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

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


						Page
Introduction						40

Financial Performance						40
Results of Operations - 2020 compared with 2019						43
Net Interest Income						43
Noninterest Income						46
Noninterest Expense						47
Provision for Credit Losses						48
Income Tax Expense						48
Business Operating Segments						49
Results of Operations - 2019 compared with 2018						50







Analysis of Financial Condition						51
Securities						51
Loans and Leases						52
Allowance for Credit Losses and Nonaccruing Loans and Leases						54
Deposits						61
Borrowed Funds						62
Quarterly Results of Operations						64
Capital and Regulatory Matters						66
Liquidity						71
Contractual Obligations						74
Off-Balance Sheet Arrangements						74
Critical Accounting Estimates						74

Risk Governance						78
Market Risk						80
Non-GAAP Financial Measures and Reconciliations						88


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INTRODUCTION

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $183.3 billion in assets as of December 31, 2020. Our mission is to help customers, colleagues and communities each reach their potential by listening to them and understanding their needs in order to offer tailored advice, ideas and solutions. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center as well as the convenience of approximately 2,700 ATMs and 1,000 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products, and asset finance. More information is available at www.citizensbank.com.

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

Non-GAAP Financial Measures

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

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

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

FINANCIAL PERFORMANCE

Key Highlights

Net income of $1.1 billion decreased 41% from 2019, with earnings per diluted common share of $2.22, down 42% from $3.81 per diluted common share for 2019. ROTCE of 6.9% declined from 12.6% in 2019. Declining results continue to be driven by the COVID-19 pandemic and its associated impact on our ACL which, coupled with our adoption of CECL on January 1, 2020, resulted in a $923 million reserve build during 2020.

In 2020, results reflected a $83 million after-tax reduction, or $0.19 per diluted common share, from notable items, largely tied to TOP 6 transformational and revenue and efficiency initiatives. In 2019, we recorded $17 million after-tax, or $0.03 per diluted common share, of notable items tied to Acquisition integration costs, costs related to strategic initiatives and income tax benefits associated with an operational restructure and legacy tax matters.


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Table 1: Notable Items
	Year Ended December 31, 2020
(in millions)	Noninterest expense	Income tax expense	Net Income
Reported results (GAAP)	$3,991	$241	$1,057
Less: Notable items
Total integration costs	10	(2)	(8)
Other notable items(1)	115	(40)	(75)
Total notable items	125	(42)	(83)
Underlying results (non-GAAP)	$3,866	$283	$1,140

(1) Other notable items include noninterest expense of $115 million related to our TOP 6 transformational and revenue and efficiency initiatives and an income tax benefit of $11 million related to an operational restructure and legacy tax matters.


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

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

Net income available to common stockholders of $950 million decreased $768 million, or 45%, compared to $1.7 billion in 2019.

◦On an Underlying basis, which excludes notable items, 2020 net income available to common stockholders of $1.0 billion compared with $1.7 billion in 2019.

◦On an Underlying basis, EPS of $2.41 per share compared to $3.84 in 2019.

Total revenue of $6.9 billion increased $414 million, or 6%, from 2019, as a 24% increase in noninterest income, given record results across mortgage, capital markets and wealth, was partially offset by a 1% decrease in net interest income given lower rates.

◦Net interest income of $4.6 billion reflected 8% growth in average interest-earning assets offset by the impact of the lower rate and challenging yield-curve environment.

◦Net interest margin of 2.88% decreased 26 basis points from 3.14% in 2019, reflecting the impact of lower interest rates, partially offset by lower funding costs and improved funding mix, as well as continued mix shift towards higher yielding assets.

–Net interest margin on a fully taxable-equivalent basis of 2.89% decreased by 27 basis points, compared to 3.16% in 2019.

–Average loans and leases of $124.5 billion increased $6.6 billion, or 6%, from $117.9 billion in 2019, reflecting a $5.5 billion increase in commercial loans and leases primarily driven by $3.2 billion of PPP loans as well as a $1.1 billion increase in retail loans.

–Period-end loan growth of $4.0 billion, or 3%, from 2019, reflected 6% growth in total commercial driven by PPP loans.

–Average deposits of $138.7 billion increased $15.4 billion, or 13%, from $123.3 billion in 2019, as a result of government stimulus benefiting consumers and small businesses as well as commercial clients building liquidity given COVID-19 disruption.

–Period-end deposit growth of $21.9 billion, or 17%, from 2019, reflecting growth in demand deposits, money market accounts, savings and checking with interest, partially offset by a decrease in term deposits.


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◦Noninterest income of $2.3 billion increased $442 million, or 24%, from 2019, driven by mortgage banking and capital markets fees, partially offset by lower service charges and fees, card fees, foreign exchange and interest rate products revenue, securities gains and other income.

Noninterest expense of $4.0 billion increased $144 million, or 4%, from $3.8 billion in 2019, driven by higher salaries and employee benefits reflecting strong mortgage production; outside services tied to growth initiatives; and equipment and software expense given continued investments in technology; partially offset by lower other operating expense given lower travel, pension and advertising expenses.

◦On an Underlying basis, noninterest expense increased 2% from 2019.

The efficiency ratio of 57.8% compared to 59.3% in 2019, and ROTCE of 6.9% compared to 12.6%.

◦On an Underlying basis, the efficiency ratio of 56.0% compared to 58.2% in 2019 and ROTCE of 7.5% compared to 12.8%, given the implementation of CECL and reserve increases tied to COVID-19 impacts.

Provision for credit losses of $1.6 billion increased $1.2 billion from $393 million in 2019, reflecting our adoption of CECL and its reliance on forecasts of expected future losses, combined with the approximate $923 million impact from COVID-19 and associated lockdowns and a sudden rise in unemployment and drop in GDP.
Tangible book value per common of $32.72 increased 2% from 2019. Fully diluted average common shares outstanding decreased 23.1 million shares, or 5% over the same period.


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RESULTS OF OPERATIONS — 2020 compared with 2019

Net Interest Income

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


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Table 2: Major Components of Net Interest Income
	Year Ended December 31,
2020					2019					Change
(dollars in millions)	Average Balances	Income/ Expense	Yields/ Rates			Average Balances	Income/ Expense	Yields/ Rates			Average Balances	Yields/ Rates (bps)
Assets
Interest-bearing cash and due from banks and deposits in banks	$6,175	$11	0.18	%		$1,544	$30	1.94	%		$4,631	(176) bps
Taxable investment securities	25,160	519	2.06			25,425	642	2.51			(265)	(45)
Non-taxable investment securities	4	—	2.60			5	—	2.60			(1)	—
Total investment securities	25,164	519	2.06			25,430	642	2.51			(266)	(45)
Commercial and industrial	46,255	1,582	3.36			41,702	1,797	4.25			4,553	(89)
Commercial real estate	14,452	438	2.98			13,160	628	4.71			1,292	(173)
Leases	2,365	64	2.71			2,694	77	2.84			(329)	(13)
Total commercial	63,072	2,084	3.25			57,556	2,502	4.29			5,516	(104)
Residential mortgages	19,178	618	3.22			19,308	687	3.56			(130)	(34)
Home Equity	12,607	461	3.66			13,645	700	5.13			(1,038)	(147)
Automobile	12,064	517	4.29			12,047	506	4.20			17	9
Education	11,165	560	5.02			9,415	555	5.89			1,750	(87)
Other retail	6,458	479	7.41			5,929	491	8.27			529	(86)
Total retail	61,472	2,635	4.29			60,344	2,939	4.87			1,128	(58)
Total loans and leases (1)	124,544	4,719	3.76			117,900	5,441	4.59			6,644	(83)
Loans held for sale, at fair value	2,772	75	2.72			1,689	63	3.74			1,083	(102)
Other loans held for sale	620	33	5.22			251	13	5.10			369	12
Interest-earning assets	159,275	5,357	3.35			146,814	6,189	4.19			12,461	(84)
Allowance for loan and lease losses	(2,218)					(1,244)					(974)
Goodwill	7,049					7,036					13
Other noninterest-earning assets	12,336					9,570					2,766
Total assets	$176,442					$162,176					$14,266
Liabilities and Stockholders’ Equity
Checking with interest	$26,002	$64	0.24	%		$23,470	$203	0.87	%		$2,532	(63) bps
Money market accounts	44,732	192	0.43			36,613	450	1.23			8,119	(80)
Regular savings	16,144	50	0.31			13,247	75	0.57			2,897	(26)
Term deposits	14,309	203	1.42			21,035	427	2.03			(6,726)	(61)
Total interest-bearing deposits	101,187	509	0.50			94,365	1,155	1.22			6,822	(72)
Short-term borrowed funds	334	2	0.52			665	10	1.47			(331)	(95)
Long-term borrowed funds	10,853	260	2.39			13,014	410	3.14			(2,161)	(75)
Total borrowed funds	11,187	262	2.33			13,679	420	3.06			(2,492)	(73)
Total interest-bearing liabilities	112,374	771	0.69			108,044	1,575	1.46			4,330	(77)
Demand deposits	37,553					28,936					8,617
Other liabilities	4,280					3,683					597
Total liabilities	154,207					140,663					13,544
Stockholders’ equity	22,235					21,513					722
Total liabilities and stockholders’ equity	$176,442					$162,176					$14,266
Interest rate spread			2.66	%				2.73	%			(7)
Net interest income and net interest margin		$4,586	2.88	%			$4,614	3.14	%			(26)
Net interest income and net interest margin, FTE(2)		$4,599	2.89	%			$4,635	3.16	%			(27)
Memo: Total deposits (interest-bearing and demand)	$138,740	$509	0.37	%		$123,301	$1,155	0.94	%		$15,439	(57) bps

