of a confidence level over the past 500 trading days. The internal VaR measure (used as the basis of the main VaR trading limits) is a 99% confidence level with a one day holding period, meaning that a loss greater than the VaR is expected to occur, on average, on only one day in 100 trading days (i.e., 1% of the time). Theoretically, there should be a loss event greater than VaR two to three times per year. The regulatory measure of VaR is done at a 99% confidence level with a ten-day holding period. The historical market data applied to calculate the VaR is updated on a two business day lag. Refer to “Market Risk Regulatory Capital” below for details of our ten-day VaR metrics for the quarters ended December 31, 2019 and 2018, respectively, including high, low, average and period end VaR for interest rate and foreign exchange rate risks, as well as total VaR.

		Citizens Financial Group, Inc. | 82

Market Risk Regulatory Capital

The U.S. banking regulators’ “Market Risk Rule” covers the calculation of market risk capital. For the purposes of the Market Risk Rule, all of our client facing trades and associated hedges maintain a net low risk and do qualify, as “covered positions.” For the three months ended December 31, 2019 we were subject to the reporting threshold under the Market Risk Rule, which resulted in the inclusion of $695 million of calculated risk-weighted assets. However, for the three months ended December 31, 2018, we were not subject to the reporting threshold. As a result, $785 million of calculated market risk-weighted assets as of December 31, 2018 was not included in our risk-weighted assets and our covered trading activities were risk-weighted under U.S. Basel III Standardized credit risk rules. The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR. The following table presents the results of our modeled and non-modeled measures for regulatory capital calculations:

(in millions)		For the Three Months Ended December 31, 2019																For the Three Months Ended December 31, 2018
Market Risk Category		Period End				Average				High				Low				Period End				Average				High				Low
Interest Rate			$1				$—				$1				$—				$—				$1				$2				$—
Foreign Exchange Currency Rate		—				—				—				—				—				—				—				—
Credit Spread		5				4				5				3				5				2				5				2
Commodity		—				—				—				—				—				—				—				—
General VaR		5				4				5				3				5				3				5				1
Specific Risk VaR		—				—				—				—				—				—				—				—
Total VaR			$5				$4				$5				$3				$5				$3				$5				$1
Stressed General VaR			$13				$10				$13				$7				$13				$13				$15				$10
Stressed Specific Risk VaR		—				—				—				—				—				—				—				—
Total Stressed VaR			$13				$10				$13				$7				$13				$13				$15				$10
Market Risk Regulatory Capital			$42																$47
Specific Risk Not Modeled Add-on		14																16
de Minimis Exposure Add-on		—																—
Total Market Risk Regulatory Capital			$56																$63
Market Risk-Weighted Assets (calculated)			$695																$785
Market Risk-Weighted Assets (included in our FR Y-9C regulatory filing) (1)			$695																$—

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

Stressed VaR

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

Sensitivity Analysis

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

		Citizens Financial Group, Inc. | 83

Stress Testing

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

VaR Model Review and Validation

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

VaR Backtesting

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

The following graph shows our daily net trading revenue and total internal, modeled VaR for the year ended December 31, 2019.

Daily VaR Backtesting

		Citizens Financial Group, Inc. | 84

KEY PERFORMANCE METRICS, NON-GAAP FINANCIAL MEASURES AND RECONCILATIONS

For more information on the computation of key performance metrics and non-GAAP financial measures, see “—Introduction— Key Performance Metrics Used by Management and Non-GAAP Financial Measures,” included in this Report. The following tables present key components and computations of key performance metrics as well as computations of non-GAAP financial measures representing our “Underlying” results used throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2019				2018
Noninterest income, Underlying:
Noninterest income (GAAP)			$1,877				$1,596
Less: Notable items		—				(5		)
Noninterest income, Underlying (non-GAAP)			$1,877				$1,601
Total revenue, Underlying:
Total revenue (GAAP)	A		$6,491				$6,128
Less: Notable items		—				(5		)
Total revenue, Underlying (non-GAAP)	B		$6,491				$6,133
Noninterest expense, Underlying:
Noninterest expense (GAAP)	C		$3,847				$3,619
Less: Notable items		68				54
Noninterest expense, Underlying (non-GAAP)	D		$3,779				$3,565
Pre-provision profit:
Total revenue (GAAP)	A	6,491					$6,128
Less: Noninterest expense (GAAP)	C	3,847				3,619
Pre-provision profit (GAAP)		2,644					$2,509
Pre-provision profit, Underlying:
Total revenue, Underlying (non-GAAP)	B		$6,491				$6,133
Less: Noninterest expense, Underlying (non-GAAP)	D	3,779				3,565
Pre-provision profit, Underlying (non-GAAP)			$2,712				$2,568
Income before income tax expense, Underlying:
Income before income tax expense (GAAP)	E		$2,251				$2,183
Less: Income (expense) before income tax expense (benefit) related to notable items		(68		)		(59		)
Income before income tax expense, Underlying (non-GAAP)	F		$2,319				$2,242
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP)	G		$460				$462
Less: Income tax expense (benefit) related to notable items		(51		)		(43		)
Income tax expense, Underlying (non-GAAP)	H		$511				$505
Effective income tax rate (GAAP)	G/E	20.43		%		21.16		%
Effective income tax rate, Underlying (non-GAAP)	H/F	22.03				22.55
Net income, Underlying:
Net income (GAAP)	I		$1,791				$1,721
Add: Notable items, net of income tax expense (benefit)		17				16
Net income, Underlying (non-GAAP)	J		$1,808				$1,737
Net income available to common stockholders, Underlying:
Net income available to common stockholders (GAAP)	K		$1,718				$1,692
Add: Notable items, net of income tax expense (benefit)		17				16
Net income available to common stockholders, Underlying (non-GAAP)	L		$1,735				$1,708

