Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

		Page
Report of Management on Internal Control Over Financial Reporting		89
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements		90
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting		93
Consolidated Balance Sheets as of December 31, 2019 and 2018		94
Consolidated Statements of Operations for the Years ended December 31, 2019, 2018, and 2017		95
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, and 2017		96
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019, 2018, and 2017		97
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018, and 2017		98
Notes to Consolidated Financial Statements		100
Note 1 - Basis of Presentation		100
Note 2 - Cash and Due from Banks		102
Note 3 - Securities		103
Note 4 - Loans and Leases		107
Note 5 - Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk		109
Note 6 - Premises, Equipment and Software		120
Note 7 - Mortgage Banking		121
Note 8 - Leases		124
Note 9 - Goodwill and Intangible Assets		125
Note 10 - Variable Interest Entities		127
Note 11 - Deposits		129
Note 12 - Borrowed Funds		130
Note 13 - Derivatives		132
Note 14 - Employee Benefits		135
Note 15 - Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		137
Note 16 - Stockholders’ Equity		138
Note 17 - Share-Based Compensation		139
Note 18 - Commitments and Contingencies		140
Note 19 - Fair Value Measurements		142
Note 20 - Noninterest Income		148
Note 21 - Other Operating Expense		150
Note 22 - Income Taxes		150
Note 23 - Earnings Per Share		153
Note 24 - Regulatory Matters		154
Note 25 - Business Operating Segments		155
Note 26 - Parent Company Financials		158

		Citizens Financial Group, Inc. | 88

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s system of internal control over financial reporting is designed, under the supervision of the Chief Executive Officer and the Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2019 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2019, the Company’s internal control over financial reporting is effective.

The Company’s internal control over financial reporting as of December 31, 2019 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their accompanying report, appearing on page 93, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

		Citizens Financial Group, Inc. | 89

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Citizens Financial Group, Inc.

Providence, Rhode Island

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Citizens Financial Group, Inc. and its subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

		Citizens Financial Group, Inc. | 90

ALLL - Commercial Loan Portfolio - Refer to Note 5 to the consolidated financial statements

Critical Audit Matter Description

Management’s estimate of probable losses in the Company’s loan and lease portfolios is recorded in the allowance ALLL and the reserve for unfunded lending commitments. On a quarterly basis, the Company evaluates the adequacy of the ALLL and the reserve for unfunded lending commitments by performing reviews of certain individual loans and leases, analyzing changes in the composition, size and delinquency of the portfolio, reviewing previous loss experience and considering current and anticipated economic factors.

The evaluation of the adequacy of the commercial, commercial real estate, and lease (collectively “commercial loan portfolio”) 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 may be included in the risk rating models. After the aggregation of individual borrower incurred loss, additional overlays can be made based on back-testing against historical losses.

The ALLL and the reserve for unfunded commitments is adjusted to reflect Management’s current assessment of various qualitative risks, factors and events that may not be measured in the statistical analysis (“qualitative component”). Such factors include trends in economic conditions, loan growth, back testing results, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons. The Company’s methodology for determining the qualitative component includes a statistical analysis of prior charge-off rates and a qualitative assessment of factors affecting the determination of incurred losses in the loan and lease portfolio.

Given the size and nature of the commercial loan portfolio and the subjective nature of estimating the ALLL and reserve for unfunded commitments, auditing the ALLL and reserve for unfunded commitments for the commercial loan portfolio involved a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the commercial loan portfolio ALLL and reserve for unfunded commitments included the following, among others:

•	We tested the effectiveness of controls over the (i) PD risk rating models, (ii) reviews of individual loans and the assignment of PD and LGD ratings, (iii) estimation of additional overlays and the qualitative component and (iv) the overall calculation of the commercial loan ALLL and reserve for unfunded commitments.

•	We used our credit specialists to assist us in evaluating the reasonableness of the PD risk rating models.

•	We evaluated the relevance of the historical loss rates and data used in the determination of the ALLL and reserve for unfunded commitments.

•	We evaluated the accuracy of the PD and LGD ratings assigned to a sample of individual loans within the commercial portfolio.

•	We evaluated the appropriateness and relevance of the qualitative factors and related quantitative measures included in the qualitative component.

•	We tested the accuracy and evaluated the relevance of the historical loss data in the statistical analysis of prior charge-off rates used in determining the qualitative component.

•	We evaluated the reasonableness of the Company’s assessment and determination of the qualitative factors and related impact on the estimation of the qualitative component.

•	We tested the arithmetic accuracy of the calculation of the qualitative component.

•	We tested the arithmetic accuracy of the calculation of the commercial loan ALLL and reserve for unfunded commitments.

•	We evaluated the reasonableness of the Company’s commercial ALLL and reserve for unfunded commitments methodology and models by comparing actual loan losses to those amounts previously estimated by the Company.

		Citizens Financial Group, Inc. | 91

Current Expected Credit Losses (ASC 326) Adoption -Refer to Note 1 to the consolidated financial statements

Critical Audit Matter Description

The Company will adopt ASC 326 on January 1, 2020, retrospectively for loans and leases and HTM securities and prospectively for AFS securities.

To estimate the ACL under CECL, Citizens uses models and other estimation techniques that are sensitive to changes in forecasted economic conditions. The Company applies qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be adequately reflected in quantitatively derived results, or other relevant factors to ensure the ACL reflects the Company’s best estimate of current expected credit losses.

The Company expects to recognize an increase in the ACL upon adoption of approximately $450 million, based on a two-year reasonable and supportable forecast period, and a one-year reversion to long-term historical macroeconomic variables. The increase in ACL is primarily related to consumer loans, such as residential mortgage, unsecured and education, due to the requirement to estimate credit losses over the full remaining expected life of the asset.

Given the subjective nature of estimating the losses under ASC 326 for the purpose of disclosing the estimated impact of the adoption of ASC 326, auditing the disclosure of the expected impact of adoption of ASC 326 on January 1, 2020 involved a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the expected impact of the adoption of ASC 326 disclosure included the following, among others:

•	We tested the effectiveness of management’s controls covering the disclosure of the expected impact of the adoption of ASC 326, including controls covering accounting policy decisions, key assumptions and judgments, loss estimation modeling methodologies and the calculation of the expected credit losses.

•	We evaluated the appropriateness of the accounting policy decisions and disclosure of the estimated impact of the ASC 326 adoption.

•	We, with the assistance of our credit specialists, evaluated the reasonableness of the key assumptions and judgments, losses estimation modeling methodologies and calculated expected credit losses.

•	We tested the arithmetic accuracy of the calculation of the expected credit losses.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 24, 2020

We have served as the Company's auditor since 2000.

		Citizens Financial Group, Inc. | 92

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Citizens Financial Group, Inc.

Providence, Rhode Island

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Citizens Financial Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 24, 2020, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management’s on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 24, 2020

		Citizens Financial Group, Inc. | 93

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)	December 31, 2019				December 31, 2018
ASSETS:
Cash and due from banks		$1,175				$1,081
Interest-bearing cash and due from banks	2,211				2,993
Interest-bearing deposits in banks	297				148
Debt securities available for sale, at fair value (including $359 and $363 pledged to creditors, respectively) (1)	20,613				19,895
Debt securities held to maturity (fair value of $3,242 and $4,041, respectively, and including $249 and $0 pledged to creditors, respectively) (1)	3,202				4,165
Equity investment securities, at fair value	47				181
Equity investment securities, at cost	807				834
Loans held for sale, at fair value	1,946				1,219
Other loans held for sale	1,384				101
Loans and leases	119,088				116,660
Less: Allowance for loan and lease losses	(1,252		)		(1,242		)
Net loans and leases	117,836				115,418
Derivative assets	807				317
Premises and equipment, net	761				791
Bank-owned life insurance	1,725				1,698
Goodwill	7,044				6,923
Other assets	5,878				4,754
TOTAL ASSETS		$165,733				$160,518
LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
Deposits:
Noninterest-bearing		$29,233				$29,458
Interest-bearing	96,080				90,117
Total deposits	125,313				119,575
Federal funds purchased and securities sold under agreements to repurchase	265				1,156
Other short-term borrowed funds	9				161
Derivative liabilities	120				292
Deferred taxes, net	866				573
Long-term borrowed funds	14,047				15,925
Other liabilities	2,912				2,019
TOTAL LIABILITIES	143,532				139,701
Contingencies (refer to Note 18)
STOCKHOLDERS’ EQUITY:
Preferred Stock:
$25.00 par value,100,000,000 shares authorized; 1,600,000 shares issued and outstanding at December 31, 2019 and 850,000 shares issued and outstanding at December 31, 2018	1,570				840
Common stock:
$0.01 par value, 1,000,000,000 shares authorized; 568,238,730 shares issued and 433,121,083 shares outstanding at December 31, 2019 and 566,819,863 shares issued and 466,007,984 shares outstanding at December 31, 2018	6				6
Additional paid-in capital	18,891				18,815
Retained earnings	6,498				5,385
Treasury stock, at cost, 135,117,647 and 100,811,879 shares at December 31, 2019 and December 31, 2018, respectively	(4,353		)		(3,133		)
Accumulated other comprehensive loss	(411		)		(1,096		)
TOTAL STOCKHOLDERS’ EQUITY	22,201				20,817
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$165,733				$160,518

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

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

		Citizens Financial Group, Inc. | 94

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
(in millions, except share and per-share data)	2019			2018			2017
INTEREST INCOME:
Interest and fees on loans and leases		$5,441			$5,010			$4,249
Interest and fees on loans held for sale, at fair value	63			37			18
Interest and fees on other loans held for sale	13			10			10
Investment securities	642			672			625
Interest-bearing deposits in banks	30			29			18
Total interest income	6,189			5,758			4,920
INTEREST EXPENSE:
Deposits	1,155			785			441
Federal funds purchased and securities sold under agreements to repurchase	8			6			3
Other short-term borrowed funds	2			9			17
Long-term borrowed funds	410			426			286
Total interest expense	1,575			1,226			747
Net interest income	4,614			4,532			4,173
Provision for credit losses	393			326			321
Net interest income after provision for credit losses	4,221			4,206			3,852
NONINTEREST INCOME:
Service charges and fees	505			513			516
Mortgage banking fees	302			152			108
Card fees	254			244			233
Capital markets fees	216			179			194
Trust and investment services fees	202			171			158
Foreign exchange and interest rate products	155			126			109
Letter of credit and loan fees	135			128			121
Securities gains, net	19			19			11
Net securities impairment losses recognized in earnings on debt securities	(2		)	(3		)	(7		)
Other income	91			67			91
Total noninterest income	1,877			1,596			1,534
NONINTEREST EXPENSE:
Salaries and employee benefits	2,026			1,880			1,766
Equipment and software expense	514			464			443
Outside services	498			447			404
Occupancy	333			333			319
Other operating expense	476			495			542
Total noninterest expense	3,847			3,619			3,474
Income before income tax expense	2,251			2,183			1,912
Income tax expense	460			462			260
NET INCOME		$1,791			$1,721			$1,652
Net income available to common stockholders	$1,718			$1,692				$1,638
Weighted-average common shares outstanding:
Basic	449,731,453			478,822,072			502,157,440
Diluted	451,213,701			480,430,741			503,685,091
Per common share information:
Basic earnings		$3.82			$3.54			$3.26
Diluted earnings	3.81			3.52			3.25

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

		Citizens Financial Group, Inc. | 95

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended December 31,
(in millions)	2019			2018			2017
Net income		$1,791			$1,721			$1,652
Other comprehensive income (loss):
Net unrealized derivative instruments gains (losses) arising during the periods, net of income taxes of $35, ($11) and ($9), respectively	103			(33		)	(14		)
Reclassification adjustment for net derivative losses (gains) included in net income, net of income taxes of $14, $10 and ($9), respectively	43			33			(16		)
Net unrealized debt securities gains (losses) arising during the periods, net of income taxes of $165, ($79) and ($4), respectively	501			(239		)	(6		)
Other-than-temporary impairment not recognized in earnings on debt securities, net of income taxes of $0, ($1) and $0, respectively	—			(3		)	—
Reclassification of net debt securities gains to net income, net of income taxes of ($8), ($4) and ($2), respectively	(15		)	(12		)	(2		)
Employee benefit plans:
Actuarial gain (loss), net of income taxes of $12, ($14) and $12, respectively	36			(35		)	19
Amortization of actuarial loss, net of income taxes of $6, $3 and $5, respectively	13			14			13
Amortization of prior service cost, net of income taxes of $0, $0 and $0, respectively	(1		)	(1		)	(1		)
Total other comprehensive income (loss), net of income taxes	680			(276		)	(7		)
Total comprehensive income		$2,471			$1,445			$1,645

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

		Citizens Financial Group, Inc. | 96

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Preferred Stock						Common Stock					Additional Paid-in Capital			Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Loss			Total
(in millions)	Shares		Amount				Shares		Amount
Balance at January 1, 2017	—			$247			512			$6			$18,722			$2,703			($1,263	)		($668	)		$19,747
Dividends to common stockholders	—		—				—		—			—			(322		)	—			—			(322		)
Dividend to preferred stockholders	—		—				—		—			—			(14		)	—			—			(14		)
Treasury stock purchased	—		—				(22	)	—			25			—			(845		)	—			(820		)
Share-based compensation plans	—		—				1		—			22			—			—			—			22
Employee stock purchase plan shares purchased	—		—				—		—			12			—			—			—			12
Total comprehensive income:
Net income	—		—				—		—			—			1,652			—			—			1,652
Other comprehensive loss	—		—				—		—			—			—			—			(7		)	(7		)
Total comprehensive income	—		—				—		—			—			1,652			—			(7		)	1,645
Reclassification of tax effects resulting from the 2017 Tax Legislation	—		—				—		—			—			145			—			(145		)	—
Balance at December 31, 2017	—			$247			491			$6			$18,781			$4,164			($2,108	)		($820	)		$20,270
Dividends to common stockholders	—		—				—		—			—			(471		)	—			—			(471		)
Dividend to preferred stockholders	—		—				—		—			—			(29		)	—			—			(29		)
Preferred stock issued	1		593				—		—			—			—			—			—			593
Treasury stock purchased	—		—				(26	)	—			—			—			(1,025		)	—			(1,025		)
Share-based compensation plans	—		—				1		—			20			—			—			—			20
Employee stock purchase plan shares purchased	—		—				—		—			14			—			—			—			14
Total comprehensive income:
Net income	—		—				—		—			—			1,721			—			—			1,721
Other comprehensive loss	—		—				—		—			—			—			—			(276		)	(276		)
Total comprehensive income	—		—				—		—			—			1,721			—			(276		)	1,445
Balance at December 31, 2018	1			$840			466			$6			$18,815			$5,385			($3,133	)		($1,096	)		$20,817
Dividends to common stockholders	—		—				—		—			—			(617		)	—			—			(617		)
Dividends to preferred stockholders	—		—				—		—			—			(73		)	—			—			(73		)
Preferred stock issued	1		730				—		—			—			—			—			—			730
Treasury stock purchased	—		—				(34	)	—			—			—			(1,220		)	—			(1,220		)
Share-based compensation plans	—		—				1		—			59			—			—			—			59
Employee stock purchase plan shares purchased	—		—				—		—			17			—			—			—			17
Cumulative effect of change in accounting standards	—		—				—		—			—			12			—			5			17
Total comprehensive income:
Net income	—		—				—		—			—			1,791			—			—			1,791
Other comprehensive income	—		—				—		—			—			—			—			680			680
Total comprehensive income	—		—				—		—			—			1,791			—			680			2,471
Balance at December 31, 2019	2			$1,570			433			$6			$18,891			$6,498			($4,353	)		($411	)		$22,201

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

		Citizens Financial Group, Inc. | 97

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
(in millions)	2019			2018			2017
OPERATING ACTIVITIES
Net income		$1,791			$1,721			$1,652
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	393			326			321
Originations of mortgage loans held for sale	(21,188		)	(8,036		)	(2,911		)
Proceeds from sales of mortgage loans held for sale	20,430			8,149			3,161
Purchases of commercial loans held for sale	(1,979		)	(1,944		)	(2,057		)
Proceeds from sales of commercial loans held for sale	2,065			1,857			1,963
Depreciation, amortization and accretion	633			489			487
Mortgage servicing rights valuation charge-off (recovery)	1			(3		)	(2		)
Debt securities impairment	2			3			7
Deferred income taxes	64			97			(136		)
Share-based compensation	41			41			48
Net gain on sales of:
Debt securities	(25		)	(19		)	(11		)
Equity securities	—			—			(1		)
Premises and equipment	(6		)	—			—
Other loans held for sale	—			—			(17		)
Increase in other assets	(856		)	(1,217		)	(502		)
Increase (decrease) in other liabilities	331			303			(119		)
Net cash provided by operating activities	1,697			1,767			1,883
INVESTING ACTIVITIES
Investment securities:
Purchases of securities available for sale	(8,422		)	(4,270		)	(5,394		)
Proceeds from maturities and paydowns of debt securities available for sale	3,946			3,258			3,470
Proceeds from sales of debt securities available for sale	5,016			998			1,257
Purchases of debt securities held to maturity	—			—			(171		)
Proceeds from maturities and paydowns of debt securities held to maturity	398			522			561
Purchases of equity securities, at fair value	(717		)	(162		)	(326		)
Proceeds from sales of equity securities, at fair value	851			150			253
Purchases of equity securities, at cost	(511		)	(754		)	(400		)
Proceeds from sales of equity securities, at cost	538			642			637
Net (increase) decrease in interest-bearing deposits in banks	(149		)	44			247
Purchases of mortgage servicing rights	—			(16		)	(28		)
Acquisitions, net of cash acquired	(129		)	(533		)	—
Net increase in loans and leases	(4,334		)	(6,445		)	(3,634		)
Net increase in bank-owned life insurance	(27		)	(42		)	(44		)
Premises and equipment:
Purchases	(126		)	(232		)	(253		)
Proceeds from sales	31			—			—
Capitalization of software	(240		)	(237		)	(159		)
Net cash used in investing activities	(3,875		)	(7,077		)	(3,984		)

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

		Citizens Financial Group, Inc. | 98

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

	Year Ended December 31,
(in millions)	2019			2018			2017
FINANCING ACTIVITIES
Net increase in deposits	5,738			4,486			5,285
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase	(891		)	341			(333		)
Net decrease in other short-term borrowed funds	(157		)	(5,211		)	(4,959		)
Proceeds from issuance of long-term borrowed funds	12,850			22,503			15,363
Repayments of long-term borrowed funds	(14,857		)	(14,837		)	(12,751		)
Treasury stock purchased	(1,220		)	(1,025		)	(820		)
Net proceeds from issuance of preferred stock	730			593			—
Dividends declared and paid to common stockholders	(617		)	(471		)	(322		)
Dividends declared and paid to preferred stockholders	(65		)	(14		)	(14		)
Payments of employee tax withholding for share-based compensation	(21		)	(13		)	(20		)
Net cash provided by financing activities	1,490			6,352			1,429
(Decrease) increase in cash and cash equivalents**(a)**	(688		)	1,042			(672		)
Cash and cash equivalents at beginning of period**(a)**	4,074			3,032			3,704
Cash and cash equivalents at end of period**(a)**		$3,386			$4,074			$3,032
Supplemental disclosures:
Interest paid		$1,560			$1,184			$716
Income taxes paid	326			241			371
Non-cash items:
Transfer of securities from available for sale to held to maturity		$192			$—			$—
Transfer of securities from held to maturity to available for sale	734			—			—
Loans securitized and transferred to securities available for sale	150			142			134
Stock issued for share-based compensation plans	59			20			22
Stock issued for Employee Stock Purchase Plan	17			14			12
Due from broker for securities sold but not settled	—			—			6

(a) Cash and cash equivalents include cash and due from banks and interest-bearing cash and due from banks as reflected on the Consolidated Balance Sheets.