(1) Interest income and rates on loans include loan fees. Additionally, $1.0 billion and $728 million of average nonaccrual loans were included in the average loan balances used to determine the average yield on loans for December 2020 and 2019, respectively.

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

Net interest income of $4.6 billion decreased $28 million, reflecting 8% average interest-earning asset growth, including the addition of PPP loans, and improvements in funding mix and deposit pricing that were more than offset by a 26 basis point decrease in net interest margin given the lower rate and challenging yield curve environment.

Net interest margin on an FTE basis of 2.89% decreased 27 basis points compared to 3.16% in 2019, primarily reflecting the impact of lower interest rates and elevated cash balances given strong deposit flows (elevated cash balances drove 8 basis points of the decline), partially offset by improved funding mix and deposit


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pricing. Average interest-earning asset yields of 3.35% decreased 84 basis points from 4.19% in 2019, while average interest-bearing liability costs of 0.69% decreased 77 basis points from 1.46% in 2019, reflecting strong pricing discipline.

Average interest-earning assets of $159.3 billion increased $12.5 billion, or 8%, from 2019, driven by a $5.5 billion increase in average commercial loans, a $4.4 billion increase in total investment securities and interest-bearing cash and due from banks and deposits in banks, a $1.5 billion increase in average total loans held for sale and a $1.1 billion increase in average retail loans. Commercial growth was driven by commercial and industrial (primarily PPP loans) and commercial real estate. Retail growth was driven by education and other retail, partially offset by home equity.

Average deposits of $138.7 billion increased $15.4 billion from 2019, as a result of government stimulus benefiting consumers and small businesses and clients building liquidity given COVID-19 disruption. Increases in demand deposits, money market accounts, savings, and checking with interest, were partially offset by a decrease in term deposits. Total interest-bearing deposit costs of $509 million decreased $646 million, or 56%, from $1.2 billion in 2019, primarily due to a lower rate environment and strong pricing discipline.

Average total borrowed funds of $11.2 billion decreased $2.5 billion from 2019 as strong deposit flows allowed for significantly lower levels of borrowings, with FHLB advances near zero at period-end and a reduction in senior and subordinated debt. Total borrowed funds costs of $262 million decreased $158 million from 2019. The total borrowed funds cost of 2.33% decreased 73 basis points from 3.06% in 2019 due to the impact of COVID-19 on the rate environment.


Table 3: Changes in Net Interest Income Due to Average Volume and Average Rate
	Year Ended December 31,
	2020 Versus 2019
(in millions)	Average Volume(1)	Average Rate(1)	Net Change
Interest Income
Interest-bearing cash and due from banks and deposits in banks	$90	($109)	($19)
Taxable investment securities	(7)	(116)	(123)

Total investment securities	(7)	(116)	(123)
Commercial and industrial	194	(409)	(215)
Commercial real estate	61	(251)	(190)
Leases	(9)	(4)	(13)
Total commercial	246	(664)	(418)
Residential mortgages	(5)	(64)	(69)
Home Equity	(52)	(187)	(239)
Automobile	1	10	11
Education	103	(98)	5
Other retail	44	(56)	(12)
Total retail	91	(395)	(304)
Total loans and leases	337	(1,059)	(722)
Loans held for sale, at fair value	41	(29)	12
Other loans held for sale	19	1	20
Total interest income	$480	($1,312)	($832)
Interest Expense
Checking with interest	$22	($161)	($139)
Money market accounts	100	(358)	(258)
Regular savings	16	(41)	(25)
Term deposits	(136)	(88)	(224)
Total interest-bearing deposits	2	(648)	(646)
Short-term borrowed funds	(5)	(3)	(8)
Long-term borrowed funds	(56)	(94)	(150)
Total borrowed funds	(61)	(97)	(158)
Total interest expense	(59)	(745)	(804)
Net interest income	$539	($567)	($28)

(1) Volume and rate changes have been allocated on a consistent basis using the respective percentage changes in average balances and average rates.


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Noninterest Income


Table 4: Noninterest Income
	Year Ended December 31,
(in millions)	2020	2019	Change	Percent
Mortgage banking fees	$915	$302	$613	203	%
Service charges and fees	403	505	(102)	(20)
Capital markets fees	250	216	34	16
Card fees	217	254	(37)	(15)
Trust and investment services fees	203	202	1	—
Letter of credit and loan fees	140	135	5	4
Foreign exchange and interest rate products	120	155	(35)	(23)
Securities gains, net	4	19	(15)	(79)
Other income(1)	67	89	(22)	(25)
Noninterest income	$2,319	$1,877	$442	24	%

(1) Includes bank-owned life insurance income and other income for all periods presented, and net impairment losses recognized in earnings on available for sale debt securities for the 2019 period.

Noninterest income of $2.3 billion increased $442 million, or 24%, from 2019, reflecting increased mortgage banking fees due to higher origination volumes and gain on sale margins, and capital markets fees. These results were partially offset by lower service charges and fees and card fees as well as lower foreign exchange and interest rate products revenue, reflecting challenging market conditions. Results also reflected decreased securities gains and other income given lower leasing income and lower gains related to asset dispositions, partially offset by gain on sale of education loans.


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Noninterest Expense


Table 5: Noninterest Expense
	Year Ended December 31,
(in millions)	2020	2019	Change	Percent
Salaries and employee benefits	$2,123	$2,026	$97	5	%
Equipment and software expense	565	514	51	10
Outside services	553	498	55	11
Occupancy	331	333	(2)	(1)
Other operating expense	419	476	(57)	(12)
Noninterest expense	$3,991	$3,847	$144	4	%

Noninterest expense of $4.0 billion in 2020 increased $144 million, or 4%, compared to 2019, reflecting higher salaries and employee benefits, reflecting strong mortgage production, outside services, tied to growth initiatives, and an increase in equipment and software expense, given continued investments in technology. These results were partially offset by lower other operating expense given a decline in travel, pension, and advertising expenses. Underlying noninterest expense increased $87 million, or 2%, due to the reasons listed above.


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Provision for Credit Losses

The provision for credit losses is the result of a detailed analysis performed to estimate our ACL. The total provision for credit losses includes the provision for loan and lease losses and the provision for unfunded commitments. Refer to “—Analysis of Financial Condition — Allowance for Credit Losses and Nonaccruing Loans and Leases” for more information.