		Citizens Financial Group, Inc. | 85

		Year Ended December 31,
(in millions, except share, per-share and ratio data)	Ref.	2019				2018
Return on average common equity and return on average common equity, Underlying:
Average common equity (GAAP)	M		$20,325				$19,645
Return on average common equity	K/M	8.45		%		8.62		%
Return on average common equity, Underlying (non-GAAP)	L/M	8.53				8.69
Return on average tangible common equity and return on average tangible common equity, Underlying:
Average common equity (GAAP)	M		$20,325				$19,645
Less: Average goodwill (GAAP)		7,036				6,912
Less: Average other intangibles (GAAP)		71				14
Add: Average deferred tax liabilities related to goodwill (GAAP)		371				359
Average tangible common equity	N		$13,589				$13,078
Return on average tangible common equity	K/N	12.64		%		12.94		%
Return on average tangible common equity, Underlying (non-GAAP)	L/N	12.76				13.06
Return on average total assets and return on average total assets, Underlying:
Average total assets (GAAP)	O		$162,176				$154,553
Return on average total assets	I/O	1.10		%		1.11		%
Return on average total assets, Underlying (non-GAAP)	J/O	1.11				1.12
Return on average total tangible assets and return on average total tangible assets, Underlying:
Average total assets (GAAP)	O		$162,176				$154,553
Less: Average goodwill (GAAP)		7,036				6,912
Less: Average other intangibles (GAAP)		71				14
Add: Average deferred tax liabilities related to goodwill (GAAP)		371				359
Average tangible assets	P		$155,440				$147,986
Return on average total tangible assets	I/P	1.15		%		1.16		%
Return on average total tangible assets, Underlying (non-GAAP)	J/P	1.16				1.17
Efficiency ratio and efficiency ratio, Underlying:
Efficiency ratio	C/A	59.28		%		59.06		%
Efficiency ratio, Underlying (non-GAAP)	D/B	58.23				58.13
Operating leverage and operating leverage, Underlying:
Increase in total revenue		5.91		%		7.37		%
Increase in noninterest expense		6.30				4.18
Operating Leverage		(0.39		)%		3.19		%
Increase in total revenue, Underlying (non-GAAP)		5.83		%		7.58		%
Increase in noninterest expense, Underlying (non-GAAP)		6.00				4.30
Operating Leverage, Underlying (non-GAAP)		(0.17		)%		3.28		%
Net income per average common share - basic and diluted, Underlying:
Average common shares outstanding - basic (GAAP)	Q	449,731,453				478,822,072
Average common shares outstanding - diluted (GAAP)	R	451,213,701				480,430,741
Net income per average common share - basic (GAAP)	K/Q		$3.82				$3.54
Net income per average common share - diluted (GAAP)	K/R	3.81				3.52
Net income per average common share-basic, Underlying (non-GAAP)	L/Q	3.86				3.57
Net income per average common share-diluted, Underlying (non-GAAP)	L/R	3.84				3.56
Dividend payout ratio and dividend payout ratio, Underlying:
Cash dividends declared and paid per common share	S		$1.36				$0.98
Dividend payout ratio	S/(K/Q)	36		%		28		%
Dividend payout ratio, Underlying (non-GAAP)	S/(L/Q)	35				27

		Citizens Financial Group, Inc. | 86

		As of and for the Year Ended December 31,
		2019													2018
(in millions, except ratio data)	Ref.	Consumer Banking			Commercial Banking			Other			Consolidated				Consumer Banking			Commercial Banking			Other			Consolidated
Net income (loss) available to common stockholders:
Net income (GAAP)	T		$875			$870			$46			$1,791				$767			$927			$27			$1,721
Less: Preferred stock dividends		—			—			73			73				—			—			29			29
Net income (loss) available to common stockholders	U		$875			$870			($27	)		$1,718				$767			$927			($2	)		$1,692
Efficiency ratio:
Total revenue (GAAP)	V		$4,338			$2,073			$80			$6,491				$4,037			$2,042			$49			$6,128
Noninterest expense (GAAP)	W	2,851			858			138			3,847				2,723			813			83			3,619
Efficiency ratio	W/V	65.72		%	41.38		%	NM			59.28		%		67.47		%	39.80		%	NM			59.06		%
Return on average total tangible assets:
Average total assets (GAAP)			$66,240			$55,947			$39,989			$162,176				$62,444			$52,362			$39,747			$154,553
Less: Average goodwill (GAAP)		120			40			6,876			7,036				25			11			6,876			6,912
Less: Average other intangibles (GAAP)		65			6			—			71				12			2			—			14
Add: Average deferred tax liabilities related to goodwill (GAAP)		—			—			371			371				—			—			359			359
Average total tangible assets	X		$66,055			$55,901			$33,484			$155,440				$62,407			$52,349			$33,230			$147,986
Return on average total tangible assets	T/X	1.32		%	1.56		%	NM			1.15		%		1.23		%	1.77		%	NM			1.16		%