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

		Citizens Financial Group, Inc. | 99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The accounting and reporting policies of Citizens Financial Group, Inc. conform to GAAP. The Company’s principal business activity is banking, conducted through its banking subsidiary Citizens Bank, National Association. The Company also provides M&A, capital raising and other financial advisory services to middle market companies across a focused set of industry verticals through its broker-dealer CCMI.

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the ACL and the fair value of MSRs.

Significant Accounting Policies

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

	Note	Page
Cash and Due From Banks	Note 2	102
Securities	Note 3	103
Loans and Leases	Note 4	107
Allowance for Credit Losses	Note 5	109
Premises, Equipment and Software	Note 6	120
Mortgage Servicing Rights	Note 7	121
Leases	Note 8	124
Goodwill	Note 9	125
Variable Interest Entities	Note 10	127
Derivative Instruments	Note 13	132
Employee Benefits	Note 14	135
Treasury Stock	Note 16	138
Employee Share-Based Compensation	Note 17	139
Fair Value Measurement	Note 19	142
Revenue Recognition	Note 20	148
Income Taxes	Note 22	150
Earnings Per Share	Note 23	153

Acquisitions

On January 1, 2019, the Company acquired Clarfeld Financial Advisors, LLC (“Clarfeld”), a Tarrytown, New York-based boutique wealth management and financial advisory firm, for total consideration of $110 million. As part of this transaction, the Company expanded its wealth management position with the addition of a robust client base. The Company recognized goodwill of $83 million and other intangibles of $21 million related to the transaction.

On March 1, 2019, the Company acquired certain assets and assumed certain liabilities of Bowstring Advisors, LLC (“Bowstring”), an Atlanta, Georgia-based mergers and acquisitions advisory and capital raising firm, for the consideration of $40 million. As part of this transaction, the Company expanded its mergers and acquisitions advisory position with the addition of a referral network and experienced staff. The Company recognized goodwill of $35 million and other intangibles of $6 million related to the transaction.

		Citizens Financial Group, Inc. | 100

Accounting Pronouncements Adopted in 2019

Pronouncement	Summary of Guidance	Effects on Financial Statements
Derivatives and Hedging Issued August 2017	• Reduces the complexity and operational burdens of the current hedge accounting model and portrays more clearly the effects of hedge accounting in the financial statements. • Modifies current requirements to facilitate the application of hedge accounting to partial-term hedges, hedges of prepayable financial instruments, and other strategies. Adoption of these optional changes would occur on a prospective basis. • Requires the effects of fair value hedges to be classified in the same income statement line as the earnings effect of the hedged item. Adoption of this change will occur on a prospective basis. • Requires all effects of cash flow hedges to be deferred in other comprehensive income until the hedged cash flows affect earnings. Periodic hedge ineffectiveness will no longer be recognized in earnings. Adoption of this change will occur on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.	• The Company adopted the new standard on January 1, 2019 under the modified retrospective method. • Adoption did not have a material impact on the Company’s Consolidated Financial Statements. • Required disclosures are included in Note 13.
Leases Issued February 2016	• Requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with a lease term of greater than one year. • Requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests. • Requires that for finance leases, a lessee recognize interest expense on the lease liability separately from the amortization of the right-of-use asset in the Consolidated Statements of Operations, while for operating leases, such amounts should be recognized as a combined expense. • Requires expanded disclosures about the nature and terms of lease agreements. • Provides the option to adopt using either a modified cumulative-effect approach wherein the guidance is applied to all periods presented, or through a cumulative-effect adjustment beginning in the period of adoption. • Requires companies with land easements to assess whether the easement meets the definition of a lease before applying other accounting guidance.	• The Company adopted the new standard under the modified retrospective approach on January 1, 2019, which is applicable to both its leasing finance business as well as property and equipment leases in which Citizens is lessee. • Adoption resulted in a cumulative-effect adjustment of $12 million, net of taxes, to retained earnings related to leases in which Citizens is lessee. • Adoption resulted in the recognition of a right-of-use asset and corresponding lease liability of $734 million and $749 million, respectively in its Consolidated Balance Sheet for non-cancelable operating lease agreements. • Required lessor disclosures are included in Note 4 and required lessee disclosures are included in Note 8.
Implementation Costs Incurred in a Cloud Computing Arrangement Issued August 2018	• Requires implementation costs incurred in a cloud computing arrangement that is a service contract be deferred and recognized over the term of the arrangement if those costs would be capitalized in a software licensing arrangement. • Requires amortization expense be presented in the same income statement line item as the related hosting service arrangement expense. • Permits adoption prospectively for all implementation costs incurred after adoption or retrospectively through a cumulative-effect adjustment as of the beginning of the first period presented.	• The Company prospectively adopted the new standard on January 1, 2019. • Adoption did not have a material impact on the Company’s Consolidated Financial Statements.

		Citizens Financial Group, Inc. | 101

Accounting Pronouncements Pending Adoption

Pronouncement	Summary of Guidance	Effects on Financial Statements
Financial Instruments - Credit Losses Issued June 2016	• Required effective date: January 1, 2020. • Replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost (including securities HTM), which will reflect management’s estimate of credit losses over the full remaining expected life of the financial assets. • Amends existing impairment guidance for securities AFS to incorporate an allowance, which will allow for reversals of impairment losses in the event that the credit of an issuer improves. • Requires a cumulative-effect adjustment to retained earnings, net of taxes, as of the beginning of the reporting period of adoption. • Requires enhanced credit quality disclosures including disaggregation of credit quality indicators by vintage.	• The Company adopted the new standard on January 1, 2020, retrospectively for loans and leases and HTM securities and prospectively for AFS securities. • To estimate the ACL under CECL, Citizens uses models and other estimation techniques that are sensitive to changes in forecasted economic conditions. The Company applies qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be adequately reflected in quantitatively derived results, or other relevant factors to ensure the ACL reflects the Company’s best estimate of current expected credit losses. • The Company recognized an increase in the ACL upon adoption of approximately $450 million, based on a two-year reasonable and supportable forecast period, and a one-year reversion to long-term historical macroeconomic variables. The increase in ACL is primarily related to consumer loans, such as residential mortgage, unsecured and education, due to the requirement to estimate credit losses over the full remaining expected life of the asset. • Adoption of the new standard could produce higher volatility in the quarterly provision for credit losses than our current reserve process and could adversely impact the Company’s ongoing earnings. • The increase in ACL upon adoption reduced the Company’s CET1 capital ratio by 24 basis points on a fully-phased in basis. This capital impact will be phased in by 25% per year through January 1, 2023, which will impact 2020 by 6 basis points. • Based on the credit quality of our existing debt securities portfolio, the Company did not recognize an ACL for HTM and AFS debt securities upon adoption.

NOTE 2 - CASH AND DUE FROM BANKS

For the purposes of reporting cash flows, cash and cash equivalents have original maturities of three months or less and include cash and due from banks and interest-bearing cash and due from banks, primarily at the FRB.

Citizens maintains certain average reserve balances and compensating balances for check clearing and other services with the FRB. At December 31, 2019 and 2018, the balance of deposits at the FRB amounted to $2.1 billion and $3.0 billion, respectively. Average balances maintained with the FRB during the years ended December 31, 2019 and 2018 exceeded amounts required by law for the FRB’s requirements. All amounts, both required and excess reserves, held at the FRB currently earn interest at a fixed rate of 155 basis points. Citizens recorded interest income on FRB deposits of $28 million, $28 million, and $16 million for the years ended December 31, 2019, 2018, and 2017, respectively, in interest-bearing deposits in banks in the Consolidated Statements of Operations.

		Citizens Financial Group, Inc. | 102

NOTE 3 - SECURITIES

Investments include debt and equity securities and other investment securities. Citizens classifies debt securities as AFS, HTM, or trading based on management’s intent to hold to maturity at the time of purchase. Equity securities are recorded at fair value or at cost if there is not a readily determinable fair value.

Debt securities that will be held for indefinite periods of time and may be sold in response to changes in interest rates, changes in prepayment risk, or other factors considered in managing the Company’s asset/liability strategy are classified as AFS and reported at fair value, with unrealized gains and losses reported in OCI, net of taxes, as a separate component of stockholders’ equity. Gains and losses on the sales of securities are recognized in noninterest income and are computed using the specific identification method.

Debt securities for which the Company has the ability and intent to hold to maturity are classified as HTM and reported at amortized cost. Transfers of debt securities to the HTM classification are recognized at fair value at the date of transfer.

For debt securities classified as AFS or HTM, interest income is recorded on the accrual basis including the amortization of premiums and the accretion of discounts. Premiums and discounts on debt securities are amortized or accreted using the effective interest method over the estimated lives of the individual securities. Citizens uses actual prepayment experience and estimates of future prepayments to determine the constant effective yield necessary to apply the effective interest method of income recognition. Estimates of future prepayments are based on the underlying collateral characteristics of each security and are derived from market sources. Judgment is involved in making determinations about prepayment expectations and in changing those expectations in response to changes in interest rates and macroeconomic conditions. The amortization of premiums and discounts associated with mortgage-backed securities may be significantly impacted by changes in prepayment assumptions.

Securities classified as trading are bought and held principally for selling them in the near term and carried at fair value, with changes in fair value recognized in earnings. When applicable, realized and unrealized gains and losses on such assets are reported in noninterest income in the Consolidated Statements of Operations.

Equity securities are primarily composed of FHLB stock and FRB stock (which are carried at cost) and money market mutual fund investments held by the Company’s broker-dealers (which are carried at fair value, with changes in fair value recognized in noninterest income). Equity securities that are carried at cost are reviewed at least annually for impairment, with valuation adjustments recognized in noninterest income.

		Citizens Financial Group, Inc. | 103

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

	December 31, 2019													December 31, 2018
(in millions)	Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value				Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Treasury and other		$71			$—			$—			$71				$24			$—			$—			$24
State and political subdivisions	5			—			—			5				5			—			—			5
Mortgage-backed securities, at fair value:
Federal agencies and U.S. government sponsored entities	19,803			143			(71		)	19,875				20,211			28			(605		)	19,634
Other/non-agency	638			24			—			662				236			3			(7		)	232
Total mortgage-backed securities, at fair value	20,441			167			(71		)	20,537				20,447			31			(612		)	19,866
Total debt securities available for sale, at fair value		$20,517			$167			($71	)		$20,613				$20,476			$31			($612	)		$19,895
Federal agencies and U.S. government sponsored entities		$3,202			$45			($5	)		$3,242				$3,425			$—			($132	)		$3,293
Other/non-agency	—			—			—			—				740			8			—			748
Total mortgage-backed securities, at cost	3,202			45			(5		)	3,242				4,165			8			(132		)	4,041
Total debt securities held to maturity		$3,202			$45			($5	)		$3,242				$4,165			$8			($132	)		$4,041
Money market mutual fund investments		$47			$—			$—			$47				$181			$—			$—			$181
Total equity securities, at fair value		$47			$—			$—			$47				$181			$—			$—			$181
Federal Reserve Bank stock		$577			$—			$—			$577				$463			$—			$—			$463
Federal Home Loan Bank stock	222			—			—			222				364			—			—			364
Other equity securities	8			—			—			8				7			—			—			7
Total equity securities, at cost		$807			$—			$—			$807				$834			$—			$—			$834

		Citizens Financial Group, Inc. | 104

The following table presents the amortized cost and fair value of debt securities by contractual maturity as of December 31, 2019. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.

	Distribution of Maturities
(in millions)	1 Year or Less			1-5 Years			5-10 Years			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		$71			$215			$1,534			$21,899			$23,719
Fair value:
U.S. Treasury and other		$71			$—			$—			$—			$71
State and political subdivisions	—			—			—			5			5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—			217			1,553			18,105			19,875
Other/non-agency	—			—			—			662			662
Total debt securities available for sale	71			217			1,553			18,772			20,613
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—			—			—			3,242			3,242
Total debt securities held to maturity	—			—			—			3,242			3,242
Total fair value of debt securities		$71			$217			$1,553			$22,014			$23,855

Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $642 million, $672 million and $625 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The following table presents realized gains and losses on securities:

	Year Ended December 31,
(in millions)	2019				2018				2017
Gains on sale of debt securities (1)		$41				$19				$11
Losses on sale of debt securities	(16		)		—				—
Debt securities gains, net		$25				$19				$11
Equity securities gains		$—				$—				$1

(1) For the year ended December 31, 2019, $6 million of gains on sale of debt securities were recognized in mortgage banking fees in the Consolidated Statements of Operations, as they related to AFS securities held as economic hedges of the value of the MSR portfolio recognized using the amortization method.

		Citizens Financial Group, Inc. | 105

The following table presents the amortized cost and fair value of debt securities pledged:

	December 31, 2019							December 31, 2018
(in millions)	Amortized Cost			Fair Value				Amortized Cost			Fair Value
Pledged against repurchase agreements		$265			$266				$344			$338
Pledged against FHLB borrowed funds	638			662				745			752
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law	3,670			3,672				3,592			3,460

Citizens regularly enters into security repurchase agreements with unrelated counterparties, which involve the transfer of a security from one party to another, and a subsequent transfer of substantially the same security back to the original party. The Company’s repurchase agreements are typically short-term in nature and are accounted for as secured borrowed funds on the Company’s Consolidated Balance Sheets. Citizens recognized no offsetting of short-term receivables or payables as of December 31, 2019 or 2018. Citizens offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 13.

Securitizations of mortgage loans retained in the investment portfolio for the years ended December 31, 2019, 2018 and 2017, were $150 million, $142 million and $134 million, respectively. These securitizations include a substantive guarantee by a third party. In 2019, 2018 and 2017 the guarantors were FNMA, FHLMC, and GNMA. The debt securities received from the guarantors are classified as AFS.

Impairment

Citizens reviews its securities for other-than-temporary impairment on a quarterly basis or more frequently if a potential loss triggering event occurs. The initial indicator of other-than-temporary impairment for both debt and equity securities is a decline in fair value below its recorded investment amount, as well as the severity and duration of the decline. For a security that has declined in fair value below the cost basis, the Company recognizes other-than-temporary impairment if management has the intent to sell the security, it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the entire cost basis of the security.

Estimating the recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of cash flows expected to be collected, discounted at the security’s original effective yield, exceeds the amortized cost, no credit impairment has occurred. If this amount is less than the amortized cost, other-than-temporary impairment is considered to have occurred. In addition to these cash flow projections, several other characteristics of each debt security are reviewed when determining whether a credit loss exists and the period over which the debt security is expected to recover. These characteristics include: (i) the type of investment, (ii) various market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), (iii) the length and severity of impairment, and (iv) the public credit rating of the instrument.

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

If the Company intends to sell an impaired security, or if it is more likely than not Citizens will be required to sell the security before recovery, the impairment loss recognized in current period earnings equals the difference between the amortized cost basis and the fair value of the security. If the Company does not intend to sell the impaired security, and it is not likely that the Company will be required to sell the impaired security, the other-than-temporary impairment write-down is separated into an amount representing the credit loss, which is recognized in current period earnings and the amount related to all other factors, which is recognized in OCI.

		Citizens Financial Group, Inc. | 106

The following table presents the net securities impairment losses recognized in earnings:

	Year Ended December 31,
(in millions)	2019				2018				2017
Other-than-temporary impairment:
Total other-than-temporary impairment losses		($2	)			($7	)			($7	)
Portions of loss recognized in other comprehensive income (before taxes)	—				4				—
Net securities impairment losses recognized in earnings on debt securities		($2	)			($3	)			($7	)

The following tables present mortgage-backed debt securities with fair values below their respective carrying values, separated by the duration the securities have been in a continuous unrealized loss position:

	December 31, 2019
	Less than 12 Months									12 Months or Longer									Total
(dollars in millions)	Number of Issues		Fair Value			Gross Unrealized Losses				Number of Issues		Fair Value			Gross Unrealized Losses				Number of Issues		Fair Value			Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities	106			$5,135			($24	)		120			$3,748			($52	)		226			$8,883			($76	)
Other/non-agency	—		—			—				—		—			—				—		—			—
Total	106			$5,135			($24	)		120			$3,748			($52	)		226			$8,883			($76	)

	December 31, 2018
	Less than 12 Months									12 Months or Longer									Total
(dollars in millions)	Number of Issues		Fair Value			Gross Unrealized Losses				Number of Issues		Fair Value			Gross Unrealized Losses				Number of Issues		Fair Value			Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities	166			$4,881			($89	)		429			$15,124			($648	)		595			$20,005			($737	)
Other/non-agency	10		139			(1		)		11		72			(6		)		21		211			(7		)
Total	176			$5,020			($90	)		440			$15,196			($654	)		616			$20,216			($744	)

NOTE 4 - LOANS AND LEASES

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

Interest income on loans is determined using the effective interest method. This method calculates periodic interest income at a constant effective yield on the net investment in the loan, to provide a constant rate of return over the term. Loans accounted for using the fair value option are measured at fair value with corresponding changes recognized in noninterest income.