Provision for credit losses of $1.6 billion included a $923 million reserve build primarily associated with the impact of the COVID-19 pandemic and associated lockdowns on our loan portfolio, which resulted in a sudden rise in unemployment and drop in GDP. Net charge-offs of $693 million increased $263 million from 2019, which reflected charge-offs in our commercial portfolio concentrated in certain sub-categories, including retail real estate, metals and mining, energy and related, and casual dining, as well as the impact of continued seasoning in retail growth portfolios, and loan growth.

Income Tax Expense

Income tax expense of $241 million decreased $219 million from $460 million in 2019. The 2020 effective tax rate of 18.5% decreased from 20.4% in 2019, driven by the increased benefit of tax-advantaged investments on lower pre-tax income. An Underlying effective tax rate of 19.9% in 2020 compared to 22.0% in 2019.


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Business Operating Segments

We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and related revenues, provision for credit losses, which, at the segment level, is equal to net charge-offs, and other expenses. The residual difference between the consolidated provision for credit losses and the business operating segments’ net charge-offs is reflected in Other.

Non-segment operations are classified as Other, which includes corporate functions, the Treasury function, the securities portfolio, wholesale funding activities, intangible assets not directly allocated to a business operating segment, community development, non-core assets, and other unallocated assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense. In addition, Other includes goodwill not directly allocated to a business operating segment and any associated goodwill impairment charges. For impairment testing purposes, we allocate all goodwill to our Consumer Banking and/or Commercial Banking reporting units.

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

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

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

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


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


Table 6: Selected Financial Data for Business Operating Segments
	As of and for the Year Ended December 31,		As of and for the Year Ended December 31,
	2020	2019	2020	2019
(dollars in millions)	Consumer Banking		Commercial Banking
Net interest income	$3,311	$3,182	$1,643	$1,466
Noninterest income	1,655	1,156	595	607
Total revenue	4,966	4,338	2,238	2,073
Noninterest expense	2,964	2,851	860	858
Profit before provision for credit losses	2,002	1,487	1,378	1,215
Net charge-offs	288	325	398	97
Income before income tax expense	1,714	1,162	980	1,118
Income tax expense	429	287	206	248
Net income	$1,285	$875	$774	$870

Average Balances:
Total assets	$72,022	$66,240	$60,839	$55,947
Total loans and leases(1)(2)	68,237	63,396	57,935	54,355
Deposits	91,541	84,835	40,417	31,085
Interest-earning assets	68,535	63,449	58,334	54,666

(1) Includes LHFS.

(2) The majority of PPP loans are reflected in Consumer Banking in accordance with how they are managed.

Consumer Banking

Net interest income increased $129 million, or 4%, from 2019, driven by the benefit of a $4.8 billion increase in average loans led by education, other retail and the impact of the PPP loan program, partially offset by lower deposit margins driven by the low rate environment. Noninterest income increased $499 million, or 43%, from 2019, driven by mortgage banking fees (reflecting strong origination volumes and gain on sale margins) and other income (gain on sale of education loans), partially offset by lower service charges and fees (higher deposit balances and lower transaction volumes) and card fees (lower transaction volumes). Noninterest expense increased $113 million, or 4%, from 2019, reflecting higher salaries and employee benefits costs tied to higher mortgage origination volumes and PPP loans. Net charge-offs of $288 million decreased $37 million, or 11%, reflecting the impact of loan forbearance programs.

Commercial Banking

Net interest income of $1.6 billion decreased $177 million, or 12%, from 2019, primarily due to the low rate environment, partially offset by higher loan and lower-costing deposit volume. Noninterest income of $595 million decreased $12 million, or 2%, from $607 million in 2019, as higher capital markets fees were offset by a decrease in other income and foreign exchange and interest rate products. Noninterest expense of $860 million increased $2 million, from $858 million in 2019, driven by higher salaries and employee benefits, partially offset by lower travel costs. Net charge-offs of $398 million increased $301 million from 2019, driven by the impact of COVID-19 and associated lockdowns, primarily in the retail real estate, metals and mining, energy and related, and casual dining industries.

RESULTS OF OPERATIONS — 2019 compared with 2018

For a description of our results of operations for 2019, see the “Results of Operations — 2019 compared with 2018” section of Item 7 in our 2019 Form 10-K.


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ANALYSIS OF FINANCIAL CONDITION

Securities


Table 7: Amortized Cost and Fair Value of AFS and HTM Securities
	December 31, 2020		December 31, 2019		December 31, 2018
(in millions)	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value
U.S. Treasury and other	$11	$11	$71	$71	$24	$24
State and political subdivisions	3	3	5	5	5	5
Mortgage-backed securities, at fair value:
Federal agencies and U.S. government sponsored entities	21,954	22,506	19,803	19,875	20,211	19,634
Other/non-agency	396	422	638	662	236	232
Total mortgage-backed securities, at fair value	22,350	22,928	20,441	20,537	20,447	19,866
Total debt securities available for sale, at fair value	$22,364	$22,942	$20,517	$20,613	$20,476	$19,895
Mortgage-backed securities, at cost:
Federal agencies and U.S. government sponsored entities	$2,342	$2,464	$3,202	$3,242	$3,425	$3,293
Other/non-agency	—	—	—	—	740	748
Total mortgage-backed securities, at cost	$2,342	$2,464	$3,202	$3,242	$4,165	$4,041
Asset-backed securities, at cost	$893	$893	$—	$—	$—	$—
Total debt securities held to maturity	$3,235	$3,357	$3,202	$3,242	$4,165	$4,041
Total debt securities available for sale and held to maturity	$25,599	$26,299	$23,719	$23,855	$24,641	$23,936
Equity securities, at fair value	$66	$66	$47	$47	$181	$181
Equity securities, at cost	604	604	807	807	834	834

Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving appropriate returns that align with our overall portfolio management strategy. The portfolio includes high quality, highly liquid investments reflecting our ongoing commitment to appropriate contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 95% of the fair value of our debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge those securities to the FHLB for collateral purposes.

The fair value of the AFS debt securities portfolio of $22.9 billion at December 31, 2020 increased $2.3 billion from $20.6 billion at December 31, 2019 largely reflecting an increase of $1.8 billion related to reinvestment timing and a $482 million increase in value from lower long-term rates. The fair value of the HTM debt securities portfolio decreased $115 million largely reflecting portfolio runoff, partially offset by the reclass of certain ABS. In September 2020, we purchased $813 million of asset-backed securities, which were recorded as AFS; however, in October 2020, management transferred these securities to HTM after concluding to hold these securities through maturity. For further information, see Note 1 in Item 8.

As of December 31, 2020, the portfolio’s average effective duration was 2.7 years compared with 3.7 years as of December 31, 2019, as lower long-term rates drove an increase in both actual and projected securities prepayment speeds. We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetite in the context of the broader interest rate risk in the banking book framework and limits.


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Table 8: Amortized Cost and Fair Value of AFS and HTM Securities by Contractual Maturity
	As of December 31, 2020
	Distribution of Maturities(1)
(dollars in millions)	Due in 1 Year or Less		Due After 1 Through 5 Years		Due After 5 Through 10 Years		Due After 10 Years		Total
Amortized cost:
U.S. Treasury and other	$11		$—		$—		$—		$11
State and political subdivisions	—		—		—		3		3
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	1		127		1,616		20,210		21,954
Other/non-agency	—		—		—		396		396
Total debt securities available for sale	12		127		1,616		20,609		22,364
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		2,342		2,342

Asset-backed securities	—		—		893		—		893
Total debt securities held to maturity	—		—		893		2,342		3,235
Total amortized cost of debt securities (2)	$12		$127		$2,509		$22,951		$25,599
Weighted-average yield (3)(4)	0.63	%	2.16	%	2.48	%	2.27	%	2.29	%

(1) Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.

(2) As of December 31, 2020, no investment exceeded 10% of Stockholders’ Equity.

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

(4) Yields exclude the impact of hedging activity.