Loan commitment fees for loans that are likely to be drawn down, and other credit related fees, are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate over the loan term. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognized over the commitment period on a straight-line basis.

Loans and leases are disclosed in portfolio segments and classes. The Company’s loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial, commercial real estate, leases, residential mortgages, home equity loans, home equity lines of credit, home equity loans serviced by others, home equity lines of credit serviced by others, automobile, education, credit cards and other retail.

		Citizens Financial Group, Inc. | 107

The following table presents the composition of loans and leases:

	December 31,
(in millions)	2019				2018
Commercial(1)		$41,479				$40,857
Commercial real estate	13,522				13,023
Leases	2,537				2,903
Total commercial loans and leases	57,538				56,783
Residential mortgages(2)	19,083				18,978
Home equity loans	812				1,073
Home equity lines of credit	11,979				12,710
Home equity loans serviced by others	289				399
Home equity lines of credit serviced by others	74				104
Automobile	12,120				12,106
Education	10,347				8,900
Credit cards	2,198				1,991
Other retail	4,648				3,616
Total retail loans	61,550				59,877
Total loans and leases (3)		$119,088				$116,660

(1) SBA loans the Company services for others of $33 million are not included above. These loans represent the government guaranteed portion of SBA loans sold to outside investors as of December 31, 2019. There were no SBA loans serviced for others as of December 31, 2018.

(2) Mortgage loans the Company services for others of $77.5 billion and $69.6 billion at December 31, 2019 and 2018, respectively, are not included above.

(3) LHFS totaling $3.3 billion and $1.3 billion at December 31, 2019 and 2018, respectively, are not included above.

The following table presents the composition of LHFS.

	December 31, 2019										December 31, 2018
(in millions)	Residential Mortgages			Commercial			Total				Residential Mortgages			Commercial			Total
Loans held for sale at fair value(1)		$1,778			$168			$1,946				$967			$252			$1,219
Other loans held for sale(2)	1,101			283			1,384				—			101			101

(1) Residential mortgage LHFS at fair value are originated for sale. Commercial LHFS at fair value consist of loans managed by the Company’s commercial secondary loan desk.

(2) Residential mortgages other LHFS of $1.1 billion as of December 31, 2019 comprised of two loan portfolio pools of $524 million and $575 million representing loan sales expected to settle in first quarter 2020. Commercial other LHFS generally consist of commercial loans associated with the Company’s syndication business.

During the year ended December 31, 2019 the Company purchased $1.1 billion of education loans and $530 million of other loans. During the year ended December 31, 2018, the Company purchased $457 million of education loans.

During the year ended December 31, 2019, the Company sold $454 million of commercial loans and $628 million of retail loans, including $22 million of TDR sales. During the year ended December 31, 2018, the Company sold $553 million of commercial loans.

Loans pledged as collateral for FHLB borrowed funds, primarily residential mortgages and home equity loans, totaled $25.3 billion and $25.6 billion at December 31, 2019 and 2018, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, were primarily comprised of auto, commercial and commercial real estate loans, and totaled $17.4 billion and $16.8 billion at December 31, 2019 and 2018, respectively.

Citizens is engaged in the leasing of equipment for commercial use, primarily focused on middle market and mid-corporate clients for large capital equipment acquisitions including aircraft and railcars, among other equipment. The Company determines if an arrangement is a lease and the related lease classification at inception. Lease terms predominantly range from three years to seven years and may include options to terminate the lease early or purchase the leased property prior to the end of the lease term. The Company does not have lease agreements which contain lease and nonlease components.

A lessee is evaluated from a credit perspective using the same underwriting standards and procedures as for a loan borrower. A lessee is expected to make rental payments based on its cash flows and the viability of its

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operations. Leases are usually not evaluated as collateral-based transactions, and therefore the lessee’s overall financial strength is the most important credit evaluation factor.

The components of the net investment in direct finance and sales-type leases, before ALLL, are presented below:

(in millions)	December 31, 2019
Total future minimum lease rentals		$1,739
Estimated residual value of leased equipment (non-guaranteed)	1,013
Initial direct costs	10
Unearned income	(225		)
Total leases		$2,537

Interest income on direct financing and sales-type leases for the year ended December 31, 2019 was $77 million and is reported within interest and fees on loans and leases in the Consolidated Statements of Operations.

A maturity analysis of direct financing and sales-type lease receivables at December 31, 2019 is presented below:

(in millions)
2020		$496
2021	385
2022	288
2023	220
2024	145
Thereafter	205
Total undiscounted future minimum lease rentals		$1,739

NOTE 5 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK

Allowance for Credit Losses

Management’s estimate of probable losses in the Company’s loan and lease portfolios is recorded in the ALLL and the reserve for unfunded lending commitments, collectively the ACL. On a quarterly basis, Citizens evaluates the adequacy of the ALLL by performing reviews of certain individual loans and leases, analyzing changes in the composition, size and delinquency of the portfolio, reviewing previous loss experience and considering current and anticipated economic factors. The ALLL is established in accordance with the Company’s credit reserve policies, as approved by the Audit Committee of the Board of Directors. The Chief Financial Officer and Chief Risk Officer review the adequacy of the ALLL each quarter, together with risk management. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. The ALLL is maintained at a level that management considers reflective of probable losses, and is established through charges to earnings in the form of a provision for credit losses. The Company’s methodology for determining the qualitative component includes a statistical analysis of prior charge-off rates and a qualitative assessment of factors affecting the determination of incurred losses in the loan and lease portfolio. Such factors include trends in economic conditions, loan growth, back testing results, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons. Amounts determined to be uncollectible are deducted from the ALLL and subsequent recoveries, if any, are added to the ALLL. While management uses available information to estimate loan and lease losses, future additions to the ALLL may be necessary based on changes in economic conditions. 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 leases ALLL and reserve for unfunded lending commitments is primarily based on risk rating models that assess probability of default, loss given default and exposure at default on an individual loan basis. The models are primarily driven by individual customer financial characteristics and are validated against historical experience. Additionally, qualitative factors 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.

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For non-impaired retail loans, the ALLL is based upon an incurred loss model utilizing the probability of default, loss given default and exposure at default on an individual loan basis. When developing these factors, the Company may consider the loan product and collateral type, delinquency status, LTV ratio, lien position, borrower’s credit, age of the loan, geographic location and incurred loss period. Certain retail portfolios, including education, unsecured personal loans, SBO home equity loans and commercial credit card receivables utilize roll rate or vintage models to estimate the ALLL.

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), the Company conducts further analysis to determine the probable amount of loss and establishes a specific allowance for the loan, if appropriate. Citizens estimates the impairment amount by 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. For collateral-dependent impaired commercial and commercial real estate loans, the excess of the Company’s recorded investment in the loan over the fair value of the collateral, less cost to sell, is charged off to the ALLL.

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

In addition to the ALLL, the Company also estimates probable credit losses associated with off-balance sheet financial instruments such as standby letters of credit, financial guarantees and binding unfunded loan commitments. Off-balance sheet financial instruments are subject to individual reviews and are analyzed and segregated by risk according to the Company’s internal risk rating scale. These risk classifications, in conjunction with historical loss experience, economic conditions and performance trends within specific portfolio segments, result in the estimate of the reserve for unfunded lending commitments.

The ALLL and the reserve for unfunded lending commitments are reported on the Consolidated Balance Sheets in the allowance for loan and lease losses and in other liabilities, respectively. Provision for credit losses related to the loans and leases portfolio and the unfunded lending commitments are reported in the Consolidated Statements of Operations as provision for credit losses.

Loan Charge-Offs

Commercial loans are charged off when it is highly certain that a loss has been realized, including situations where a loan is determined to be both impaired and collateral-dependent. The determination of whether to recognize a charge-off involves many factors, including the prioritization of the Company’s claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity or the loan collateral. A loan is considered to be collateral-dependent when repayment of the loan is expected to be provided solely by the underlying collateral, rather than by cash flows from the borrower’s operations, income or other resources.

Retail loans are generally fully charged-off or written down to the net realizable value of the underlying collateral, with an offset to the ALLL, upon reaching specified stages of delinquency in accordance with standards established by the FFIEC. Residential real estate loans, credit card loans and unsecured open end loans are generally charged off in the month in which the account becomes 180 days past due. Auto loans, education loans and unsecured closed end loans are generally charged off in the month in which the account becomes 120 days past due. Certain retail loans will be charged off or charged down to their net realizable value earlier than the FFIEC charge-off standards in the following circumstances:

•	Loans modified in a TDR that are determined to be collateral-dependent.

•	Loans to borrowers who have experienced an event (e.g., bankruptcy) that suggests a loss is either known or highly certain.

◦	Residential real estate and auto loans are charged down to the net realizable value within 60 days of receiving notification of the bankruptcy filing, or when the loan becomes 60 days past due if repayment is likely to occur.

◦	Credit card loans are fully charged off within 60 days of receiving notification of the bankruptcy filing or other event.

◦	Education loans are generally charged off when the loan becomes 60 days past due after receiving notification of a bankruptcy.

		Citizens Financial Group, Inc. | 110

•	Auto loans are written down to net realizable value upon repossession of the collateral.

The following tables present a summary of changes in the ACL:

	Year Ended December 31, 2019
(in millions)	Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$690			$552			$1,242
Charge-offs	(140		)	(475		)	(615		)
Recoveries	24			161			185
Net charge-offs	(116		)	(314		)	(430		)
Provision charged to income	100			340			440
Allowance for loan and lease losses, end of period	674			578			1,252
Reserve for unfunded lending commitments, beginning of period	91			—			91
Provision for unfunded lending commitments	(47		)	—			(47		)
Reserve for unfunded lending commitments, end of period	44			—			44
Total allowance for credit losses, end of period		$718			$578			$1,296

	Year Ended December 31, 2018
(in millions)	Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$685			$551			$1,236
Charge-offs	(52		)	(442		)	(494		)
Recoveries	19			158			177
Net charge-offs	(33		)	(284		)	(317		)
Provision charged to income	38			285			323
Allowance for loan and lease losses, end of period	690			552			1,242
Reserve for unfunded lending commitments, beginning of period	88			—			88
Provision for unfunded lending commitments	3			—			3
Reserve for unfunded lending commitments, end of period	91			—			91
Total allowance for credit losses, end of period		$781			$552			$1,333

	Year Ended December 31, 2017
(in millions)	Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$663			$573			$1,236
Charge-offs	(75		)	(437		)	(512		)
Recoveries	40			167			207
Net charge-offs	(35		)	(270		)	(305		)
Provision charged to income(1)	57			248			305
Allowance for loan and lease losses, end of period	685			551			1,236
Reserve for unfunded lending commitments, beginning of period	72			—			72
Provision for unfunded lending commitments	16			—			16
Reserve for unfunded lending commitments, end of period	88			—			88
Total allowance for credit losses, end of period		$773			$551			$1,324

(1) Includes an increase of approximately $50 million to commercial and corresponding decrease to retail for the impact of the enhancement to the assessment of qualitative risks, factors and events that may not be measured in the modeled results.

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The following table presents the recorded investment in loans and leases based on the Company’s evaluation methodology:

	December 31, 2019										December 31, 2018
(in millions)	Commercial			Retail			Total				Commercial			Retail			Total
Individually evaluated		$399			$667			$1,066				$391			$723			$1,114
Formula-based evaluation	57,139			60,883			118,022				56,392			59,154			115,546
Total loans and leases		$57,538			$61,550			$119,088				$56,783			$59,877			$116,660

The following table presents a summary of the ACL by evaluation methodology:

	December 31, 2019										December 31, 2018
(in millions)	Commercial			Retail			Total				Commercial			Retail			Total
Individually evaluated		$85			$25			$110				$38			$26			$64
Formula-based evaluation	633			553			1,186				743			526			1,269
Allowance for credit losses		$718			$578			$1,296				$781			$552			$1,333

For commercial loans and leases, Citizens utilizes regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that the Company believes will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness, or potential weakness, that indicate an increased probability of future loss. “Criticized” loans are grouped into three categories, “special mention,” “substandard” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of the Company’s credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection of the debt. Doubtful loans have the same weaknesses as substandard, with the added characteristics that the possibility of loss is high and collection of the full amount of the loan is improbable. For retail loans, the Company primarily uses the loan’s payment and delinquency status to monitor credit quality. The further a loan is past due, the greater the likelihood of future credit loss. These credit quality indicators for both commercial and retail loans are continually updated and monitored.

The following tables present the recorded investment in commercial loans and leases based on regulatory classification ratings:

	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

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The following tables present the recorded investment in classes of retail loans, categorized by delinquency status:

	December 31, 2019
				Days Past Due
(in millions)	Current			1-29			30-59			60-89			90 or More			Total
Residential mortgages		$18,818			$129			$35			$17			$84			$19,083
Home equity loans	713			64			10			4			21			812
Home equity lines of credit	11,383			346			72			32			146			11,979
Home equity loans serviced by others	244			23			7			3			12			289
Home equity lines of credit serviced by others	50			11			2			1			10			74
Automobile	10,787			1,001			227			81			24			12,120
Education	10,088			202			30			15			12			10,347
Credit cards	2,076			74			15			11			22			2,198
Other retail	4,492			87			30			20			19			4,648
Total retail loans		$58,651			$1,937			$428			$184			$350			$61,550

	December 31, 2018
				Days Past Due
(in millions)	Current			1-29			30-59			60-89			90 or More			Total
Residential mortgages		$18,664			$131			$37			$13			$133			$18,978
Home equity loans	945			75			12			3			38			1,073
Home equity lines of credit	12,042			386			65			22			195			12,710
Home equity loans serviced by others	355			21			7			3			13			399
Home equity lines of credit serviced by others	79			15			2			1			7			104
Automobile	10,729			1,039			207			59			72			12,106
Education	8,694			159			23			13			11			8,900
Credit cards	1,894			53			14			10			20			1,991
Other retail	3,481			76			26			18			15			3,616
Total retail loans		$56,883			$1,955			$393			$142			$504			$59,877

Nonperforming Assets

Nonperforming loans and leases are those on which accrual of interest has been suspended. Loans (other than certain retail loans insured by U.S. government agencies) are placed on nonaccrual status and considered nonperforming when full payment of principal and interest is in doubt, unless the loan is both well secured and in the process of collection.

When the Company places a loan on nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and amortization of any net deferred fees is suspended. Interest collections on nonaccruing loans and leases for which the ultimate collectability of principal is uncertain are generally applied to first reduce the carrying value of the asset. Otherwise, interest income may be recognized to the extent of the cash received. A loan or lease may be returned to accrual status if (i) principal and interest payments have been brought current, and the Company expects repayment of the remaining contractual principal and interest, (ii) the loan or lease has otherwise become well-secured and in the process of collection, or (iii) the borrower has been making regularly scheduled payments in full for the prior six months and the Company is reasonably assured that the loan or lease will be brought fully current within a reasonable period.

Commercial loans, commercial real estate loans, and leases are generally placed on nonaccrual status when contractually past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Some of these loans and leases may remain on accrual status when contractually past due 90 days or more if management considers the loan collectible.

Residential mortgages are generally placed on nonaccrual status when past due 120 days, or sooner if determined to be collateral-dependent, unless repayment of the loan is guaranteed by the Federal Housing

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Administration. Credit card balances are placed on nonaccrual status when past due 90 days or more and are restored to accruing status if they subsequently become less than 90 days past due. All other retail loans are generally placed on nonaccrual status when past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Loans less than 90 days past due may be placed on nonaccrual status upon the death of the borrower, fraud or bankruptcy.

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

	Nonperforming (1)(2)								Accruing and 90 days or more past due
(in millions)	December 31, 2019				December 31, 2018				December 31, 2019				December 31, 2018
Commercial		$240				$194				$2				$1
Commercial real estate	2				7				—				—
Leases	3				—				—				—
Total commercial loans and leases	245				201				2				1
Residential mortgages	93				105				13				15
Home equity loans	33				50				—				—
Home equity lines of credit	187				231				—				—
Home equity loans serviced by others	14				17				—				—
Home equity lines of credit serviced by others	12				15				—				—
Automobile	67				81				—				—
Education	18				38				2				2
Credit card	22				20				—				—
Other retail	12				8				8				7
Total retail loans	458				565				23				24
Total		$703				$766				$25				$25

(1) Nonperforming balances exclude first lien residential mortgage loans that are 100% guaranteed by the Federal Housing Administration. These loans are included in the Company’s Consolidated Balance Sheets.

(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 the Company has 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. These loans are included in the Company’s Consolidated Balance Sheets.

Other nonperforming assets primarily consist of other real estate owned and are presented in other assets on the Consolidated Balance Sheets. Other real estate owned, net of valuation allowance, was $45 million and $34 million as of December 31, 2019 and 2018, respectively.

The following table presents a summary of nonperforming loan and lease key performance indicators:

	December 31,
	2019			2018
Nonperforming commercial loans and leases as a percentage of total loans and leases	0.21	%		0.17	%
Nonperforming retail loans as a percentage of total loans and leases	0.38			0.49
Total nonperforming loans and leases as a percentage of total loans and leases (1)	0.59	%		0.66	%
Nonperforming commercial assets as a percentage of total assets	0.15	%		0.13	%
Nonperforming retail assets as a percentage of total assets	0.30			0.37
Total nonperforming assets as a percentage of total assets	0.45	%		0.50	%

(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 the Company has 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. These loans are included in the Company’s Consolidated Balance Sheets.