Loans and Leases


Table 9: Composition of Loans and Leases, Excluding LHFS
	December 31,					Changes from 2020-2019
(in millions)	2020	2019	2018	2017	2016	$	%
Commercial and industrial (1) (2)	$44,173	$41,479	$40,857	$37,562	$37,274	$2,694	6	%
Commercial real estate	14,652	13,522	13,023	11,308	10,624	1,130	8
Leases	1,968	2,537	2,903	3,161	3,753	(569)	(22)
Total commercial (1)	60,793	57,538	56,783	52,031	51,651	3,255	6
Residential mortgages	19,539	19,083	18,978	17,045	15,115	456	2
Home equity (3)	12,149	13,154	14,286	15,566	16,927	(1,005)	(8)
Automobile	12,153	12,120	12,106	13,204	13,938	33	—
Education	12,308	10,347	8,900	8,134	6,610	1,961	19
Other retail (4)	6,148	6,846	5,607	4,637	3,428	(698)	(10)
Total retail	62,297	61,550	59,877	58,586	56,018	747	1
Total loans and leases	$123,090	$119,088	$116,660	$110,617	$107,669	$4,002	3	%

(1) The commercial loan class has been renamed commercial and industrial, and the commercial loans and leases loan segment has been renamed commercial.

(2) The December 31, 2020 commercial and industrial balance included PPP loans fully guaranteed by the SBA.

(3) Beginning in the first quarter of 2020, home equity loans, home equity lines of credit, home equity loans serviced by others and home equity lines of credit serviced by others are included in home equity. Prior periods have been adjusted to conform with the current period presentation.

(4) Beginning in the first quarter of 2020, credit card and other retail are included in other retail. Prior periods have been adjusted to conform with the current period presentation.

Total loans and leases increased $4.0 billion, or 3%, from $119.1 billion as of December 31, 2019, largely driven by commercial PPP loans to small business customers. Growth in retail loans, driven by education, was muted in part by the sale of education loans in September and December 2020 amounting to $1.1 billion, inclusive of accrued interest, capitalized interest and fees, and a decline in home equity and other retail. For further information, see Note 10 in Item 8.

PPP loans to small business customers totaled approximately $4.7 billion for the quarters ended June 30, 2020 and September 30, 2020, and $4.2 billion as of December 31, 2020. Average PPP loans totaled approximately $3.4 billion, $4.7 billion and $4.5 billion for the quarters ended June 30, 2020, September 30, 2020, and December 31, 2020, respectively. There were no outstanding PPP loans as of and during the quarter ended March 31, 2020.


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As of December 31, 2020, under our COVID-19-related forbearance programs, that are guided by the CARES Act as well as banking regulator interagency guidance, we have deferred payments on:

Approximately $1.4 billion, or 2.3%, of our retail portfolio, for which the weighted average FICO score is 711

◦94% of customers that exited forbearance are current on payments

◦Although not required, approximately 42% of our residential mortgage borrowers have made payment while in active forbearance, and the weighted average loan-to-value of the $700 million in residential mortgage loans in active forbearance is 62%.

Approximately $343 million, or 0.6%, of our commercial portfolio, including approximately $53 million, or 1.0%, of our small business portfolio.

The vast majority of these deferrals are not classified as TDRs.


Table 10: Maturities and Sensitivities of Loans and Leases to Changes in Interest Rates
	December 31, 2020
(in millions)	Due in 1 Year or Less	Due After 1 Year Through 5 Years	Due After 5 Years	Total Loans and Leases
Commercial and industrial	$7,678	$31,390	$5,105	$44,173
Commercial real estate	3,710	9,951	991	14,652
Leases	460	1,208	300	1,968
Total commercial	11,848	42,549	6,396	60,793
Residential mortgages	1,033	2,247	16,259	19,539
Home equity	10,179	258	1,712	12,149
Automobile	170	6,801	5,182	12,153
Education	17	1,346	10,945	12,308
Other retail	2,196	3,713	239	6,148
Total retail	13,595	14,365	34,337	62,297
Total loans and leases	$25,443	$56,914	$40,733	$123,090
Loans and leases due after one year at fixed interest rates		$22,848	$22,730	$45,578
Loans and leases due after one year at variable interest rates		34,066	18,003	52,069

Loan and Lease Concentrations

At December 31, 2020, we did not identify any concentration of loans and leases exceeding 10% of total loans and leases that were not otherwise disclosed as a category of loans and leases. For further information on how we manage concentration exposures, see Note 5 in Item 8.


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Allowance for Credit Losses and Nonaccruing Loans and Leases

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

Summary of Loan and Lease Loss Experience


Table 11: Summary of Changes in ALLL and Reserve for Unfunded Commitments
	As of and for the Year Ended December 31,
(dollars in millions)	2020	2019	2018	2017	2016
Allowance for Loan and Lease Losses — Beginning:
Commercial and industrial	$548	$530	$541	$516	$376
Commercial real estate	107	138	121	99	111
Leases	19	22	23	48	23
Qualitative	—	—	—	—	86
Total commercial	674	690	685	663	596
Residential mortgages	35	36	44	55	46
Home equity	83	108	122	182	203
Automobile	123	127	139	127	106
Education	116	101	120	102	96
Other retail	221	180	126	107	88
Qualitative	—	—	—	—	81
Total retail	578	552	551	573	620
Total allowance for loan and lease losses — Beginning	$1,252	$1,242	$1,236	$1,236	$1,216
Cumulative effect of change in accounting principle:
Commercial and industrial	($197)	$—	$—	$—	$—
Commercial real estate	(57)	—	—	—	—
Leases	78	—	—	—	—
Total commercial	(176)	—	—	—	—
Residential mortgages	95	—	—	—	—
Home equity	74	—	—	—	—
Automobile	82	—	—	—	—
Education	298	—	—	—	—
Other retail	80	—	—	—	—
Total retail loans	629	—	—	—	—
Cumulative effect of change in accounting principle	$453	$—	$—	$—	$—
Allowance for Loan and Lease Losses — Beginning, Adjusted:
Commercial and industrial	$351	$530	$541	$516	$376
Commercial real estate	50	138	121	99	111
Leases	97	22	23	48	23
Qualitative	—	—	—	—	86
Total commercial	498	690	685	663	596
Residential mortgages	130	36	44	55	46
Home equity	157	108	122	182	203
Automobile	205	127	139	127	106
Education	414	101	120	102	96
Other retail	301	180	126	107	88
Qualitative	—	—	—	—	81
Total retail loans	1,207	552	551	573	620
Total allowance for loan and lease losses — beginning, Adjusted	$1,705	$1,242	$1,236	$1,236	$1,216


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Table 11: Summary of Changes in ALLL and Reserve for Unfunded Commitments
	As of and for the Year Ended December 31,
(dollars in millions)	2020		2019		2018		2017		2016
Gross Charge-offs:
Commercial and industrial	($247)		($87)		($48)		($62)		($56)
Commercial real estate	(112)		(39)		(4)		(13)		(14)
Leases	(78)		(14)		—		—		(9)
Total commercial	(437)		(140)		(52)		(75)		(79)
Residential mortgages	(7)		(8)		(8)		(11)		(21)
Home equity	(25)		(39)		(45)		(65)		(109)
Automobile	(114)		(143)		(158)		(181)		(160)
Education	(51)		(72)		(68)		(59)		(52)
Other retail	(209)		(213)		(163)		(121)		(115)
Total retail	(406)		(475)		(442)		(437)		(457)
Total gross charge-offs	($843)		($615)		($494)		($512)		($536)
Gross Recoveries:
Commercial and industrial	$11		$24		$15		$37		$21
Commercial real estate	1		—		4		3		12

Total commercial	12		24		19		40		33
Residential mortgages	6		9		5		6		9
Home equity	38		49		49		54		61
Automobile	51		57		67		73		65
Education	16		16		16		15		11
Other retail	27		30		21		19		22
Total retail	138		161		158		167		168
Total gross recoveries	$150		$185		$177		$207		$201
Net (Charge-offs)/Recoveries:
Commercial and industrial	($236)		($63)		($33)		($25)		($35)
Commercial real estate	(111)		(39)		—		(10)		(2)
Leases	(78)		(14)		—		—		(9)
Total commercial	(425)		(116)		(33)		(35)		(46)
Residential mortgages	(1)		1		(3)		(5)		(12)
Home equity	13		10		4		(11)		(48)
Automobile	(63)		(86)		(91)		(108)		(95)
Education	(35)		(56)		(52)		(44)		(41)
Other retail	(182)		(183)		(142)		(102)		(93)
Total retail	(268)		(314)		(284)		(270)		(289)
Total net charge-offs	($693)		($430)		($317)		($305)		($335)
Ratio of net charge-offs to average loans and leases	(0.56	%)	(0.36	%)	(0.28	%)	(0.28	%)	(0.32	%)