The recorded investment in mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in-process was $152 million and $172 million as of December 31, 2019 and 2018, respectively.

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The following table presents the aging of both accruing and nonaccruing loan and lease past due amounts:

	December 31, 2019													December 31, 2018
	Days Past Due													Days Past Due
(in millions)	30-59			60-89			90 or More			Total				30-59			60-89			90 or More			Total
Commercial		$45			$27			$67			$139				$85			$3			$78			$166
Commercial real estate	1			1			—			2				8			32			5			45
Leases	37			—			2			39				7			—			—			7
Total commercial loans and leases	83			28			69			180				100			35			83			218
Residential mortgages	35			17			84			136				37			13			133			183
Home equity loans	10			4			21			35				12			3			38			53
Home equity lines of credit	72			32			146			250				65			22			195			282
Home equity loans serviced by others	7			3			12			22				7			3			13			23
Home equity lines of credit serviced by others	2			1			10			13				2			1			7			10
Automobile	227			81			24			332				207			59			72			338
Education	30			15			12			57				23			13			11			47
Credit cards	15			11			22			48				14			10			20			44
Other retail	30			20			19			69				26			18			15			59
Total retail loans	428			184			350			962				393			142			504			1,039
Total		$511			$212			$419			$1,142				$493			$177			$587			$1,257

Impaired Loans

A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all of the contractual interest and principal payments as scheduled in the loan agreement. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. Impaired loans include nonaccruing larger balance (greater than $3 million carrying value), non-homogeneous commercial and commercial real estate loans, and restructured loans that are deemed TDRs.

When a loan is identified as impaired, the impairment is measured on an individual loan level as the difference between the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount) and the present value of expected future cash flows, discounted at the loan’s effective interest rate. When collateral is the sole source of repayment for the impaired loan, rather than the borrower’s income or other sources of repayment, the Company charges down the loan to its net realizable value.

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The following tables present a summary of impaired loans by class:

	December 31, 2019
(in millions)	Impaired Loans With a Related Allowance			Allowance on Impaired Loans			Impaired Loans Without a Related Allowance			Unpaid Contractual Balance			Total Recorded Investment in Impaired Loans
Commercial		$243			$85			$137			$458			$380
Commercial real estate	—			—			19			19			19
Total commercial loans	243			85			156			477			399
Residential mortgages	29			2			125			196			154
Home equity loans	22			1			65			121			87
Home equity lines of credit	27			2			173			242			200
Home equity loans serviced by others	15			1			16			41			31
Home equity lines of credit serviced by others	1			—			5			9			6
Automobile	1			—			20			30			21
Education	112			9			22			135			134
Credit cards	27			9			1			29			28
Other retail	3			1			3			8			6
Total retail loans	237			25			430			811			667
Total		$480			$110			$586			$1,288			$1,066

	December 31, 2018
(in millions)	Impaired Loans With a Related Allowance			Allowance on Impaired Loans			Impaired Loans Without a Related Allowance			Unpaid Contractual Balance			Total Recorded Investment in Impaired Loans
Commercial		$186			$31			$167			$450			$353
Commercial real estate	32			7			6			38			38
Total commercial loans	218			38			173			488			391
Residential mortgages	28			2			127			201			155
Home equity loans	34			3			76			148			110
Home equity lines of credit	21			1			181			244			202
Home equity loans serviced by others	22			1			19			54			41
Home equity lines of credit serviced by others	1			—			7			11			8
Automobile	1			—			22			31			23
Education	130			11			23			153			153
Credit cards	24			7			1			25			25
Other retail	4			1			2			8			6
Total retail loans	265			26			458			875			723
Total		$483			$64			$631			$1,363			$1,114

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The following table presents additional information on impaired loans:

	Year Ended December 31,
	2019							2018							2017
(in millions)	Interest Income Recognized			Average Recorded Investment				Interest Income Recognized			Average Recorded Investment				Interest Income Recognized			Average Recorded Investment
Commercial		$11			$311				$9			$312				$4			$380
Commercial real estate	1			39				1			32				—			37
Total commercial loans	12			350				10			344				4			417
Residential mortgages	5			126				5			146				4			136
Home equity loans	5			84				6			107				6			121
Home equity lines of credit	7			172				7			181				6			176
Home equity loans serviced by others	2			30				3			42				3			49
Home equity lines of credit serviced by others	—			6				—			9				—			9
Automobile	1			17				1			20				1			18
Education	8			125				8			154				9			173
Credit cards	2			21				1			21				2			22
Other retail	—			5				—			7				—			9
Total retail loans	30			586				31			687				31			713
Total		$42			$936				$41			$1,031				$35			$1,130

Troubled Debt Restructurings

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

Retail and commercial loans whose contractual terms have been modified in a TDR and are current at the time of restructuring may remain on accrual status if there is demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Retail loans that were discharged in bankruptcy and not reaffirmed by the borrower are deemed to be collateral-dependent TDRs and are generally charged off to the fair value of the collateral, less cost to sell, and less amounts recoverable under a government guarantee (if any). Cash receipts on nonaccruing impaired loans, including nonaccruing loans involved in TDRs, are generally applied to reduce the unpaid principal balance. Certain TDRs that are current in payment status are classified as nonaccrual in accordance with regulatory guidance. Income on these loans may be recognized on a cash basis if management believes that the remaining book value of the loan is realizable. Nonaccruing TDRs that meet the guidelines above for accrual status can be returned to accruing if supported by a well-documented evaluation of the borrowers’ financial condition, and if they have been current for at least six months.

Because TDRs are impaired loans, Citizens measures impairment by comparing the present value of expected future cash flows, or when appropriate, the fair value of collateral less costs to sell, to the loan’s recorded investment. Any excess of recorded investment over the present value of expected future cash flows or collateral value is included in the ALLL. Any portion of the loan’s recorded investment the Company does not expect to collect as a result of the modification is charged off at the time of modification. For retail TDR accounts where the expected

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value of cash flows is utilized, any recorded investment in excess of the present value of expected cash flows is recognized by increasing the ALLL. For retail TDR accounts assessed based on the fair value of collateral, any portion of the loan’s recorded investment in excess of the collateral value less costs to sell is charged off at the time of modification or at the time of subsequent and regularly recurring valuations.

The following table summarizes TDRs by class and total unfunded commitments:

	December 31,
(in millions)	2019				2018
Commercial		$297				$304
Retail	667				723
Unfunded commitments related to TDRs	42				30

The following tables summarize how loans were modified during the years ended December 31, 2019, 2018 and 2017. The reported balances represent the post-modification outstanding recorded investment and can include loans that became TDRs during the period and were paid off in full, charged off, or sold prior to period end. Pre-modification balances for modified loans approximate the post-modification balances shown.

	December 31, 2019
	Primary Modification Types
	Interest Rate Reduction**(1)**						Maturity Extension**(2)**						Other**(3)**
(dollars in millions)	Number of Contracts		Recorded Investment				Number of Contracts		Recorded Investment				Number of Contracts		Recorded Investment
Commercial	3			$—			26			$5			56			$210
Commercial real estate	—		—				1		—				—		—
Total commercial loans	3		—				27		5				56		210
Residential mortgages	60		12				62		10				120		17
Home equity loans	31		2				—		—				82		4
Home equity lines of credit	163		18				72		11				350		22
Home equity loans serviced by others	2		—				—		—				14		—
Home equity lines of credit serviced by others	—		—				—		—				8		—
Automobile	160		3				21		—				1,250		17
Education	—		—				—		—				272		7
Credit cards	3,259		18				—		—				304		1
Other retail	—		—				—		—				176		1
Total retail loans	3,675		53				155		21				2,576		69
Total	3,678			$53			182			$26			2,632			$279

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	December 31, 2018
	Primary Modification Types
	Interest Rate Reduction**(1)**						Maturity Extension**(2)**						Other**(3)**
(dollars in millions)	Number of Contracts		Recorded Investment				Number of Contracts		Recorded Investment				Number of Contracts		Recorded Investment
Commercial	7			$1			49			$22			53			$200
Commercial real estate	—		—				3		31				2		31
Total commercial loans	7		1				52		53				55		231
Residential mortgages	35		4				61		8				142		17
Home equity loans	43		4				1		—				134		5
Home equity lines of credit	76		7				178		26				413		29
Home equity loans serviced by others	4		—				—		—				23		1
Home equity lines of credit serviced by others	5		—				1		—				14		1
Automobile	158		3				46		1				1,189		17
Education	—		—				—		—				355		7
Credit cards	2,312		13				—		—				—		—
Other retail	1		—				—		—				9		—
Total retail loans	2,634		31				287		35				2,279		77
Total	2,641			$32			339			$88			2,334			$308

	December 31, 2017
	Primary Modification Types
	Interest Rate Reduction**(1)**						Maturity Extension**(2)**						Other**(3)**
(dollars in millions)	Number of Contracts		Recorded Investment				Number of Contracts		Recorded Investment				Number of Contracts		Recorded Investment
Commercial	7			$1			45			$22			15			$71
Commercial real estate	—		—				1		—				1		—
Total commercial loans	7		1				46		22				16		71
Residential mortgages	71		10				73		13				171		19
Home equity loans	82		6				1		—				232		13
Home equity lines of credit	50		3				235		30				395		27
Home equity loans serviced by others	15		1				—		—				52		2
Home equity lines of credit serviced by others	5		—				2		—				26		2
Automobile	130		2				29		1				1,336		20
Education	—		—				—		—				329		7
Credit cards	2,363		13				—		—				—		—
Other retail	1		—				—		—				5		—
Total retail loans	2,717		35				340		44				2,546		90
Total	2,724			$36			386			$66			2,562			$161

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

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

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

The net change to ALLL resulting from modifications of loans for the years ended December 31, 2019, 2018 and 2017 was $9 million, $3 million and $1 million, respectively. Charge-offs may also be recorded on TDRs. Citizens recorded charge-offs resulting from the modification of loans of $7 million for the year ended December 31, 2019 and $5 million for the years ended December 31, 2018 and 2017.

A payment default refers to a loan that becomes 90 days or more past due under the modified terms. Loan data includes loans meeting the criteria that were paid off in full, charged off, or sold prior to December 31, 2019, 2018 and 2017. For commercial loans, recorded investment in TDRs that defaulted within 12 months of their modification date for the years ended December 31, 2019, 2018 and 2017 were $1 million, $63 million and $9 million, respectively. For retail loans, there were $37 million, $40 million and $41 million of loans which defaulted within 12 months of their restructuring date for the years ended December 31, 2019, 2018 and 2017, respectively.

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Concentrations of Credit Risk

Most of the Company’s lending activity is with customers located in the New England, Mid-Atlantic and Midwest regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of December 31, 2019 and 2018, Citizens had a significant amount of loans collateralized by residential and commercial real estate. There were no significant concentration risks within the commercial loan or retail loan portfolios. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which may not perform according to contractual agreements. The Company’s policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.

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

	December 31, 2019
(in millions)	Residential Mortgages			Home Equity Loans and Lines of Credit			Home Equity Products Serviced by Others			Credit Cards			Total
High loan-to-value		$402			$61			$90			$—			$553
Interest only/negative amortization	2,043			—			—			—			2,043
Low introductory rate	—			—			—			235			235
Multiple characteristics and other	—			—			—			—			—
Total		$2,445			$61			$90			$235			$2,831

	December 31, 2018
(in millions)	Residential Mortgages			Home Equity Loans and Lines of Credit			Home Equity Products Serviced by Others			Credit Cards			Education			Total
High loan-to-value		$318			$87			$148			$—			$—			$553
Interest only/negative amortization	1,794			—			—			—			1			1,795
Low introductory rate	—			—			—			217			—			217
Multiple characteristics and other	1			—			—			—			—			1
Total		$2,113			$87			$148			$217			$1			$2,566

NOTE 6 - PREMISES, EQUIPMENT AND SOFTWARE

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization have been computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the life of the lease (including renewal options if exercise of those options is reasonably assured) or their estimated useful life, whichever is shorter.

Additions to premises and equipment are recorded at cost. The cost of major additions, improvements and betterments is capitalized. Normal repairs and maintenance and other costs that do not improve the property, extend the useful life or otherwise do not meet capitalization criteria are charged to expense as incurred. Citizens evaluates premises and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

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A summary of the carrying value of premises and equipment is presented below:

			December 31,
(dollars in millions)	Useful Lives (years)		2019				2018
Land and land improvements	10 - 75			$102				$112
Buildings and leasehold improvements	5 - 60		848				852
Furniture, fixtures and equipment	5 - 20		535				1,019
Construction in progress			368				292
Total premises and equipment, gross			1,853				2,275
Accumulated depreciation			(1,092		)		(1,484		)
Total premises and equipment, net				$761				$791

Depreciation charged to noninterest expense totaled $116 million, $117 million, and $124 million for the years ended December 31, 2019, 2018, and 2017, respectively, and is presented in the Consolidated Statements of Operations in both occupancy and equipment expense.

Software

Costs related to computer software developed or obtained for internal use are capitalized if the projects improve functionality and provide long-term future operational benefits. Capitalized costs are amortized using the straight-line method over the asset’s expected useful life, based upon the basic pattern of consumption and economic benefits provided by the asset. Citizens begins to amortize the software when the asset (or identifiable component of the asset) is substantially complete and ready for its intended use. All other costs incurred in connection with an internal-use software project are expensed as incurred. Capitalized software is included in other assets on the Consolidated Balance Sheets.

Citizens had capitalized software assets of $2.0 billion and $1.8 billion and related accumulated amortization of $1.1 billion and $948 million as of December 31, 2019 and 2018, respectively. Amortization expense was $194 million, $189 million, and $180 million for the years ended December 31, 2019, 2018, and 2017, respectively.

The estimated future amortization expense for capitalized software assets is presented below:

Year	(in millions)
2020		$175
2021	136
2022	102
2023	73
2024	46
Thereafter	62
Total (1)		$594

(1) Excluded from this balance is $296 million of in-process software at December 31, 2019.

NOTE 7 - MORTGAGE BANKING

The Company sells residential mortgages to GSEs and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. The Company is obligated to subsequently repurchase a loan if the purchaser discovers a representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud, that should have been identified in a loan file review.

Mortgage loans held for sale are accounted for at fair value on an individual loan basis. Changes in the fair value, and realized gains and losses on the sales of mortgage loans, are reported in mortgage banking income.

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The following table summarizes activity related to the Company’s residential mortgage loan sales and the Company's mortgage banking activity:

	Year Ended December 31,
(in millions)	2019				2018				2017
Residential mortgage loan sold with servicing retained		$20,430				$8,149				$3,161
Gain on sales (1)	251				89				35
Contractually specified servicing, late and other ancillary fees (1)	208				118				53

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

The Company recognizes the right to service residential mortgage loans for others, or MSRs, as separate assets, which are presented in other assets on the Consolidated Balance Sheets, when purchased, or when servicing is contractually separated from the underlying mortgage loans by sale with servicing rights retained. MSRs are initially recorded at fair value. Subsequent to the initial recognition, MSRs are measured using either the fair value method or the amortization method. MSRs accounted for under the amortization method are subsequently accounted for at lower of cost or fair value, net of accumulated amortization, which is recorded in proportion to, and over the period of, net servicing income. The unpaid principal balance of the related residential mortgage loans was $77.5 billion and $69.6 billion as of December 31, 2019 and 2018, respectively.

In connection with the August 1, 2018 acquisition of FAMC, the Company began maintaining two separate classes of MSRs which, at the time of initial capitalization, were differentiated by how the risk associated with valuation changes of the MSRs was being managed. The acquired FAMC portfolio is accounted for under the fair value method while the Company’s MSR portfolio held before the FAMC acquisition is accounted for under the amortization method. Beginning January 1, 2019, all of the Company’s newly originated MSRs are accounted for under the fair value method. The Company implemented an active hedging strategy to manage the risk associated with changes in the value of the MSR portfolio accounted for under the fair value method, which includes the purchase of freestanding derivatives. Depending on the interest rate environment, economic hedges may be used to protect the market value of MSRs accounted for under the amortization method. Any changes in fair value during the period for MSRs carried under the fair value method, as well as amortization and impairment of MSRs under the amortization method, are recorded in mortgage banking fees in the Consolidated Statements of Operations.

The following table summarizes changes in MSRs recorded using the amortization method:

	As of and for the Year Ended December 31,
(in millions)	2019				2018
Mortgage servicing rights:
Balance as of beginning of period		$221				$201
Amount capitalized	—				36
Purchases	—				16
Amortization	(38		)		(32		)
Carrying amount before valuation allowance	183				221
Valuation allowance for servicing assets:
Balance as of beginning of period	—				3
Valuation charge-offs (recoveries)	1				(3		)
Balance at end of period	1				—
Net carrying value of MSRs		$182				$221

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The following table summarizes changes in MSRs recorded using the fair value method:

	As of and for the Year Ended December 31,
(in millions)	2019				2018
Fair value as of beginning of the period		$600				$—
Acquired MSRs	—				590
Amounts capitalized	270				73
Changes in unpaid principal balance during the period (1)	(119		)		(32		)
Changes in fair value during the period (2)	(109		)		(31		)
Fair value at end of the period		$642				$600

(1) Represents changes in value due to passage of time including the impact from both regularly scheduled loan principal payments and partial paydowns, and

loans that paid off during the period.

(2) Represents changes in value primarily due to market driven changes in interest rates and prepayment speeds.

The fair value of MSRs is estimated by using the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, contractual servicing fee income, servicing costs, default rates, ancillary income, and other economic factors, which are determined based on current market interest rates. The valuation does not attempt to forecast or predict the future direction of interest rates.

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

For MSRs under the amortization method, the key economic assumptions used to estimate the fair value are presented below:

	December 31, 2019				December 31, 2018
	Actual	Decline in fair value due to			Actual	Decline in fair value due to
(dollars in millions)
Fair value	$193	50 bps adverse change	100 bps adverse change		$243	50 bps adverse change	100 bps adverse change
Weighted average life (in years)	6.4		6.5
Weighted average constant prepayment rate	8.9%	$28	$53		8.5%	$24	$56
Weighted average discount rate	9.4%	4	7		9.3%	5	9

For MSRs under the fair value method, the key economic assumptions used to estimate the fair value are presented below:

	December 31, 2019				December 31, 2018
	Actual	Decline in fair value due to			Actual	Decline in fair value due to
(dollars in millions)
Fair value	$642	50 bps adverse change	100 bps adverse change		$600	50 bps adverse change	100 bps adverse change
Weighted average life (in years)	5.5		8.0
Weighted average constant prepayment rate	13.9%	$116	$222		8.2%	$68	$148
Weighted average option adjusted spread	440 bps	12	25		609 bps	13	26

Citizens accounts for derivatives in its mortgage banking operations at fair value on the Consolidated Balance Sheets as derivative assets or derivative liabilities, depending on whether the derivative had a positive (asset) or negative (liability) fair value as of the balance sheet date. The Company’s mortgage banking derivatives include commitments to originate mortgages held for sale, certain loan sale agreements, and other financial instruments that meet the definition of a derivative. Refer to Note 13 for additional information.

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NOTE 8 - LEASES

Citizens as Lessee

The Company determines if an arrangement is a lease at inception and records a right-of-use asset and a corresponding lease liability. A right-of-use asset represents the value of the Company’s contractual right to use an underlying leased asset and a lease liability represents the Company’s contractual obligation to make payments on the same underlying leased asset. Operating and finance lease right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the non-cancelable lease term. As most of the Company’s leases do not specify an implicit rate, the Company uses an incremental borrowing rate based on information available at the lease commencement date to determine the present value of the lease payments. The Company evaluates right-of-use assets for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

In its normal course of business, the Company leases both equipment and real estate, including office and branch space. Lease terms predominantly range from one year to ten years and may include options to extend the lease, terminate the lease, or purchase the underlying asset at the end of the lease. Certain lease agreements include rental payments based on an index or are adjusted periodically for inflation. The Company has lease agreements that contain lease and non-lease components and for certain real estate leases, these components are accounted for as a single lease component.

Leases with an initial term of 12 months or less are not recorded on the Company’s Consolidated Balance Sheets and are recognized in occupancy expense in the Company’s Consolidated Statements of Operations on a straight-line basis over the remaining lease term. The Company may also enter into subleases with third parties for certain leased real estate properties that are no longer occupied.

The components of operating lease cost are presented below:

(in millions)	Year Ended December 31, 2019
Operating lease cost		$165
Short-term lease cost	10
Variable lease cost	7
Sublease income	(3		)
Total		$179

Operating lease cost is recognized on a straight line basis over the lease term and recorded in occupancy expense on the Consolidated Statements of Operations.

Supplemental Consolidated Balance Sheet information related to the Company’s operating lease arrangements is presented below:

(in millions)	December 31, 2019			Affected Line Item in Consolidated Balance Sheets
Operating lease right-of-use assets		$699		Other assets
Operating lease liabilities	721			Other liabilities

Supplemental information related to the Company’s operating lease arrangements is presented below:

(in millions)	Year Ended December 31, 2019
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases		$164
Right-of-use assets in exchange for new operating lease liabilities	117

The weighted average remaining lease term and weighted average discount rate for operating leases as of December 31, 2019 is seven years and 3.15%, respectively.

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At December 31, 2019, lease liabilities maturing under non-cancelable operating leases are presented below for the years ended December 31:

(in millions)	Operating Leases
2020	150
2021	150
2022	125
2023	100
Thereafter	281
Total lease payments	806
Less: Interest	85
Present value of lease liabilities		$721

Citizens as Lessor

Operating lease assets where Citizens was the lessor totaled $57 million and $92 million as of December 31, 2019 and 2018, respectively. Operating lease rental income for leased assets where Citizens is the lessor is recognized in other income on a straight-line basis over the lease term.

Depreciation expense associated with operating lease assets is recorded on a straight-line basis over the estimated useful life, considering the estimated residual value of the leased asset and is included in other operating expense in the Consolidated Statements of Operations. On a periodic basis, operating lease assets are reviewed for impairment. Impairment loss is recognized in other operating expense if the carrying amount of the leased assets exceeds fair value and is not recoverable. The carrying amount of leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the asset.

For discussion of direct finance and sales-type leases where Citizens is lessor, refer to Note 4.

NOTE 9 - GOODWILL AND INTANGIBLE ASSETS

Goodwill is the purchase premium associated with the acquisition of a business and is assigned to the Company’s reporting units at the acquisition date. A reporting unit is a business operating segment or a component of a business operating segment. Citizens has identified and assigned goodwill to two reporting units - Consumer Banking and Commercial Banking - based upon reviews of the structure of the Company’s executive team and supporting functions, resource allocations and financial reporting processes. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

Goodwill is not amortized, but is subject to annual impairment tests. Citizens reviews goodwill for impairment annually as of October 31st and in interim periods when events or changes indicate the carrying value of one or more reporting units may not be recoverable. The Company has the option of performing a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of each reporting unit is less than the carrying value. If it is more likely than not that the fair value exceeds the carrying value, then no further testing is necessary; otherwise, Citizens must perform a two-step quantitative assessment of goodwill.

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

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangible. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss that is recognized cannot

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exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.

Under the quantitative impairment assessment, the fair values of the Company’s reporting units are determined using a combination of income and market-based approaches. Citizens relies on the income approach (discounted cash flow method) for determining fair value. Market and transaction approaches are used as benchmarks only to corroborate the value determined by the discounted cash flow method. Citizens relies on several assumptions when estimating the fair value of its reporting units using the discounted cash flow method. These assumptions include the discount rate, as well as projected loan loss, income tax and capital retention rates.

Discount rates are estimated based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta, and size premium adjustments specific to a particular reporting unit. The discount rates are also calibrated on the assessment of the risks related to the projected cash flows of each reporting unit. Cash flow projections include estimates for projected loan loss, income tax and capital retention rates. Multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, customer retention standards, market share changes, anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. The long-term growth rate used in determining the terminal value of each reporting unit is estimated based on management’s assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic considerations such as GDP and inflation.

Citizens bases its fair value estimates on assumptions it believes to be representative of assumptions that a market participant would use in valuing the reporting unit but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for its reporting units. There can be no assurances that future estimates and assumptions made for purposes of goodwill testing will prove accurate predictions of the future. If the assumptions regarding business plans, competitive environments or anticipated growth rates are not achieved, Citizens may be required to record goodwill impairment charges in future periods.

For the year ended December 31, 2019, Citizens elected to perform a qualitative analysis to determine whether it was more likely than not that the fair value of either of its reporting units was less than the respective reporting unit’s carrying value. As a result of this qualitative assessment, the Company determined that it was not necessary to perform a quantitative impairment test and concluded that there was no impairment to the carrying value of the Company's goodwill.

The Company acquired Clarfeld in January 2019 and Bowstring in March 2019, which resulted in increases to goodwill of $83 million and $35 million, respectively. Changes in the carrying value of goodwill for the years ended December 31, 2019 and 2018 are presented below:

(in millions)	Consumer Banking				Commercial Banking				Total
Balance at December 31, 2017		$2,136				$4,751				$6,887
Business acquisition	59				—				59
Adjustments (1)	(23		)		—				(23		)
Balance at December 31, 2018		$2,172				$4,751				$6,923
Business acquisitions	83				35				118
Adjustments	3				—				3
Balance at December 31, 2019		$2,258				$4,786				$7,044

(1) Adjustments to goodwill are the result of an update to the purchase price allocation for the FAMC acquisition, given higher value attributed to purchased net assets.

Accumulated impairment losses related to the Consumer Banking reporting unit totaled $5.9 billion at December 31, 2019 and 2018. The accumulated impairment losses related to the Commercial Banking reporting unit totaled $50 million at December 31, 2019 and 2018. No impairment was recorded for the years ended December 31, 2019, 2018 and 2017.

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Other Intangibles

Other intangible assets are recognized separately from goodwill if the asset arises as a result of contractual rights or if the asset is capable of being separated and sold, transferred or exchanged. Intangible assets are recorded in other assets on the Consolidated Balance Sheets. Intangible assets are amortized on a straight-line basis and subject to an annual impairment evaluation. Amortization expense is recorded in other expenses in our Consolidated Statements of Operations.

A summary of the carrying value of intangible assets is presented below. Included in the carrying value at December 31, 2019 was $19 million and $5 million in other intangibles related to the Clarfeld and Bowstring acquisitions, respectively. Additionally, included in the carrying value at December 31, 2019 was $18 million related to the March 2019 purchase of naming rights for a theater in Boston, Massachusetts, and a sponsorship and promotion arrangement.

		December 31, 2019										December 31, 2018
(in millions)	Amortizable Lives (years)	Gross			Accumulated Amortization			Net				Gross			Accumulated Amortization			Net
Acquired technology	7		$21			$4			$17				$20			$1			$19
Acquired relationships	5 - 15	37			5			32				11			1			10
Naming Rights	10	11			1			10				—			—			—
Other	2 - 7	13			4			9				3			1			2
Total			$82			$14			$68				$34			$3			$31

As of December 31, 2019, all of the Company’s intangible assets were being amortized. Amortization expense recognized on intangible assets was $11 million and $3 million for the year ended December 31, 2019 and 2018, respectively. There was no amortization expense recognized on intangible assets for the year ended December 31, 2017. The Company’s projection of amortization expense is based on balances as of December 31, 2019, and future amortization expense may vary from these projections.

Estimated intangible asset amortization expense for the next five years is as follows:

(in millions)	Total
2020		$11
2021	10
2022	9
2023	9
2024	8

NOTE 10 - VARIABLE INTEREST ENTITIES

Citizens makes equity investments in various entities that are considered VIEs, as defined by GAAP. A VIE typically does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. The Company’s variable interest arises from contractual, ownership or other monetary interests in the entity, which change with fluctuations in the fair value of the entity's net assets. Citizens consolidates a VIE if it is the primary beneficiary of the entity. Citizens is the primary beneficiary of a VIE if its variable interest provides it with the power to direct the activities that most significantly impact the VIE and the right to receive benefits (or the obligation to absorb losses) that could potentially be significant to the VIE. To determine whether or not a variable interest held could potentially be significant to the VIE, the company considers both qualitative and quantitative factors regarding the nature, size and form of its involvement with the VIE. Citizens assesses whether or not it is the primary beneficiary of a VIE on an ongoing basis.

Citizens is involved in various entities that are considered VIEs, including investments in limited partnerships that sponsor affordable housing projects, limited liability companies that sponsor renewable energy projects and lending to special purpose entities. Citizens’ maximum exposure to loss as a result of its involvement with these entities is limited to the balance sheet carrying amount of its equity investment and outstanding principal balance of loans to special purpose entities.

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A summary of these investments is presented below:

	December 31,
(in millions)	2019				2018
LIHTC investment included in other assets		$1,401				$1,236
LIHTC unfunded commitments included in other liabilities	716				673
Lending to special purpose entities included in loans and leases	1,101				613
Renewable energy investments included in other assets	355				319

Low Income Housing Tax Credit Partnerships

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

Citizens applies the proportional amortization method to account for its LIHTC investments. Under the proportional amortization method, the Company applies a practical expedient and amortizes the initial cost of the investment in proportion to the tax credits received in the current period as compared to the total tax credits expected to be received over the life of the investment. The amortization and tax benefits are included as a component of income tax expense. The tax credits received are reported as a reduction of income tax expense (or an increase to income tax benefit) related to these transactions.

The following table presents other information related to the Company’s affordable housing tax credit investments:

	Year Ended December 31,
(in millions)	2019				2018				2017
Tax credits included in income tax expense		$128				$101				$83
Amortization expense included in income tax expense	137				110				94
Other tax benefits included in income tax expense	32				25				31

No LIHTC investment impairment losses were recognized during the years ended December 31, 2019, 2018, and 2017.

Lending to Special Purpose Entities

Citizens provides lending facilities to third-party sponsored special purpose entities. Because the sponsor for each respective entity has the power to direct how proceeds from the Company are utilized, as well as maintains responsibility for any associated servicing commitments, Citizens is not the primary beneficiary of these entities. Accordingly, Citizens does not consolidate these VIEs on the Consolidated Balance Sheets. As of December 31, 2019 and 2018, the lending facilities had aggregate unpaid principal balances of $1.1 billion and $613 million, respectively, and undrawn commitments to extend credit of $1.2 billion and $584 million, respectively.

Renewable Energy Entities

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

		Citizens Financial Group, Inc. | 128

NOTE 11 - DEPOSITS

Interest-bearing deposits in banks are carried at cost and include deposits that mature within one year.

The following table presents the major components of deposits:

	December 31,
(in millions)	2019				2018
Demand		$29,233				$29,458
Checking with interest	24,840				23,067
Regular savings	13,779				12,007
Money market accounts	38,725				35,701
Term deposits	18,736				19,342
Total deposits		$125,313				$119,575

The following table presents the maturity distribution by year of term deposits as of December 31, 2019:

(in millions)
2020		$16,151
2021	1,995
2022	316
2023	144
2024	126
2025 and thereafter	4
Total		$18,736

Of these deposits, the amount of term deposits with a denomination of $100,000 or more was $13.4 billion at December 31, 2019. The following table presents the remaining maturities of these deposits:

(in millions)
Three months or less		$6,987
After three months through six months	3,224
After six months through twelve months	2,015
After twelve months	1,206
Total term deposits		$13,432

		Citizens Financial Group, Inc. | 129

NOTE 12 - BORROWED FUNDS

The following table presents a summary of the Company’s short-term borrowed funds:

	December 31,
(in millions)	2019				2018
Securities sold under agreements to repurchase		$265				$336
Federal funds purchased	—				820
Other short-term borrowed funds	9				161
Total short-term borrowed funds		$274				$1,317

The following table presents key data related to the Company’s short-term borrowed funds:

	As of and for the Year Ended December 31,
(dollars in millions, except ratio data)	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.

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The following table presents a summary of the Company’s 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		$14,047				$15,925

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

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 for further information about the Company’s hedging of certain long-term borrowed funds.

Advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and pledged securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $9.8 billion and $13.0 billion at December 31, 2019 and 2018, respectively. The Company’s available FHLB borrowing capacity was $7.2 billion and $4.8 billion at December 31, 2019 and 2018, respectively. Citizens 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, the Company’s unused secured borrowing capacity was approximately $38.9 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.

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The following table presents a summary of maturities for the Company’s long-term borrowed funds at December 31, 2019:

(in millions)	Parent Company			CBNA and Other Subsidiaries			Consolidated
Year
2020		$—			$2,504			$2,504
2021	349			5,998			6,347
2022	348			1,767			2,115
2023	—			765			765
2024	292			1			293
2025 and thereafter	1,495			528			2,023
Total		$2,484			$11,563			$14,047

NOTE 13 - DERIVATIVES

In the normal course of business, Citizens enters into a variety of derivative transactions to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. These transactions include interest rate swap contracts, interest rate options, foreign exchange contracts, residential loan commitment rate locks, interest rate future contracts, swaptions, forward commitments to sell to-be-announced mortgage securities (“TBAs”), forward sale contracts and purchase options. The Company does not use derivatives for speculative purposes.

The Company’s derivative instruments are recognized on the Consolidated Balance Sheets in derivative assets and derivative liabilities at fair value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 19.

Derivative assets and derivative liabilities are netted by counterparty on the Consolidated Balance Sheets if a “right of setoff” has been established in a master netting agreement between the Company and the counterparty. This netted derivative asset or liability position is also netted against the fair value of any cash collateral that has been pledged or received in accordance with a master netting agreement.

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The following table presents derivative instruments included on the Consolidated Balance Sheets:

	December 31, 2019										December 31, 2018
(in millions)	Notional Amount (1)			Derivative Assets			Derivative Liabilities				Notional Amount (1)			Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate contracts		$29,846			$1			$—				$12,050			$5			$—
Derivatives not designated as hedging instruments:
Interest rate contracts	142,386			772			133				117,076			301			277
Foreign exchange contracts	15,101			174			166				9,866			129			113
Other contracts	6,868			37			23				3,555			14			25
Total derivatives not designated as hedging instruments				983			322							444			415
Gross derivative fair values				984			322							449			415
Less: Gross amounts offset in the Consolidated Balance Sheets (2)				(107		)	(107		)					(87		)	(87		)
Less: Cash collateral applied (2)				(70		)	(95		)					(45		)	(36		)
Total net derivative fair values presented in the Consolidated Balance Sheets					$807			$120							$317			$292

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

(2) Amounts represent the impact of enforceable master netting agreements that allow the Company to net settle positive and negative positions as well as collateral paid and received.

The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan. Certain derivative transactions within these sub-groups are designated as fair value or cash flow hedges, as described below:

Derivatives Designated As Hedging Instruments

The Company’s institutional derivatives qualify for hedge accounting treatment. The net interest accruals on interest rate swaps designated in a fair value or cash flow hedge relationship are treated as an adjustment to interest income or interest expense of the item being hedged. The Company formally documents at inception all hedging relationships, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company monitors the effectiveness of its hedge relationships during the duration of the hedge period. The methods utilized to assess hedge effectiveness vary based on the hedge relationship and the Company monitors each relationship to ensure that management’s initial intent continues to be satisfied. The Company discontinues hedge accounting treatment when it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge and subsequently reflects changes in the fair value of the derivative in earnings after termination of the hedge relationship.

Fair Value Hedges

In a fair value hedge, changes in the fair value of both the derivative instrument and the hedged asset or liability attributable to the risk being hedged are recognized in the same income statement line item in the Consolidated Statements of Operations when the changes in fair value occur.

Citizens has outstanding interest rate swap agreements utilized to manage the interest rate exposure on its long-term borrowings, certain fixed rate residential mortgages and AFS debt securities. Certain fair value hedges have been designated as a last-of-layer hedge, which affords the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item.