Provision for Loan and Lease Losses:
Commercial and industrial	$706		$81		$22		$50		$117
Commercial real estate	421		8		17		32		(17)
Leases	33		11		(1)		(25)		34
Qualitative	—		—		—		—		(21)
Total commercial	1,160		100		38		57		113
Residential mortgages	12		(2)		(5)		(6)		8
Home equity	(36)		(35)		(18)		(49)		(8)
Automobile	58		82		79		120		99
Education	(18)		71		33		62		21
Other retail	255		224		196		121		95
Qualitative	—		—		—		—		27
Total retail	271		340		285		248		242
Total provision for loan and lease losses	$1,431		$440		$323		$305		$355


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Table 11: Summary of Changes in ALLL and Reserve for Unfunded Commitments
	As of and for the Year Ended December 31,
(dollars in millions)	2020	2019	2018	2017	2016
Total Allowance for Loan and Lease Losses — Ending:
Commercial and industrial	$821	$548	$530	$541	$458
Commercial real estate	360	107	138	121	92
Leases	52	19	22	23	48
Qualitative	—	—	—	—	65
Total commercial	1,233	674	690	685	663
Residential mortgages	141	35	36	44	42
Home equity	134	83	108	122	147
Automobile	200	123	127	139	110
Education	361	116	101	120	76
Other retail	374	221	180	126	90
Qualitative	—	—	—	—	108
Total retail	1,210	578	552	551	573

Total allowance for loan and lease losses — Ending	$2,443	$1,252	$1,242	$1,236	$1,236
Reserve for Unfunded Lending Commitments — Beginning	$44	$91	$88	$72	$58
Cumulative effect of change in accounting principle	(2)	—	—	—	—
Provision for unfunded lending commitments	185	(47)	3	16	14
Reserve for unfunded lending commitments — Ending	$227	$44	$91	$88	$72
Total Allowance for Credit Losses — Ending	$2,670	$1,296	$1,333	$1,324	$1,308


Table 12: Allocation of the ALLL
	December 31,
(dollars in millions)	2020			2019			2018			2017			2016
Commercial and industrial	$821	36	%	$548	35	%	$530	35	%	$541	34	%	$458	35	%
Commercial real estate	360	12		107	11		138	11		121	10		92	10
Leases	52	1		19	2		22	3		23	3		48	3
Qualitative	—	N/A		—	N/A		—	N/A		—	N/A		65	N/A
Total commercial	1,233	49		674	48		690	49		685	47		663	48
Residential mortgages	141	16		35	16		36	16		44	15		42	14
Home equity	134	10		83	11		108	12		122	14		147	16
Automobile	200	10		123	10		127	10		139	12		110	13
Education	361	10		116	9		101	8		120	7		76	6
Other retail	374	5		221	6		180	5		126	5		90	3
Qualitative	—	N/A		—	N/A		—	N/A		—	N/A		108	N/A
Total retail	1,210	51		578	52		552	51		551	53		573	52
Total loans and leases	$2,443	100	%	$1,252	100	%	$1,242	100	%	$1,236	100	%	$1,236	100	%

The ALLL represented 1.98% of total loans and leases and 240% of NPLs as of December 31, 2020 compared with 1.05% and 178%, respectively, as of December 31, 2019.


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Risk Elements


Table 13: Nonaccrual Loans and Leases, Accruing and 90 Days or More Past Due and Restructured Loans and Leases
	December 31,
(in millions)	2020	2019	2018	2017	2016
Nonaccrual loans and leases
Commercial and industrial	$280	$240	$194	$238	$322
Commercial real estate	176	2	7	27	50
Leases	2	3	—	—	15
Total commercial	458	245	201	265	387
Residential mortgages	167	93	105	125	139
Home equity	276	246	313	348	406
Automobile	72	67	81	70	50
Education	18	18	38	38	38
Other retail	28	34	28	22	20
Total retail	561	458	565	603	653
Total nonaccrual loans and leases	$1,019	$703	$766	$868	$1,040
Loans and leases that are accruing and 90 days or more delinquent
Commercial and industrial	$20	$2	$1	$5	$2
Commercial real estate	—	—	—	3	—
Leases	1	—	—	—	—
Total commercial	21	2	1	8	2
Residential mortgages	30	13	15	16	18


Education	2	2	2	3	5
Other retail	9	8	7	5	1
Total retail	41	23	24	24	24
Total accruing and 90 days or more delinquent	62	25	25	32	26
Total	$1,081	$728	$791	$900	$1,066
Troubled debt restructurings (1)	$690	$692	$723	$629	$633

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

NPLs of $1.0 billion as of December 31, 2020 increased $316 million from December 31, 2019, driven by a $103 million increase in retail reflecting growth in mortgage NPLs, and a $213 million increase in commercial NPLs reflecting a deterioration in certain industry sectors from the impacts of COVID-19 and associated lockdowns. NCOs of $693 million increased $263 million, or 61%, from $430 million in 2019 reflecting charge-offs in our commercial portfolio related to retail real estate, metals and mining, energy and related, and casual dining, while retail NCOs were down compared to 2019 due in large part to U.S. Government stimulus programs and forbearance. NCOs as a percentage of total average loans of 0.56% increased 20 basis points compared to 0.36% in 2019.

We continue to assess the impact of the COVID-19 pandemic and associated lockdowns and have instituted a variety of measures to identify and monitor areas of potential risk, including direct outreach to commercial clients and close monitoring of retail credit metrics.

Potential Problem Loans and Leases

At December 31, 2020, we did not identify any potential problem loans or leases within the portfolio that were not already disclosed in “—Risk Elements” and “—Commercial Loan Asset Quality.” Potential problem loans or leases consist of loans and leases where information about a borrower’s possible credit problems cause management to have serious doubts as to the ability of a borrower to comply with the present repayment terms.

Commercial Loan Asset Quality

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


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Commercial NPLs increased $213 million to $458 million as of December 31, 2020 from $245 million as of December 31, 2019. As of December 31, 2020, total commercial NPLs were 0.8% of the commercial portfolio and increased from 0.4% at December 31, 2019. Total 2020 commercial portfolio net charge-offs of $425 million increased from $116 million in 2019. For the year ended December 31, 2020, the commercial portfolio annualized net charge-off ratio of 0.67% increased from 0.20% for the year ended December 31, 2019, reflecting charge-offs in the retail real estate, metals and mining, energy and related, and casual dining industry sectors.

The increases in commercial NPLs and NCOs were driven largely by a deterioration in certain industry sectors, including retail real estate, casual dining, and energy and related, resulting from the impacts of COVID-19 and associated lockdowns.

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


Table 14: Commercial Loans and Leases by Regulatory Classification
	December 31, 2020
		Criticized
(in millions)	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial(1)	$40,878	$1,583	$1,464	$248	$44,173
Commercial real estate	13,356	804	416	76	14,652
Leases	1,922	33	12	1	1,968
Total commercial	$56,156	$2,420	$1,892	$325	$60,793

(1) Pass includes PPP loans.


	December 31, 2019
		Criticized
(in millions)	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial	$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	$54,502	$1,778	$1,009	$249	$57,538

Total commercial criticized balances of $4.6 billion as of December 31, 2020 increased $1.6 billion compared with December 31, 2019. Commercial criticized as a percent of total commercial of 7.6% at December 31, 2020 increased from 5.3% at December 31, 2019.

Commercial and industrial criticized balances of $3.3 billion, or 7.5% of the total commercial and industrial loan portfolio as of December 31, 2020, increased from $2.5 billion, or 6.1%, as of December 31, 2019. The increase was due to the migration to criticized loans for hospitality, energy and related, and casual dining. Commercial and industrial criticized loans represented 71% of total criticized loans as of December 31, 2020 compared to 83% as of December 31, 2019.