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The following table presents the change in fair value of interest rate contracts designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Operations:

	Year Ended December 31,
(in millions)	2019				2018				2017			Affected Line Item in the Consolidated Statements of Operations
Change in fair value of interest rate swaps hedging borrowed funds		$107				$8				($26	)	Interest expense - long-term borrowed funds
Change in fair value of hedged long-term debt attributable to the risk being hedged	(107		)		(9		)		27			Interest expense - long-term borrowed funds
Change in fair value of interest rate swaps hedging fixed rate loans	(17		)		—				—			Interest and fees on loans and leases
Change in fair value of hedged fixed rate loans attributable to the risk being hedged	17				—				—			Interest and fees on loans and leases
Change in fair value of interest rate swaps hedging debt securities available for sale	8				—				—			Interest income - investment securities
Change in fair value of hedged debt securities available for sale attributable to risk being hedged	(8		)		—				—			Interest income - investment securities

The following table reflects amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:

	December 31, 2019
(in millions)	Debt securities available for sale**(1)**			Residential mortgages			Long-term borrowed funds
Carrying amount of hedged assets		$15,798			$976			$—
Carrying amount of hedged liabilities	—			—			4,689
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items	(8		)	17			50

(1) The Company designated $2.0 billion as the hedged amount (from a closed portfolio of prepayable financial assets with a carrying value of $15.8 billion as of December 31, 2019) in a last-of-layer hedging relationship, which commenced in the third quarter of 2019.

Cash Flow Hedges

In a cash flow hedge, the entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is initially recorded in OCI and is subsequently reclassified from OCI to current period earnings (interest income or interest expense) in the same period that the hedged item affects earnings.

Citizens has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating-rate assets, and liabilities. All of these swaps have been deemed highly effective cash flow hedges. During the next 12 months, there are $4 million in pre-tax net gains on derivative instruments included in OCI expected to be reclassified to net interest income in the Consolidated Statements of Operations. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to December 31, 2019.

During the years ended December 31, 2019, 2018 and 2017, there were no gains or losses reclassified from OCI to current period earnings (other income) related to the discontinuance of a cash flow hedge where it became probable that the original forecasted transaction would no longer occur by the end of the originally specified time period.

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The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:

	Amounts Recognized for the Year Ended December 31,
(in millions)	2019				2018				2017
Amount of pre-tax net gains (losses) recognized in OCI		$138				($44	)			($23	)
Amount of pre-tax net losses reclassified from OCI into interest income	(68		)		(55		)		25
Amount of pre-tax net gains reclassified from OCI into interest expense	11				12				—

Derivatives not designated as hedging instruments

Economic Hedges

The Company’s economic hedges include those related to offsetting customer derivatives, residential mortgage loan derivatives (including interest rate lock commitments and forward sales commitments) and derivatives to hedge its residential MSR portfolio. Customer derivatives include interest rate and foreign exchange derivative contracts designed to meet the hedging and financing needs of the Company’s customers, and are economically hedged by the Company to offset its market exposure. Interest rate lock commitments on residential mortgage loans that will be held for sale are considered derivative instruments, and are economically hedged by entering into forward sale commitments to manage changes in fair value due to interest rate risk. Residential MSR portfolio derivatives are entered to hedge the risk of changes in the fair value of the Company’s MSR asset.

The following table presents the effect of economic hedges on noninterest income:

	Amounts Recognized in Noninterest Income for the Year Ended December 31,											Affected Line Item in the Consolidated Statements of Operations
(in millions)	2019				2018				2017
Economic hedge type:
Customer interest rate contracts		$687				$5				$5		Foreign exchange and interest rate products
Customer foreign exchange contracts	(166		)		(54		)		172			Foreign exchange and interest rate products
Derivatives transactions to hedge interest rate risk	(620		)		43				46			Foreign exchange and interest rate products
Derivatives transactions to hedge foreign exchange risk	200				158				(151		)	Foreign exchange and interest rate products
Residential loan commitments	8				(3		)		2			Mortgage banking fees
Forward sale contracts	20				21				(8		)	Mortgage banking fees
Interest rate derivative contracts used to hedge residential MSRs(1)	134				35				—			Mortgage banking fees
Total		$263				$205				$66

(1)Includes ($5) million related to interest rate derivative contracts used to hedge residential MSRs valued at LOCOM for the year ended December 31, 2019.

NOTE 14 - EMPLOYEE BENEFITS

Pension Plans

Citizens maintains a non-contributory pension plan (the “Qualified Plan”) that was closed to new hires and re-hires effective January 1, 2009, and frozen to all participants effective December 31, 2012. Benefits under the Qualified Plan are based on employees’ years of service and highest 5-year average of eligible compensation. The Qualified Plan is funded on a current basis, in compliance with the requirements of ERISA. Citizens also provides an unfunded, non-qualified supplemental retirement plan (the “Non-Qualified Plan”), which was closed and frozen effective December 31, 2012. The Company’s Qualified Plan and Non-Qualified Plan are collectively referred to as the Company’s “Pension Plans”. The Pension Plans’ investments include equity-oriented and fixed income-oriented investments, including but not limited to government obligations, corporate bonds, and common and collective equity and fixed income funds.

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The following table presents changes in the fair value of the Company’s Pension Plans’ assets, projected benefit obligation, funded status, and accumulated benefit obligation:

	Year Ended December 31,
	Qualified Plan								Non-Qualified Plan
(in millions)	2019				2018				2019				2018
Fair value of plan assets as of January 1		$1,050				$1,139				$—				$—
Actual return on plan assets	259				(81		)		—				—
Employer contributions	—				50				8				8
Benefits and administrative expenses paid	(63		)		(58		)		(8		)		(8		)
Fair value of plan assets as of December 31	1,246				1,050				—				—
Projected benefit obligation	1,075				972				102				95
Pension asset (obligation)		$171				$78				($102	)			($95	)
Accumulated benefit obligation		$1,075				$972				$102				$95

The Company’s projected benefit obligation increased for the year ending December 31, 2019, due to the decrease in the discount rate assumption, partially offset by updated mortality assumptions. Citizens recognized actuarial gains and losses on the Pension Plans in AOCI resulting in an ending balance of $551 million and $618 million at December 31, 2019 and 2018, respectively.

No contributions were made to the Qualified Plan in 2019 and no contribution is planned for 2020. Citizens contributed $50 million to the qualified plan in 2018. Citizens contributed $8 million to the Non-Qualified Plan in 2019 and expects to contribute $8 million in 2020.

The following table presents other changes in plan assets and benefit obligations recognized in OCI for the Company’s Pension Plans:

	Year Ended December 31,
(in millions)	2019				2018				2017
Net periodic pension income		($5	)			($16	)			($2	)
Net actuarial (gain) loss	(49		)		49				(31		)
Amortization of prior service credit	—				1				1
Amortization of net actuarial loss	(19		)		(17		)		(18		)
Total (loss) gain recognized in other comprehensive loss	(68		)		33				(48		)
Total (loss) gain recognized in net periodic pension (income) cost and other comprehensive loss		($73	)			$17				($50	)

Costs under the Company’s Pension Plans are actuarially computed and include current service costs and amortization of prior service costs over the participants’ average future working lifetime. The actuarial cost method used in determining the net periodic pension cost is the projected unit method.

The following table presents the components of net periodic pension (income) cost for the Company’s Pension Plans:

	Year Ended December 31,
	Qualified Plan												Non-Qualified Plan												Total
(in millions)	2019				2018				2017				2019				2018				2017				2019				2018				2017
Service cost		$3				$3				$3				$—				$—				$—				$3				$3				$3
Interest cost	41				39				42				4				4				4				45				43				46
Expected return on plan assets	(72		)		(79		)		(69		)		—				—				—				(72		)		(79		)		(69		)
Amortization of actuarial loss	17				15				16				2				2				2				19				17				18
Net periodic pension (income) cost(1)		($11	)			($22	)			($8	)			$6				$6				$6				($5	)			($16	)			($2	)

(1) In the Consolidated Statements of Operations, service cost is presented in salaries and employee benefits, and all other components of net periodic pension (income) cost are presented in other operating expense.

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The following table presents the expected future benefit payments for the Company’s Pension Plans:

	(in millions)
Expected benefit payments by fiscal year ending:
December 31, 2020		$67
December 31, 2021	68
December 31, 2022	68
December 31, 2023	68
December 31, 2024	69
December 31, 2025 - 2029	348

401(k) Plan

Citizens sponsors a 401(k) Plan under which employee tax-deferred/Roth after-tax contributions to the 401(k) Plan are matched by the Company after completion of one year of service. Contributions are matched at 100% up to an overall limitation of 4% on a pay period basis. Substantially all employees will receive an additional 2% of earnings after completion of one year of service, subject to limits set by the Internal Revenue Service. Amounts contributed and expensed by the Company were $72 million in 2019 compared to $68 million in 2018 and $61 million in 2017.

NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in the balances, net of income taxes, of each component of AOCI:

(in millions)			Net Unrealized (Losses) Gains on Derivatives				Net Unrealized (Losses) Gains on Securities				Employee Benefit Plans				Total AOCI
Balance at January 1, 2017				($88	)			($186	)			($394	)			($668	)
Other comprehensive loss before reclassifications			(14		)		(6		)		—				(20		)
Amounts reclassified to the Consolidated Statements of Operations			(16		)		(2		)		31				13
Net other comprehensive (loss) income			(30		)		(8		)		31				(7		)
Reclassification of tax effects resulting from the 2017 Tax Legislation (1)				($25	)			($42	)			($78	)			($145	)
Balance at December 31, 2017				($143	)			($236	)			($441	)			($820	)
Other comprehensive loss before reclassifications			(33		)		(239		)		—				(272		)
Other-than-temporary impairment not recognized in earnings on securities			—				(3		)		—				(3		)
Amounts reclassified to the Consolidated Statements of Operations			33				(12		)		(22		)		(1		)
Net other comprehensive loss			—				(254		)		(22		)		(276		)
Balance at December 31, 2018				($143	)			($490	)			($463	)			($1,096	)
Other comprehensive income before reclassifications			103				501				—				604
Amounts reclassified to the Consolidated Statements of Operations			43				(15		)		48				76
Net other comprehensive income			146				486				48				680
Cumulative effect of change in accounting standards			—				5				—				5
Balance at December 31, 2019				$3				$1				($415	)			($411	)
Primary income statement location of amounts reclassified from AOCI			Net interest income				Securities gains, net				Other operating expense

(1) As of December 31, 2017, the balance of AOCI reflects the retrospective adoption of FASB ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

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NOTE 16 - STOCKHOLDERS’ EQUITY

Preferred Stock

The following table provides the number of authorized preferred shares, the number of issued and outstanding, the liquidation value per share and the carrying amount as of December 31:

				2019						2018
(in millions, except per share and share data)	Liquidation value per share			Preferred Shares			Carrying Amount			Preferred Shares		Carrying Amount
Authorized ($25 par value)				100,000,000						100,000,000
Issued and outstanding
Series A	$1,000			250,000			$247			250,000		$247
Series B	1,000			300,000			296			300,000		296
Series C	1,000			300,000			297			300,000		297
Series D	1,000		(1)	300,000		(2)	293			—		—
Series E	1,000		(1)	450,000		(3)	437			—		—
Total issued and outstanding				1,600,000			$1,570			850,000		$840

(1) Equivalent to $25 per depositary share.

(2) Represented by 12,000,000 depositary shares each representing a 1/40th interest in the Series D Preferred Stock.

(3) Represented by 18,000,000 depositary shares each representing a 1/40th interest in the Series E Preferred Stock.

The following table provides information related to the Company’s preferred stock outstanding as of December 31, 2019:

(in millions, except per share and share data)
Preferred Stock	Issue Date	Number of Shares Issued	Dividend Dates(3)	Annual Per Share Dividend Rate	Optional Redemption Date**(4)**
Series A(1)	April 6, 2015	250,000	Semi-annually beginning October 6, 2015 until April 6, 2020	5.500% until April 6, 2020	April 6, 2020
			Quarterly beginning July 6, 2020	3 Mo. LIBOR plus 3.960% beginning April 6, 2020
Series B(1)	May 24, 2018	300,000	Semi-annually beginning January 6, 2019 until July 6, 2023	6.000% until July 6, 2023	July 6, 2023
			Quarterly beginning October 6, 2023	3 Mo. LIBOR plus 3.003% beginning July 6, 2023
Series C(1)	October 25, 2018	300,000	Quarterly beginning January 6, 2019 until April 6, 2024	6.375% until April 6, 2024	April 6, 2024
			Quarterly beginning July 6, 2024	3 Mo. LIBOR plus 3.157% beginning April 6, 2024
Series D(1)	January 29, 2019	300,000(5)	Quarterly beginning April 6, 2019 until April 6, 2024	6.350% until April 6, 2024	April 6, 2024
			Quarterly beginning July 6, 2024	3 Mo. LIBOR plus 3.642% beginning April 6, 2024
Series E(2)	October 28, 2019	450,000(6)	Quarterly beginning January 6, 2020	5.000%	January 6, 2025

(1) Series are non-cumulative fixed-to-floating rate perpetual preferred stock. Except in limited circumstances, the preferred stock does not have voting rights.

(2) Series are non-cumulative fixed rate perpetual preferred stock. Except in limited circumstances, the preferred stock does not have voting rights.

(3) Dividends are payable when, and if, declared by the Company’s Board of Directors or an authorized committee thereof.

(4) Redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after the date stated, or in whole but not in part, at any time within 90 days following a regulatory capital treatment event a as defined in the applicable certificate of designations, in each case at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Under current rules, any redemption is subject to approval by the FRB.

(5) Represented by 12,000,000 depositary shares each representing a 1/40th interest in the Series D Preferred Stock.

(6) Represented by 18,000,000 depositary shares each representing a 1/40th interest in the Series E Preferred Stock.

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Dividends

The following table provides information related to dividends per share and in the aggregate, declared and paid, for each type of stock issued and outstanding for the year ended December 31:

		2019										2018										2017
(in millions, except per share and share data)		Dividends per Share			Dividends Declared			Dividends Paid				Dividends per Share			Dividends Declared			Dividends Paid				Dividends per Share			Dividends Declared			Dividends Paid
Common stock			$1.36			$617			$617				$0.98			$471			$471				$0.64			$322			$322
Preferred stock
Series A			$55.00			$14			$14				$55.00			$14			$14				$55.00			$14			$14
Series B		60.00			18			20				37.00			11			—				—			—			—
Series C		63.75			19			18				12.57			4			—				—			—			—
Series D		59.45			18			13				—			—			—				—			—			—
Series E		9.44			4			—				—			—			—				—			—			—
Total preferred stock						$73			$65							$29			$14							$14			$14

Treasury Stock

The purchase of the Company’s common stock is recorded at cost. At the date of retirement or subsequent reissuance, treasury stock is reduced by the cost of such stock on a first-in, first-out basis with differences recorded in additional paid-in capital or retained earnings, as applicable.

During the year ended December 31, 2019, the Company paid $1.220 billion to repurchase 34,305,768 common shares at a weighted-average price of $35.56. During the year ended December 31, 2019, the Company recorded no shares of treasury stock associated with share-based compensation plan activity.

During the year ended December 31, 2018, the Company paid $1.025 billion to repurchase 25,773,807 common shares at an average price of $39.77. During the year ended December 31, 2018, the Company recorded no shares of treasury stock associated with share-based compensation plan activity.

NOTE 17 - SHARE-BASED COMPENSATION

Citizens has share-based employee compensation plans as outlined below, pursuant to which stock awards are granted to employees and non-employee directors.

Employees of the Company hold time-based restricted stock units and performance-based restricted stock units. A restricted stock unit is the right to receive shares of stock on a future date, which may be subject to time-based vesting conditions and/or performance-based vesting conditions. If a dividend is paid on shares underlying the awards prior to the date such shares are distributed, those dividends will be distributed following vesting in the same form as the dividend that has been paid to common stockholders generally.

Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan. Certain employees of the Company hold time-based restricted stock units and performance-based restricted stock units granted under this plan. Time-based restricted stock units granted generally become vested ratably over a 3-year period and performance-based restricted stock units granted generally become vested in a single installment at the end of a 3-year performance period, depending on the level of performance achieved during such period.

Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan. Non-employee directors receive grants of time-based restricted stock units under this plan as compensation for their services pursuant to the Citizens Financial Group, Inc. Directors Compensation Policy. Restricted stock units granted to directors are fully vested on the grant date, with settlement of the awards deferred until a director’s cessation of service.

Citizens Financial Group, Inc. 2014 Employee Stock Purchase Plan. Citizens also maintains the Citizens Financial Group, Inc. Employee Stock Purchase Plan (the “ESPP”), which provides eligible employees an opportunity to purchase its common stock at a 10% discount, through accumulated payroll deductions. Eligible employees may contribute up to 10% of eligible compensation to the ESPP, up to a maximum purchase of $25,000 worth of stock in any calendar year. Offering periods under the ESPP are quarterly. Shares of CFG common stock are purchased for a participant on the last day of each quarter at a 10% discount from the fair market value (fair market value under the plan is defined as the closing price on the day of purchase). Prior to the date the shares are purchased, participants do not have any rights or privileges as a stockholder with respect to shares to be purchased at the end of the offering period.

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Summary of Share-Based Plans Activity

The following table presents the activity related to the Company’s share-based plans (excluding the ESPP) for the year ended December 31, 2019:

	Shares Underlying Awards			Weighted-Average Grant Price
Outstanding, January 1	2,893,281				$34.04
Granted	1,677,167			36.21
Vested & Distributed	(1,518,836	)		32.21
Forfeited	(51,388	)		38.29
Outstanding, December 31	3,000,224				$36.71

During the years ended December 31, 2019, 2018 and 2017, the following number of CFG share awards were granted: 2019 (1,677,167 granted with a weighted-average grant price of $36.21); 2018 (1,174,501 granted with weighted-average grant price of $39.54); and 2017 (1,256,816 granted with weighted-average grant price of $39.09).

In addition, the following number of CFG share awards became vested and distributed: 2019 (1,518,836 vested and distributed with a weighted-average grant price of $32.21); 2018 (877,111 vested with weighted-average grant price of $30.50); and 2017 (1,426,850 vested with weighted-average grant price of $21.91).