Commercial real estate criticized balances of $1.3 billion, or 8.8% of the commercial real estate portfolio, increased from $353 million, or 2.6%, as of December 31, 2019. The increase was due to the migration to criticized loans for a few larger borrowers in the hospitality and retail industry sectors. Commercial real estate accounted for 28% of total criticized loans as of December 31, 2020 compared to 12% as of December 31, 2019.


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Table 15: Commercial Loans and Leases by Industry Sector
	December 31, 2020			December 31, 2019
(dollars in millions)	Balance	% of Total Loans		Balance	% of Total Loans
Finance and insurance	$6,481	5	%	$5,155	4	%
Health, pharma, and social assistance	3,243	3		3,496	3
Accommodation and food services	3,206	3		3,346	3
Professional, scientific, and technical services	2,804	2		2,986	3
Other manufacturing	2,403	2		2,337	2
Information	2,378	2		2,485	2
Retail trade	2,336	2		2,319	2
Energy and related	2,237	2		2,564	2
Wholesale trade	1,904	2		2,606	2
Metals and mining	1,646	1		1,956	2
Arts, entertainment, and recreation	1,382	1		1,229	1
Other services	1,370	1		1,413	1
Administrative and waste management services	1,320	1		1,454	1
Computer, electrical equipment, appliance, and component manufacturing	1,174	1		1,199	1
Transportation and warehousing	1,169	1		1,141	1
Consumer products manufacturing	1,112	1		1,005	1
Automotive	1,051	1		1,213	1
Educational services	844	1		1,093	1
Chemicals	736	—		983	1
Real estate and rental and leasing	732	—		659	—
All other (1)	490	—		840	1
Total commercial and industrial	40,018	32		41,479	35
Real estate and rental and leasing	13,169	11		12,116	10
Accommodation and food services	749	1		606	1
Finance and insurance	498	—		418	—
All other (1)	236	—		382	—
Total commercial real estate	14,652	12		13,522	11
Total leases	1,968	2		2,537	2
Total commercial (2)	$56,638	46	%	$57,538	48	%

(1) Deferred fees and costs are reported in All other

(2) Excludes PPP loans for the year-ended December 31, 2020.

Retail Loan Asset Quality

For retail loans, we utilize credit scores provided by FICO which are generally refreshed on a quarterly basis and the loan’s payment and delinquency status to monitor credit quality. Management believes FICO credit scores are considered the strongest indicator of credit losses over the contractual life of the loan as the scores are based on current and historical national industry-wide consumer level credit performance data, and assist management in predicting the borrower’s future payment performance. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-Atlantic and Midwest regions, although we have continued to lend selectively in areas outside the footprint primarily in the auto finance and education lending.


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Table 16: Aging of Retail Loans as a Percentage of Loan Class
	December 31, 2020								December 31, 2019
	Days Past Due								Days Past Due
	Current-29		30-59		60-89		90 or More			Current-29		30-59		60-89		90 or More




Residential mortgages	98.73	%	0.30	%	0.11	%	0.86	%		99.29	%	0.18	%	0.09	%	0.44	%
Home equity	97.53		0.50		0.23		1.74			97.57		0.69		0.30		1.44
Automobile	97.93		1.40		0.53		0.14			97.26		1.87		0.67		0.20
Education	99.56		0.27		0.11		0.06			99.45		0.29		0.14		0.12
Other retail	98.36		0.62		0.47		0.55			98.29		0.66		0.45		0.60
Total retail loans	98.47	%	0.58	%	0.25	%	0.70	%		98.43	%	0.70	%	0.30	%	0.57	%

For more information on the aging of accruing and nonaccruing retail loans, see Note 5 in Item 8.


Table 17: Retail Asset Quality Metrics
	December 31, 2020		December 31, 2019
Average refreshed FICO for total portfolio	771		764
CLTV ratio for secured real estate(1)	60	%	59	%
Nonaccrual retail loans as a percentage of total retail	0.90	%	0.74	%

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


	Year Ended December 31,
(dollars in millions)	2020		2019		Change		Percent
Net charge-offs	$268		$314		($46)		(15	%)
Annualized net charge-off rate	0.44	%	0.52	%	(8)	bps

Retail asset quality remained relatively stable with December 31, 2019. The net charge-off rate of 0.44% for the year ended December 31, 2020 reflected a decrease of 8 basis points from the year ended December 31, 2019, driven by the forbearance and stimulus activity stemming from the COVID-19 pandemic and associated lockdowns.

Troubled Debt Restructurings

TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower experiencing financial hardship that we would not otherwise make. TDRs typically result from our loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our borrower’s financial needs. The types of concessions include interest rate reductions, term extensions, principal forgiveness and other modifications to the structure of the loan that fall outside our lending policy. Depending on the specific facts and circumstances of the customer, restructuring can involve loans moving to nonaccrual, remaining on nonaccrual, or remaining on accrual status.

In the first quarter of 2020, we adopted the CARES Act and interagency guidance issued by the bank regulatory agencies which provide that COVID-19-related modifications to retail and commercial loans that met certain eligibility criteria are exempt from classification as a TDR. Loans with payment deferrals and forbearance plans entered into as a result of the COVID-19 pandemic and associated lockdowns were generally not considered TDRs.

As of December 31, 2020, $718 million of retail loans were classified as TDRs, compared with $667 million as of December 31, 2019. As of December 31, 2020, $171 million of retail TDRs were in nonaccrual status with 38% current with payments, compared to $143 million in nonaccrual status with 38% current on payments at December 31, 2019. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated for impairment and loans, once classified as TDRs, remain classified as TDRs until paid off, sold or refinanced at market terms. For additional information regarding TDRs, see “—Critical Accounting Estimates — Allowance for Credit Losses” and Note 5 in Item 8.


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Table 18: Accruing and Nonaccruing Retail Troubled Debt Restructurings
	December 31, 2020
		As a % of Accruing Retail TDRs
(dollars in millions)	Accruing	30-89 Days Past Due		90+ Days Past Due		Nonaccruing	Total
Residential mortgages	$172	2.7	%	2.6	%	$43	$215
Home equity	221	1.3		—		83	304
Automobile	13	0.5		—		33	46
Education	116	0.6		0.3		10	126
Other retail	25	0.3		—		2	27
Total	$547	5.4	%	2.9	%	$171	$718


	December 31, 2019
		As a % of Accruing Retail TDRs
(dollars in millions)	Accruing	30-89 Days Past Due		90+ Days Past Due		Nonaccruing	Total
Residential mortgages	$113	3.8	%	2.1	%	$41	$154
Home equity loans	240	1.9		—		84	324
Automobile	13	0.2		—		8	21
Education	127	0.9		0.3		7	134
Other retail	31	0.6		—		3	34
Total	$524	7.4	%	2.4	%	$143	$667

Impact of Nonperforming Loans and Leases on Interest Income

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


Table 19: Interest Income Foregone
(in millions)			For the Year Ended December 31, 2020
Gross amount of interest income that would have been recorded (1)			$126
Interest income actually recognized			17
Total interest income foregone			$109

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

Cross-Border Outstandings

Cross-border outstandings can include loans, receivables, interest-bearing deposits with other banks, other interest-bearing investments and other monetary assets that are denominated in either dollars or non-local currency. As of December 31, 2020, 2019 and 2018, there were no aggregate cross-border outstandings from borrowers or counterparties in any country that exceeded 1%, or were between 0.75% and 1% of consolidated total assets.

Deposits


Table 20: Composition of Deposits
	December 31,
(in millions)	2020	2019	Change	Percent
Demand	$43,831	$29,233	$14,598	50	%
Checking with interest	27,204	24,840	2,364	10
Regular savings	18,044	13,779	4,265	31
Money market accounts	48,569	38,725	9,844	25
Term deposits	9,516	18,736	(9,220)	(49)
Total deposits	$147,164	$125,313	$21,851	17	%


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Total deposits as of December 31, 2020, increased $21.9 billion, or 17%, to $147.2 billion compared to $125.3 billion, driven by growth in demand deposits, money market accounts, savings, and checking with interest, partially offset by a decrease in term deposits and demand deposits. Citizens Access®, our national digital platform, attracted $5.9 billion of deposits through December 31, 2020, up from $5.8 billion as of December 31, 2019.


Table 21: Average Balances of and Average Interest Rates Paid for Deposits
	For the Year Ended December 31,
	2020			2019			2018
(dollars in millions)	Average Balances	Yields/ Rates		Average Balances	Yields/ Rates		Average Balances	Yields/ Rates
Noninterest-bearing demand deposits (1)	$37,553	—		$28,936	—		$29,231	—
Checking with interest	$26,002	0.24	%	$23,470	0.87	%	$21,856	0.63	%
Money market accounts	44,732	0.43		36,613	1.23		36,497	0.94
Regular savings	16,144	0.31		13,247	0.57		10,238	0.15
Term deposits	14,309	1.42		21,035	2.03		18,035	1.61
Total interest-bearing deposits (1)	$101,187	0.50	%	$94,365	1.22	%	$86,626	0.91	%

(1) The aggregate amount of deposits by foreign depositors in domestic offices was $839 million, $1.7 billion and $1.2 billion as of December 31, 2020, 2019 and 2018, respectively.

Borrowed Funds


Table 22: Summary of Short-Term Borrowed Funds
	December 31,
(in millions)	2020	2019	Change	Percent
Securities sold under agreements to repurchase	$231	$265	($34)	(13	%)

Other short-term borrowed funds	12	9	3	33
Total short-term borrowed funds	$243	$274	($31)	(11	%)

Our advances, lines of credit, and letters of credit from the FHLB are collateralized by pledged mortgages and securities at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $3.2 billion and $9.8 billion at December 31, 2020 and 2019, respectively. Our remaining available FHLB borrowing capacity was $13.9 billion and $7.2 billion at December 31, 2020 and 2019, respectively. We can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At December 31, 2020, our unused secured borrowing capacity was approximately $64.6 billion, which included unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.


Table 23: Key Data Related to Short-Term Borrowed Funds
	As of and for the Year Ended December 31,
(dollars in millions)	2020		2019		2018
Weighted-average interest rate at year-end: (1)
Federal funds purchased and securities sold under agreements to repurchase	—	%	0.41	%	1.72	%
Other short-term borrowed funds	0.02		3.85		2.73
Maximum amount outstanding at any month-end during the year:
Federal funds purchased and securities sold under agreements to repurchase (2)	$1,049		$1,499		$1,282
Other short-term borrowed funds	18		511		1,110
Average amount outstanding during the year:
Federal funds purchased and securities sold under agreements to repurchase (2)	$300		$599		$654
Other short-term borrowed funds	34		66		467
Weighted-average interest rate during the year: (1)
Federal funds purchased and securities sold under agreements to repurchase	0.37	%	1.36	%	0.92	%
Other short-term borrowed funds	0.76		2.50		2.10

(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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Table 24: Summary of Long-Term Borrowed Funds
	December 31,
(in millions)	2020	2019
Parent Company:
2.375% fixed-rate senior unsecured debt, due July 2021	$350	$349
4.150% fixed-rate subordinated debt, due September 2022(1)	182	348
3.750% fixed-rate subordinated debt, due July 2024(1)	159	250
4.023% fixed-rate subordinated debt, due October 2024(1)	25	42
4.350% fixed-rate subordinated debt, due August 2025(1)	193	249
4.300% fixed-rate subordinated debt, due December 2025(1)	450	750
2.850% fixed-rate senior unsecured notes, due July 2026	497	496
2.500% fixed-rate senior unsecured notes, due February 2030	297	—
3.250% fixed-rate senior unsecured notes, due April 2030	745	—
2.638% fixed-rate subordinated debt, due September 2032(1)	543	—
CBNA’s Global Note Program:
2.250% senior unsecured notes, due March 2020	—	700
2.447% floating-rate senior unsecured notes, due March 2020(2)	—	300
2.487% floating-rate senior unsecured notes, due May 2020(2)	—	250
2.200% senior unsecured notes, due May 2020	—	500
2.250% senior unsecured notes, due October 2020	—	750
2.550% senior unsecured notes, due May 2021	1,003	991
3.250% senior unsecured notes, due February 2022	716	711
0.941% floating-rate senior unsecured notes, due February 2022(2)	299	299
1.042% floating-rate senior unsecured notes, due May 2022(2)	250	250
2.650% senior unsecured notes, due May 2022	510	501
3.700% senior unsecured notes, due March 2023	527	515
1.201% floating-rate senior unsecured notes, due March 2023(2)	249	249
2.250% senior unsecured notes, due April 2025	746	—
3.750% senior unsecured notes, due February 2026	551	521
Additional Borrowings by CBNA and Other Subsidiaries:
Federal Home Loan Bank advances, 0.932% weighted average rate, due through 2038	19	5,008
Other	35	18
Total long-term borrowed funds	$8,346	$14,047

(1) Reflects the September 2020 completion of (i) $621 million in private exchange offers for five series of outstanding subordinated notes whereby participants received a combination of the our newly issued 2.638% fixed-rate subordinated notes due 2032 and an additional cash payment and (ii) $11 million in related cash tender offers whereby validly tendered and accepted subordinated notes were purchased by us and subsequently cancelled.

(2) Rate disclosed reflects the floating rate as of December 31, 2020, or final rate as applicable.

Long-term borrowed funds of $8.3 billion as of December 31, 2020 decreased $5.7 billion from December 31, 2019, as strong deposit flows allowed for significantly lower levels of borrowings. The decline in borrowed funds reflected a decrease of $5.0 billion in FHLB borrowings, and a decrease of $729 million in subordinated debt and unsecured notes.

The Parent Company’s long-term borrowed funds as of December 31, 2020 and 2019 included principal balances of $3.5 billion and $2.5 billion, respectively, and unamortized deferred issuance costs and/or discounts of ($90) million and ($8) million, respectively. CBNA and other subsidiaries’ long-term borrowed funds as of December 31, 2020 and 2019 included principal balances of $4.8 billion and $11.5 billion, respectively, with unamortized deferred issuance costs and/or discounts of ($11) million and ($13) million, respectively, and hedging basis adjustments of $112 million and $50 million, respectively. See Note 13 in Item 8 for further information about our hedging of certain long-term borrowed funds.


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QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly Consolidated Statements of Operations data and Consolidated Balance Sheet data as of and for the four quarters of 2020 and 2019, respectively. We have prepared the Consolidated Statements of Operations data and Balance Sheet data on the same basis as our Consolidated Financial Statements in Item 8 and, in the opinion of management, each Consolidated Statement of Operations and Balance Sheet includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations and balance sheet data as of and for these periods. This information should be read in conjunction with our Consolidated Financial Statements and Notes in Item 8.


Table 25: Quarterly Results of Operations
	For the Three Months Ended
(dollars in millions, except per share amounts)	December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019		March 31, 2019
Operating Data:
Net interest income	$1,129		$1,137		$1,160		$1,160		$1,143		$1,145		$1,166		$1,160
Noninterest income	578		654		590		497		494		493		462		428
Total revenue	1,707		1,791		1,750		1,657		1,637		1,638		1,628		1,588
Provision for credit losses	124		428		464		600		110		101		97		85
Noninterest expense (1) (4) (5) (6) (7) (8) (9) (10)	1,012		988		979		1,012		986		973		951		937
Income before income tax expense (benefit)	571		375		307		45		541		564		580		566
Income tax expense (2) (4) (5) (6) (7) (8) (9) (10)	115		61		54		11		91		115		127		127
Net income (3) (4) (5) (6) (7) (8) (9) (10)	$456		$314		$253		$34		$450		$449		$453		$439
Net income available to common stockholders (3) (4) (5) (6) (7) (8) (9) (10)	$424		$289		$225		$12		$427		$432		$435		$424
Net income per average common share- basic (3) (4) (5) (6) (7) (8) (9) (10)	$0.99		$0.68		$0.53		$0.03		$0.98		$0.97		$0.95		$0.92
Net income per average common share- diluted (3) (4) (5) (6) (7) (8) (9) (10)	0.99		0.68		0.53		0.03		0.98		0.97		0.95		0.92
Other Operating Data:
Return on average common equity(11)	8.20	%	5.60	%	4.44	%	0.24	%	8.30	%	8.35	%	8.54	%	8.62	%
Return on average tangible common equity (11)	12.20		8.33		6.62		0.36		12.39		12.44		12.75		13.00
Return on average total assets (11)	1.00		0.70		0.57		0.08		1.08		1.10		1.13		1.11
Return on average total tangible assets (11)	1.04		0.73		0.59		0.09		1.13		1.15		1.17		1.16
Efficiency ratio (11)	59.28		55.18		55.91		61.10		60.28		59.40		58.41		59.00
Net interest margin (11)	2.75		2.82		2.87		3.09		3.04		3.10		3.20		3.23
Net interest margin, FTE (11) (12)	2.75		2.83		2.88		3.10		3.06		3.12		3.21		3.25