There are 48,116,987 shares of Company common stock available for awards to be granted under the Omnibus Plan and Directors Plan. In addition, there are 5,782,877 shares available for awards under the ESPP. Upon settlement of share-based awards, the Company generally issues new shares, but may also issue shares from treasury stock.

Citizens measures compensation expense related to stock awards based upon the fair value of the awards on the grant date. Compensation expense is adjusted for forfeitures as they occur. The related expense is charged to earnings on a straight-line basis over the requisite service period (e.g., vesting period) of the award. With respect to performance-based stock awards, compensation expense is adjusted upward or downward based upon the probability of achievement of performance. Awards that continue to vest after retirement are expensed over the shorter of the period of time from grant date to the final vesting date or from the grant date to the date when an employee is retirement eligible. Awards granted to employees who are retirement eligible at the grant date are generally expensed immediately upon grant.

Share-based compensation expense (including ESPP) was $55 million, $41 million, and $39 million for the years ended December 31, 2019, 2018, and 2017, respectively. At December 31, 2019, the total unrecognized compensation expense for nonvested equity awards granted was $47 million. This expense is expected to be recognized over a weighted-average period of approximately two years. No share-based compensation costs were capitalized during the years ended December 31, 2019, 2018, and 2017.

The income tax benefit recognized in earnings based on the compensation expense recognized for all share-based compensation arrangements amounted to $1 million, $3 million and $9 million for the years ended December 31, 2019, 2018, and 2017, respectively.

NOTE 18 - COMMITMENTS AND CONTINGENCIES

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

	December 31,
(in millions)	2019				2018
Commitments to extend credit		$72,743				$69,553
Letters of credit	2,190				2,125
Risk participation agreements	37				19
Loans sold with recourse	37				5
Marketing rights	33				37
Total		$75,040				$71,739

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Commitments to Extend Credit

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

The Company’s commercial loan trading desk provides ongoing secondary market support and liquidity to its clients. Unsettled loan trades (i.e., loan purchase contracts) represent firm commitments to purchase loans from a third party at an agreed-upon price. Principal amounts associated with unsettled commercial loan trades are off-balance sheet commitments until delivery of the loans has taken place. The principal balances of unsettled commercial loan trade purchases and sales were $183 million and $236 million, respectively, at December 31, 2019 and $68 million and $161 million, respectively, at December 31, 2018.

Letters of Credit

Letters of credit in the table above reflect commercial, standby financial and standby performance letters of credit. Standby letters of credit, both financial and performance, are issued by the Company for its customers. They are used as conditional guarantees of payment to a third party in the event the customer either fails to make specific payments (financial) or fails to complete a specific project (performance). The Company’s exposure to credit loss in the event of counterparty nonperformance in connection with the above instruments is represented by the contractual amount of those instruments, net of the value of collateral held. Generally, letters of credit are collateralized by cash, accounts receivable, inventory or investment securities. Credit risk associated with letters of credit is considered in determining the appropriate amounts of reserves for unfunded commitments. Standby letters of credit and commercial letters of credit are issued for terms of up to ten years and one year, respectively.

Other Commitments

Citizens has additional off-balance sheet arrangements that are summarized below:

•	Marketing Rights - During 2003, Citizens entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania.

•

Loans sold with recourse - Citizens is an originator and servicer of residential mortgages and routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales, the Company makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of those representations and warranties. The Company also sells the government guaranteed portion of certain SBA loans to outside investors, for which it retains the servicing rights.

•

Risk Participation Agreements - RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. The current amount of credit exposure is spread out over 89 counterparties. RPAs generally have terms ranging from one year to five years; however, certain outstanding agreements have terms as long as ten years.

Contingencies

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

In these disputes and proceedings, the Company contests liability and the amount of damages as appropriate. Given their complex nature, and based on the Company's experience, it may be years before some of these matters are finally resolved. Moreover, before liability can be reasonably estimated for a claim, numerous legal and factual issues may need to be examined, including through potentially lengthy discovery and determination of important

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factual matters, and by addressing novel or unsettled legal issues relevant to the proceedings in question. The Company cannot predict with certainty if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages. The Company recognizes a provision for a claim when, in the opinion of management after seeking legal advice, it is probable that a liability exists and the amount of loss can be reasonably estimated. In many proceedings, however, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.

Based on information currently available, the advice of legal counsel and other advisers, and established reserves, management believes that the aggregate liabilities, if any, potentially arising from these proceedings will not have a materially adverse effect on the Company’s Consolidated Financial Statements.

NOTE 19 - FAIR VALUE MEASUREMENTS

Citizens measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Citizens also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this Note for assets and liabilities that are not required to be reported at fair value in the financial statements.

Fair Value Option

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

The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of LHFS measured at fair value:

	December 31, 2019										December 31, 2018
(in millions)	Aggregate Fair Value			Aggregate Unpaid Principal			Aggregate Fair Value Less Aggregate Unpaid Principal				Aggregate Fair Value			Aggregate Unpaid Principal			Aggregate Fair Value Less Aggregate Unpaid Principal
Residential mortgage loans held for sale, at fair value		$1,778			$1,727			$51				$967			$967			$—
Commercial and commercial real estate loans held for sale, at fair value	168			175			(7		)		252			252			—

Residential Mortgage Loans Held for Sale

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

The residential mortgage loans accounted for under the fair value option are initially measured at fair value (i.e., acquisition cost) when the financial asset is acquired. Subsequent changes in fair value are recognized in mortgage banking fees on the Consolidated Statements of Operations. The Company recognized changes in fair value in mortgage banking income of $6 million for the years ended December 31, 2019, 2018 and 2017.

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

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Commercial and Commercial Real Estate Loans Held for Sale

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

There were no loans in this portfolio that were 90 days or more past due or nonaccruing as of December 31, 2019. The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in other noninterest income on the Consolidated Statements of Operations. Since all loans in the Company’s commercial trading portfolio consist of floating rate obligations, all changes in fair value are due to changes in credit risk. Such credit-related fair value changes may include observed changes in overall credit spreads and/or changes to the creditworthiness of an individual borrower. Unsettled trades within the commercial trading portfolio are not recognized on the Consolidated Balance Sheets and represent off-balance sheet commitments. Refer to Note 18 for further information.

Interest income on commercial and commercial real estate loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income. Citizens recognized $5 million, ($2) million and $4 million for the years ended December 31, 2019, 2018 and 2017, respectively, in other noninterest income related to its commercial trading portfolio.

Recurring Fair Value Measurements

Citizens measures 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.

A portion of the Company’s assets and liabilities are carried at fair value, including securities available for sale, derivative instruments and other investment securities. In addition, the Company elects to account for its loans associated with its mortgage banking business and secondary loan trading desk at fair value. Citizens classifies its 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.

•	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 Levels 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.

Citizens reviews and updates 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 period-end balances.

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

Debt securities available for sale

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

A significant majority of the Company’s Level 1 and 2 debt securities are priced using an external pricing service. Citizens verifies the accuracy of the pricing provided by its primary outside pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for the Company’s securities portfolio for comparison purposes. Any valuation discrepancies beyond a certain threshold are researched and, if necessary, corroborated by an independent outside broker.

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

Mortgage Servicing Rights — Fair Value Method

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. 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. Refer to Note 7 for more information.

Derivatives

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

The Company’s other derivatives include foreign exchange contracts. The fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based

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on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy.

Money Market Mutual Fund Investments

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

The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at December 31, 2019:

(in millions)	Total			Level 1			Level 2			Level 3
Debt securities available for sale:
Mortgage-backed securities		$20,537			$—			$20,537			$—
State and political subdivisions	5			—			5			—
U.S. Treasury and other	71			71			—			—
Total debt securities available for sale	20,613			71			20,542			—
Loans held for sale, at fair value:
Residential loans held for sale	1,778			—			1,778			—
Commercial loans held for sale	168			—			168			—
Total loans held for sale, at fair value	1,946			—			1,946			—
Mortgage servicing rights	642			—			—			642
Derivative assets:
Interest rate contracts	773			—			773			—
Foreign exchange contracts	174			—			174			—
Other contracts	37			—			18			19
Total derivative assets	984			—			965			19
Equity securities, at fair value:
Money market mutual fund investments	47			47			—			—
Total equity securities, at fair value	47			47			—			—
Total assets		$24,232			$118			$23,453			$661
Derivative liabilities:
Interest rate contracts		$133			$—			$133			$—
Foreign exchange contracts	166			—			166			—
Other contracts	23			—			23			—
Total derivative liabilities	322			—			322			—
Total liabilities		$322			$—			$322			$—

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The following table presents assets and liabilities measured at fair value including gross derivative assets and liabilities on a recurring basis at December 31, 2018:

(in millions)	Total			Level 1			Level 2			Level 3
Debt securities available for sale:
Mortgage-backed securities		$19,866			$—			$19,866			$—
State and political subdivisions	5			—			5			—
U.S. Treasury and other	24			24			—			—
Total debt securities available for sale	19,895			24			19,871			—
Loans held for sale, at fair value:
Residential loans held for sale	967			—			967			—
Commercial loans held for sale	252			—			252			—
Total loans held for sale, at fair value	1,219			—			1,219			—
Mortgage servicing rights	600			—			—			600
Derivative assets:
Interest rate contracts	306			—			306			—
Foreign exchange contracts	129			—			129			—
Other contracts	14			—			14			—
Total derivative assets	449			—			449			—
Equity securities, at fair value:
Money market mutual fund investments	181			181			—			—
Total equity securities, at fair value	181			181			—			—
Total assets		$22,344			$205			$21,539			$600
Derivative liabilities:
Interest rate contracts		$277			$—			$277			$—
Foreign exchange contracts	113			—			113			—
Other contracts	25			—			25			—
Total derivative liabilities	415			—			415			—
Total liabilities		$415			$—			$415			$—

The following table present a rollforward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as Level 3 for the year ended December 31, 2019. There were no other derivative contracts measured at fair value on a recurring basis and classified as Level 3 for the year ended December 31, 2018.

	For the Year Ended December 31,
	2019								2018
(in millions)	Mortgage Servicing Rights				Other Derivative Contracts				Mortgage Servicing Rights
Beginning balance		$600				$—				$—
Acquired MSRs	—				—				590
Issuances	270				144				73
Settlements (1)	(119		)		(161		)		(32		)
Changes in fair value during the period recognized in earnings(2)	(109		)		17				(31		)
Transfers from Level 2 to Level 3 (3)	—				18				—
Ending balance		$642				$19				$600

(1) Represents changes in value of the MSRs due to i) passage of time including the impact from both regularly scheduled loan principal payments and partial

paydowns, and ii) loans that paid off during the period.

(2) Represents changes in value primarily driven by market conditions. These changes are recorded in mortgage banking fees in the Consolidated Statements of Operations.

(3) Reflects changes in the significance of unobservable inputs on derivative contracts associated with mortgage origination costs.

Nonrecurring Fair Value Measurements

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 MSRs accounted for by the amortization method and loan impairments for certain loans and leases.

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

Impaired Loans

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

Mortgage Servicing Rights — Amortization Method

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, weighted-average constant prepayment rate and weighted-average discount rate. Refer to Note 7 for more information.

Leased assets

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 discounted cash flows 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 fair value measurement.

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

	Year Ended December 31,
(in millions)	2019				2018				2017
Impaired collateral-dependent loans		($34	)			($13	)			($35	)
MSRs	(1		)		3				2
Leased assets	(12		)		(7		)		(15		)

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

	December 31, 2019													December 31, 2018
(in millions)	Total			Level 1			Level 2			Level 3				Total			Level 1			Level 2			Level 3
Impaired collateral-dependent loans		$312			$—			$312			$—				$338			$—			$338			$—
MSRs	193			—			—			193				243			—			—			243
Leased assets	57			—			57			—				92			—			92			—

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Disclosures about Fair Value of Financial Instruments

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

	December 31, 2019
	Total							Level 1							Level 2							Level 3
(in millions)	Carrying Value			Estimated Fair Value				Carrying Value			Estimated Fair Value				Carrying Value			Estimated Fair Value				Carrying Value			Estimated Fair Value
Financial assets:
Securities held to maturity		$3,202			$3,242				$—			$—				$3,202			$3,242				$—			$—
Equity securities, at cost	807			807				—			—				807			807				—			—
Other loans held for sale	1,384			1,384				—			—				—			—				1,384			1,384
Loans and leases	119,088			119,792				—			—				312			312				118,776			119,480
Financial liabilities:
Deposits	125,313			125,340				—			—				125,313			125,340				—			—
Federal funds purchased and securities sold under agreements to repurchase	265			265				—			—				265			265				—			—
Other short-term borrowed funds	9			9				—			—				9			9				—			—
Long-term borrowed funds	14,047			14,228				—			—				14,047			14,228				—			—

	December 31, 2018
	Total							Level 1							Level 2							Level 3
(in millions)	Carrying Value			Estimated Fair Value				Carrying Value			Estimated Fair Value				Carrying Value			Estimated Fair Value				Carrying Value			Estimated Fair Value
Financial assets:
Securities held to maturity		$4,165			$4,041				$—			$—				$4,165			$4,041				$—			$—
Equity securities, at cost	834			834				—			—				834			834				—			—
Other loans held for sale	101			101				—			—				—			—				101			101
Loans and leases	116,660			116,627				—			—				338			338				116,322			116,289
Financial liabilities:
Deposits	119,575			119,503				—			—				119,575			119,503				—			—
Federal funds purchased and securities sold under agreements to repurchase	1,156			1,156				—			—				1,156			1,156				—			—
Other short-term borrowed funds	161			161				—			—				161			161				—			—
Long-term borrowed funds	15,925			15,877				—			—				15,925			15,877				—			—

NOTE 20 - NONINTEREST INCOME

The following table presents noninterest income, segregated between revenue from contracts with customers and revenue from other sources:

	December 31,
(in millions)	2019				2018
Revenue from contracts with customers		$1,172				$1,119
Revenue from other sources	705				477
Noninterest income		$1,877				$1,596

Revenues from Contracts with Customers

Citizens recognizes revenue from contracts with customers in the amount of consideration it expects to receive upon the transfer of control of a good or service. The timing of recognition is dependent on whether the Company satisfies a performance obligation by transferring control of the product or service to a customer over

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time or at a point in time. Judgments are made in the recognition of income including the timing of satisfaction of performance obligations and determination of the transaction price.

The following table presents the components of revenue from contracts with customers disaggregated by revenue stream and business operating segment:

	Year Ended December 31, 2019										Year Ended December 31, 2018
(in millions)	Consumer Banking			Commercial Banking			Consolidated (1)				Consumer Banking			Commercial Banking			Consolidated (1)
Service charges and fees		$400			$103			$503				$408			$105			$513
Card fees	215			39			254				207			37			244
Capital markets fees	—			202			202				—			181			181
Trust and investment services fees	202			—			202				171			—			171
Other banking fees	1			10			11				—			10			10
Total revenue from contracts with customers		$818			$354			$1,172				$786			$333			$1,119

(1) There is no revenue from contracts with customers included in Other non-segment operations.

Citizens does not have any material contract assets, liabilities, or other receivables recorded on its Consolidated Balance Sheets related to revenues from contracts with customers as of December 31, 2019. Citizens has elected the practical expedient to exclude disclosure of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognized revenue at the amount to which the Company has the right to invoice for services performed. A description of the above components of revenue from contracts with customers is presented below:

Service Charges and Fees

Service charges and fees include fees earned from deposit products in lieu of compensating balances, service charges for transactions performed upon depositors’ request, as well as fees earned from performing cash management activities. Service charges on deposit products are recognized over the period in which the related service is provided, typically monthly. Service fees are recognized at a point in time upon completion of the requested service transaction. Fees on cash management products are recognized over time (typically monthly) as services are provided.

Card Fees

Card fees include interchange income from credit and debit card transactions and are recognized at a point in time upon settlement by the association network. Interchange rates are generally set by the association network based on purchase volume and other factors. Other card-related fees are recognized at a point in time upon completion of the transaction. Costs related to card rewards programs are recognized in current earnings as the rewards are earned by the customer and are presented as a reduction to card fees on the Consolidated Statements of Operations.

Capital Markets Fees

Capital markets fees include fees received from leading or participating in loan syndications, underwriting services and advisory fees. Loan syndication and underwriting fees are recognized as revenue at a point in time when the Company has rendered all services to, and is entitled to collect the fee from, the borrower or the issuer, and there are no other contingencies associated with the fee. Underwriting expenses passed through from the lead underwriter are recognized within other operating expense on the Consolidated Statements of Operations. Advisory fees for merger and acquisitions are recognized over time, while valuation services and fairness opinions are recognized at a point in time upon completion of the advisory service.

Trust and Investment Services Fees

Trust and investment services fees include fees from investment management services and brokerage services. Fees from investment management services are based on asset market values and are recognized over the period in which the related service is provided. Brokerage services include custody fees, commission income, trailing commissions and other investment securities. Custody fees are recognized on a monthly basis for customers that are assessed custody fees. Commission income is recognized at a point in time on trade date. Trailing commissions such as 12b-1 fees, insurance renewal income, and income based on asset or investment levels in future periods are recognized at a point in time when the asset balance is known, or the renewal occurs and the income is no longer constrained. For the years ended December 31, 2019 and 2018, the Company recognized trailing commissions

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of $15 million and $16 million, respectively, related to services provided in previous reporting periods. Fees from other investment services are recognized at a point in time upon completion of the service.

O**ther Banking Fees

Other banking fees include fees for various transactional banking activities such as letter of credit fees, foreign wire transfers and other transactional services. These fees are recognized in a manner that reflects the timing of when transactions occur and as services are provided.

Revenue from Other Sources

Letter of Credit and Loan Fees

Letter of credit and loan fees primarily includes fees received related to letter of credit agreements as well as loan fees received from lending activities that are not deferrable. These fees are generally recognized upon execution of the contract.

Foreign Exchange and Interest Rate Products

Foreign exchange and interest rate products primarily includes the fees received from foreign exchange and interest rate derivative contracts executed with customers to meet their hedging and financing needs. These fees are generally recognized upon execution of the contracts. Foreign exchange and interest rate products also include the mark-to-market gains and losses recognized on (i) these customer contracts and (ii) offsetting derivative contracts that are executed with external counterparties to hedge the foreign exchange and interest rate risk associated with the customer contracts.

Mortgage Banking Fees

Mortgage banking fees primarily include gains on sales of residential mortgages originated with the intent to sell and servicing fees on mortgages where the Company is the servicer. Mortgage banking fees also include valuation adjustments for mortgage loans held-for-sale that are measured at the lower of cost or fair value, as well as mortgage loans originated with the intent to sell that are measured at fair value under the fair value option. Changes in the value of MSRs are reported in mortgage fees and related income. For a further discussion of MSRs, see Note 8. Net interest income from mortgage loans is recorded in interest income.

Other Income

Bank-owned life insurance is stated at its cash surrender value. Citizens is the beneficiary of the life insurance policies on current and former officers and selected employees of the Company. Net changes in the carrying amount of the cash surrender value are an adjustment of premiums paid in determining the expense or income to be recognized under the life insurance policy for the period.

	Year Ended December 31,
(in millions)	2019				2018				2017
Bank-owned life insurance		$55				$56				$54

NOTE 21 - OTHER OPERATING EXPENSE

The following table presents the details of other operating expense:

	Year Ended December 31,
(in millions)	2019				2018				2017
Promotional expense		$112				$129				$105
Deposit insurance	62				104				137
Other	302				262				300
Other operating expense		$476				$495				$542

NOTE 22 - INCOME TAXES

Citizens uses an asset and liability (balance sheet) approach for financial accounting and reporting of income taxes, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in gross deferred tax assets and liabilities between periods. These gross deferred tax assets and liabilities represent changes in taxes expected to be paid in the future due to reversals of temporary differences between the bases of

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the assets and liabilities as measured under tax laws, and their bases reported in the Consolidated Financial Statements as measured under GAAP.

Citizens also assesses the probability that the positions taken, or expected to be taken, in its income tax returns will be sustained by taxing authorities. A “more likely than not” (more than 50 percent) recognition threshold must be met before a tax benefit can be recognized. Tax positions that are more likely than not to be sustained are reflected in the Company’s Consolidated Financial Statements.

The following table presents total income tax expense:

	Year Ended December 31,
(in millions)	2019				2018				2017
Income tax expense		$460				$462				$260
Tax effect of changes in OCI	225				(96		)		(7		)
Total comprehensive income tax expense		$685				$366				$253

The following table presents the components of income tax expense:

(in millions)	Current			Deferred			Total
Year Ended December 31, 2019
U.S. federal		$323			$64			$387
State and local	73			—			73
Total		$396			$64			$460
Year Ended December 31, 2018
U.S. federal		$271			$90			$361
State and local	94			7			101
Total		$365			$97			$462
Year Ended December 31, 2017
U.S. federal		$376			($142	)		$234
State and local	20			6			26
Total		$396			($136	)		$260

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The following table presents a reconciliation between the U.S. federal income tax rate and the Company’s effective income tax rate:

	Year Ended December 31,
	2019						2018						2017
(in millions, except ratio data)	Amount			Rate			Amount			Rate			Amount			Rate
U.S. federal income tax expense and tax rate		$473		21.0	%			$459		21.0	%			$669		35.0	%
Increase (decrease) resulting from:
Federal rate change	—			—			(34		)	(1.6	)		(331		)	(17.3	)
State and local income taxes (net of federal benefit)	73			3.2			89			4.1			46			2.4
Bank-owned life insurance	(12		)	(0.5	)		(12		)	(0.5	)		(19		)	(1.0	)
Tax-exempt interest	(15		)	(0.7	)		(15		)	(0.7	)		(21		)	(1.1	)
Tax advantaged investments (including related credits)	(50		)	(2.3	)		(44		)	(2.0	)		(51		)	(2.7	)
Other tax credits	(10		)	(0.4	)		(8		)	(0.4	)		(3		)	(0.1	)
Adjustments for uncertain tax positions	—			—			1			0.1			(23		)	(1.2	)
Non-deductible FDIC premiums	13			0.6			21			1.0			—			—
Legacy tax matters	(19		)	(0.8	)		—			—			—			—
Other	7			0.3			5			0.2			(7		)	(0.4	)
Total income tax expense and tax rate		$460		20.4	%			$462		21.2	%			$260		13.6	%

The following table presents the tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities:

	December 31,
(in millions)	2019				2018
Deferred tax assets:
Other comprehensive income		$141				$366
Allowance for credit losses	315				308
State net operating loss carryforwards	62				90
Accrued expenses not currently deductible	24				36
Investment and other tax credit carryforwards	89				74
Fair value adjustments	—				28
Total deferred tax assets	631				902
Valuation allowance	(79		)		(110		)
Deferred tax assets, net of valuation allowance	552				792
Deferred tax liabilities:
Leasing transactions	513				527
Amortization of intangibles	370				364
Depreciation	186				195
Pension and other employee compensation plans	124				127
Partnerships	71				51
Deferred Income	79				50
MSRs	75				51
Total deferred tax liabilities	1,418				1,365
Net deferred tax liability		$866				$573

Deferred tax assets are recognized for net operating loss carryforwards and tax credit carryforwards. Valuation allowances are recorded as necessary to reduce deferred tax assets to the amounts that management concludes are more likely than not to be realized.

At December 31, 2019, the Company had state tax net operating loss carryforwards of $1.1 billion. Limitations on the ability to realize these carryforwards are reflected in the associated valuation allowance. At December 31, 2019, the Company had a valuation allowance of $79 million against various deferred tax assets related to state net operating losses and state tax credits, as it is management’s current assessment that it is more likely than not that

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the Company will not recognize a portion of the deferred tax assets related to these items. The valuation allowance decreased $31 million during the year ended December 31, 2019.

Effective with the fiscal year ended September 30, 1997, the reserve method for bad debts was no longer permitted for tax purposes. The repeal of the reserve method required the recapture of the reserve balance in excess of certain base year reserve amounts attributable to years ended prior to 1988. At December 31, 2019, the Company’s base year loan loss reserves attributable to years ended prior to 1988, for which no deferred income taxes have been provided, was $557 million. This base year reserve may become taxable if certain distributions are made with respect to the stock of the Company or if the Company ceases to qualify as a bank for tax purposes. No actions are planned that would cause this reserve to become wholly or partially taxable.

Citizens files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state and local income tax examinations by major tax authorities for years before 2016.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits:

	December 31,
(in millions)	2019				2018				2017
Balance at the beginning of the year		$8				$5				$42
Gross increase for tax positions related to current year	—				3				—
Gross decrease for tax positions related to prior years	(2		)		—				(27		)
Decrease for tax positions as a result of the lapse of the statutes of limitations	(1		)		—				(1		)
Decrease for tax positions related to settlements with taxing authorities	—				—				(9		)
Balance at end of year		$5				$8				$5

Tax positions are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The difference between the benefit recognized for a position and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit.

Included in the total amount of unrecognized tax benefits at December 31, 2019, are potential benefits of $5 million that, if recognized, would impact the effective tax rate.

Citizens classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no interest accrued through income tax expense during the years ended December 31, 2019 and 2018. The Company released $8 million of accrued interest through income tax expense during the year ended December 31, 2017. Citizens had approximately $1 million, $2 million, and $1 million accrued for the payment of interest at December 31, 2019, 2018, and 2017, respectively. There were no amounts accrued for penalties as of December 31, 2019, 2018, and 2017, and there were no penalties recognized during the years ended December 31, 2019, 2018, and 2017.

NOTE 23 - EARNINGS PER SHARE

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period. Net income available to common stockholders represents net income after preferred stock dividends, accretion of the discount on preferred stock issuances, and gains or losses from any repurchases of preferred stock. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period, plus potential dilutive shares such as share-based payment awards and warrants using the treasury stock method.

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	Year Ended December 31,
(in millions, except share and per-share data)	2019				2018				2017
Numerator (basic and diluted):
Net income		$1,791				$1,721				$1,652
Less: Preferred stock dividends	73				29				14
Net income available to common stockholders		$1,718				$1,692				$1,638
Denominator:
Weighted-average common shares outstanding - basic	449,731,453				478,822,072				502,157,440
Dilutive common shares: share-based awards	1,482,248				1,608,669				1,527,651
Weighted-average common shares outstanding - diluted	451,213,701				480,430,741				503,685,091
Earnings per common share:
Basic		$3.82				$3.54				$3.26
Diluted(1)	3.81				3.52				3.25

(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted average antidilutive shares totaling 783 and 533 for the years ended December 31, 2019 and 2017. There were no potentially dilutive shares to exclude from the calculation for the year ended December 31, 2018.

NOTE 24 - REGULATORY MATTERS

As a bank holding company, Citizens is subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the OCC.

Under the U.S. Basel III capital framework, the Company and CBNA 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 CCB of 2.5% is imposed on top of each of the three minimum risk-weighted capital ratios listed above. In addition, the Company must not be subject to a written agreement, order or capital directive with any of its regulators. Failure to meet minimum capital requirements can result in the initiation of certain actions that, if undertaken, could have a material effect on the Company’s Consolidated Financial Statements.

The following table presents the Company’s capital and capital ratios under U.S. Basel III Standardized rules. The Company has declared itself as an “AOCI opt-out” institution, which means the Company is not required to recognize in regulatory capital the impacts of net unrealized gains and losses included within AOCI for debt securities that are available for sale or held to maturity, accumulated net gains and losses on cash flow hedges and certain defined benefit pension plan assets.

	Actual						Minimum Capital Adequacy
(in millions, except ratio data)	Amount			Ratio			Amount			Ratio**(1)**
As of December 31, 2019
CET1 capital		$14,304		10.0				$10,004		7.000	%
Tier 1 capital	15,874			11.1			12,148			8.500
Total capital	18,542			13.0			15,006			10.500
Tier 1 leverage	15,874			10.0			6,351			4.000
As of December 31, 2018
CET1 capital		$14,485		10.6	%			$8,683		6.375	%
Tier 1 capital	15,325			11.3			10,726			7.875
Total capital	18,157			13.3			13,450			9.875
Tier 1 leverage	15,325			10.0			6,121			4.000

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

Under the FRB’s Capital Plan Rule, the Company may only make capital distributions, including payment of dividends and share repurchases, in accordance with a capital plan that has been reviewed by the FRB with no objection or as otherwise authorized by the FRB. The timing and exact amount of future dividends and share repurchases will depend on various factors, including the Company’s capital position, financial performance and market conditions. All future capital distributions are subject to consideration and approval by the Board of Directors prior to execution. See Note 16 for more information regarding the Company’s preferred stock issuances, common stock repurchases, and dividends.

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Dividends payable by CBNA, as a national bank subsidiary, are limited to the lesser of the amount calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, less any required transfers to surplus, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of the entity’s “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus). Federal bank regulatory agencies have issued policy statements which provide that FDIC-insured depository institutions and their holding companies should generally pay dividends only out of their current operating earnings.

NOTE 25 - BUSINESS OPERATING SEGMENTS

Citizens is managed by its Chief Executive Officer on a segment basis. The Company’s two business operating segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided, or the type of customer served. Each segment has a segment head who reports directly to the Chief Executive Officer. The Chief Executive Officer has final authority over resource allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the Chief Executive Officer.

Reportable Segments

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

Consumer Banking

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

Commercial Banking

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

Non-segment Operations

Other

Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets, community development, non-core assets, and other unallocated assets, liabilities, capital, revenues, provision for credit losses, and expenses including income tax expense. In addition to non-segment operations, Other includes goodwill and any associated goodwill impairment

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charges. For impairment testing purposes, the Company assigns goodwill to its Consumer Banking and Commercial Banking reporting units.

	As of and for the Year Ended December 31, 2019
(in millions)	Consumer Banking				Commercial Banking				Other				Consolidated
Net interest income		$3,182				$1,466				($34	)			$4,614
Noninterest income	1,156				607				114				1,877
Total revenue	4,338				2,073				80				6,491
Noninterest expense	2,851				858				138				3,847
Profit before provision for credit losses	1,487				1,215				(58		)		2,644
Provision for credit losses	325				97				(29		)		393
Income (loss) before income tax expense (benefit)	1,162				1,118				(29		)		2,251
Income tax expense (benefit)	287				248				(75		)		460
Net income		$875				$870				$46				$1,791
Total average assets		$66,240				$55,947				$39,989				$162,176

	As of and for the Year Ended December 31, 2018
(in millions)	Consumer Banking				Commercial Banking				Other				Consolidated
Net interest income		$3,064				$1,497				($29	)			$4,532
Noninterest income	973				545				78				1,596
Total revenue	4,037				2,042				49				6,128
Noninterest expense	2,723				813				83				3,619
Profit before provision for credit losses	1,314				1,229				(34		)		2,509
Provision for credit losses	289				26				11				326
Income (loss) before income tax expense (benefit)	1,025				1,203				(45		)		2,183
Income tax expense (benefit)	258				276				(72		)		462
Net income		$767				$927				$27				$1,721
Total average assets		$62,444				$52,362				$39,747				$154,553

	As of and for the Year Ended December 31, 2017
(in millions)	Consumer Banking				Commercial Banking				Other				Consolidated
Net interest income		$2,651				$1,411				$111				$4,173
Noninterest income	905				538				91				1,534
Total revenue	3,556				1,949				202				5,707
Noninterest expense	2,593				772				109				3,474
Profit before provision for credit losses	963				1,177				93				2,233
Provision for credit losses	265				19				37				321
Income before income tax expense (benefit)	698				1,158				56				1,912
Income tax expense (benefit)	246				384				(370		)		260
Net income		$452				$774				$426				$1,652
Total average assets		$59,714				$49,747				$40,492				$149,953

		Citizens Financial Group, Inc. | 156

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

FTP adjustments

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

Provision for credit losses allocations

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

Income tax allocations

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

Expense allocations

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

Goodwill

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

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

		Citizens Financial Group, Inc. | 157

NOTE 26 - PARENT COMPANY FINANCIALS

Condensed Statements of Operations

	Year Ended December 31,
(in millions)	2019				2018				2017
OPERATING INCOME:
Income from consolidated subsidiaries and excluding equity in undistributed earnings:
Dividends from banking subsidiaries		$1,130				$1,650				$1,055
Interest	48				46				43
Management and service fees	42				22				31
Income from nonbank subsidiaries and excluding equity in undistributed earnings:
Dividends from nonbank subsidiaries	8				5				4
Interest	4				2				1
Equity securities gains	—				—				1
All other operating income	1				1				1
Total operating income	1,233				1,726				1,136
OPERATING EXPENSE:
Salaries and employee benefits	35				25				40
Interest expense	87				89				97
All other expenses	27				23				22
Total operating expense	149				137				159
Income before taxes and undistributed income	1,084				1,589				977
Income taxes	(10		)		(13		)		(10		)
Income before undistributed earnings of subsidiaries	1,094				1,602				987
Equity in undistributed earnings of subsidiaries:
Bank	682				109				655
Nonbank	15				10				10
Net income		$1,791				$1,721				$1,652
Other comprehensive income (loss), net of income taxes:
Net pension plan activity arising during the period		($5	)			$5				($1	)
Net unrealized derivative instrument gains arising during the period	2				2				1
Other comprehensive (loss) income activity of the Parent Company, net of income taxes	(3		)		7				—
Other comprehensive income (loss) activity of Bank subsidiaries, net of income taxes	683				(283		)		(7		)
Total other comprehensive income (loss), net of income taxes	680				(276		)		(7		)
Total comprehensive income		$2,471				$1,445				$1,645

In accordance with federal and state banking regulations, dividends paid by CBNA to the Company are subject to certain limitations, see Note 24 for more information. Additionally, see Note 16 for more information regarding the Company’s common and preferred stock dividends.

		Citizens Financial Group, Inc. | 158

Condensed Balance Sheets

(in millions)	December 31, 2019				December 31, 2018
ASSETS:
Cash and due from banks		$1,418				$961
Loans and advances to:
Bank subsidiaries	1,146				1,158
Nonbank subsidiaries	120				70
Investments in subsidiaries:
Bank subsidiaries	21,973				20,590
Nonbank subsidiaries	99				83
Other assets	127				117
TOTAL ASSETS		$24,883				$22,979
LIABILITIES:
Long-term borrowed funds due to unaffiliated companies		$2,485				$1,987
Other liabilities	197				175
TOTAL LIABILITIES	2,682				2,162
TOTAL STOCKHOLDERS’ EQUITY	22,201				20,817
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$24,883				$22,979

Condensed Cash Flow Statements

	Year Ended December 31,
(in millions)	2019				2018				2017
OPERATING ACTIVITIES
Net income		$1,791				$1,721				$1,652
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(8		)		17				(11		)
Gain on sales of assets	—				—				(1		)
Equity in undistributed earnings of subsidiaries	(697		)		(120		)		(665		)
Increase in other liabilities	50				11				99
Decrease (increase) in other assets	7				(7		)		5
Other operating, net	58				40				(1		)
Net cash provided by operating activities	1,201				1,662				1,078
INVESTING ACTIVITIES
Investments in and advances to subsidiaries	(105		)		—				(230		)
Repayment of investments in and advances to subsidiaries	55				—				167
Other investing, net	(1		)		(1		)		(1		)
Net cash used by investing activities	(51		)		(1		)		(64		)
FINANCING ACTIVITIES
Proceeds from issuance of long-term borrowed funds	500				—				—
Repayments of long-term borrowed funds	—				(333		)		—
Proceeds from issuance of common stock	—				—				34
Treasury stock purchased	(1,220		)		(1,025		)		(820		)
Net proceeds from issuance of preferred stock	730				593				—
Dividends declared and paid to common stockholders	(617		)		(471		)		(322		)
Dividends declared and paid to preferred stockholders	(65		)		(14		)		(14		)
Other financing, net	(21		)		(13		)		—
Net cash used by financing activities	(693		)		(1,263		)		(1,122		)
Increase (decrease) in cash and due from banks	457				398				(108		)
Cash and due from banks at beginning of year	961				563				671
Cash and due from banks at end of year		$1,418				$961				$563

		Citizens Financial Group, Inc. | 159