Share Data:
Cash dividends declared and paid per common share	$0.39		$0.39		$0.39		$0.39		$0.36		$0.36		$0.32		$0.32
Dividend payout ratio	39	%	58	%	74	%	1,398	%	37	%	37	%	34	%	35	%


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	As of
(dollars in millions)	December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019		March 31, 2019
Balance Sheet Data:
Total assets	$183,349		$179,228		$179,874		$176,719		$165,733		$164,362		$162,749		$161,342
Loans and leases (13)	123,090		124,071		125,713		127,528		119,088		117,880		116,838		117,615
Allowance for loan and lease losses	2,443		2,542		2,448		2,171		1,252		1,263		1,227		1,245
Total securities	26,847		26,124		25,657		26,352		24,669		25,602		25,898		25,651
Goodwill	7,050		7,050		7,050		7,050		7,044		7,044		7,040		7,040
Total liabilities	160,676		156,759		157,456		154,769		143,532		142,511		140,732		139,811
Deposits	147,164		142,921		143,618		133,475		125,313		124,714		124,004		123,916
Short-term borrowed funds (14)	243		252		255		1,059		274		1,077		1,441		679
Long-term borrowed funds	8,346		9,109		9,202		16,437		14,047		12,806		11,538		11,725
Total stockholders’ equity	22,673		22,469		22,418		21,950		22,201		21,851		22,017		21,531
Asset Quality Ratios:
Allowance for loan and lease losses to loans and leases	1.98	%	2.05	%	1.95	%	1.70	%	1.05	%	1.07	%	1.05	%	1.06	%
Allowance for credit losses to loans and leases	2.17		2.21		2.01		1.73		1.09		1.11		1.13		1.13
Allowance for loan and lease losses to nonaccruing loans and leases	240		199		247		279		178		171		169		167
Allowance for credit losses to nonaccruing loans and leases	262		214		255		283		184		177		182		179
Nonaccruing loans and leases to loans and leases	0.83		1.03		0.79		0.61		0.59		0.63		0.62		0.63
Capital ratios:(15)
CET1 capital ratio	10.0		9.8		9.6		9.4		10.0		10.3		10.5		10.5
Tier 1 capital ratio	11.3		11.2		10.9		10.5		11.1		11.1		11.3		11.3
Total capital ratio	13.4		13.3		13.1		12.5		13.0		13.0		13.4		13.4
Tier 1 leverage ratio	9.4		9.5		9.3		9.6		10.0		9.9		10.1		10.0

(1) Fourth quarter 2020 noninterest expense included $42 million of pre-tax notable items consisting of $2 million of integration costs associated with Acquisitions and $40 million in other notable items related to TOP programs and other efficiency initiatives.

(2) Fourth quarter 2020 income tax expense included $18 million of benefits associated with other notable items ($7 million largely tied to an operational restructure and $11 million in TOP programs and other efficiency initiatives).

(3) Fourth quarter 2020 net income included $24 million of after-tax notable items consisting of $2 million in integration costs associated with Acquisitions and $22 million in other notable items (including a $7 million benefit largely tied to an operational restructure more than offset by $29 million in after-tax TOP programs and other efficiency initiatives).

(4) Third quarter 2020 noninterest expense included $31 million of pre-tax notable items consisting of $2 million of integration costs associated with Acquisitions and $29 million in other notable items related to TOP programs and other efficiency initiatives. Income tax expense included $7 million of benefits associated with notable items related to TOP programs and other efficiency initiatives. Net income included $24 million of after-tax notable items consisting of $2 million of total integration costs associated with Acquisitions and $22 million in other notable items related to TOP programs and other efficiency initiatives.

(5) Second quarter 2020 noninterest expense included $19 million of pre-tax notable items consisting of $2 million of integration costs associated with Acquisitions and $17 million in other notable items related to TOP programs and other efficiency initiatives. Income tax expense included $9 million of benefits associated with notable items ($1 million for integration costs associated with Acquisitions and $8 million in other notable items, consisting of $4 million related to legacy tax matters and $4 million in TOP programs and other efficiency initiatives). Net income included $10 million of after-tax notable items consisting of $1 million of total integration costs associated with Acquisitions and $9 million in other notable items (including $4 million related to legacy tax matters more than offset by $13 million after-tax in TOP programs and other efficiency initiatives.

(6) First quarter 2020 noninterest expense included $33 million of pre-tax notable items consisting of $4 million of integration costs associated with Acquisitions and $29 million in other notable items related to TOP programs and other efficiency initiatives. Income tax expense included $8 million of benefits associated with notable items ($1 million for integration costs associated with Acquisitions and $7 million in TOP programs and other efficiency initiatives). Net income included $25 million of after-tax notable items consisting of $3 million after-tax of total integration costs associated with Acquisitions and $22 million after-tax in other notable items related to TOP programs and other efficiency initiatives.

(7) Fourth quarter 2019 noninterest expense included $37 million of pre-tax notable items consisting of $35 million in other notable items ($35 million in TOP programs and other efficiency initiatives) and $2 million of integration costs associated with acquisitions. Income tax expense included $33 million of benefits associated with other notable items ($24 million largely tied to legacy tax matters and $9 million in TOP programs and other efficiency initiatives). Net income included $4 million of after-tax notable items consisting of $2 million in total integration costs associated with acquisitions and $2 million in other notable items (including $24 million largely tied to legacy tax matters offset by $26 million in after-tax TOP programs and other efficiency initiatives).

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

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

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

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


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

(13) Excludes LHFS of $4.0 billion, $3.7 billion, $5.0 billion, $3.3 billion, $3.3 billion, $2.0 billion, $2.2 billion, and $1.3 billion as of December 31, 2020, September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively.

(14) In the first quarter of 2020, we reclassified federal funds purchased and securities sold under agreement to repurchase and other short-term borrowed funds to short-term borrowed funds. Prior periods have been adjusted to conform with the current period presentation.

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

CAPITAL AND REGULATORY MATTERS

As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. For more information, see the “Regulation and Supervision” section in Item 1.

Tailoring of Prudential Requirements

In October 2019, the FRB and the other banking regulators finalized rules that tailor the application of the enhanced prudential standards to bank holding companies and depository institutions to implement the EGRRCPA amendments to the Dodd-Frank Act (“Tailoring Rules”). Under the Tailoring Rules, Category IV firms, such as us, are subject to biennial supervisory stress-testing and are exempt from company-run stress testing and related disclosure requirements. Category IV firms are also no longer required to submit resolution plans. The FRB continues to supervise Category IV firms on an ongoing basis, including evaluation of the capital adequacy and capital planning processes during off-cycle years. We remain subject to the requirement to develop, maintain and submit an annual capital plan for review and approval by our board of directors (or one of its committees), as well as FR Y-14 reporting requirements. On April 6, 2020, we submitted our 2020 Capital Plan to the FRB under the FRB’s 2020 CCAR process. For more information, see the “Tailoring of Prudential Requirements” section in Item 1.

On March 4, 2020, the FRB finalized a stress capital buffer (“SCB”) requirement that integrates regulatory capital requirements with the results of the FRB’s supervisory stress tests by replacing the static CCB of 2.5% with a dynamic SCB requirement. The new SCB requirement is based on the projected losses under the supervisory severely adverse scenario of each firm subject to CCAR plus four quarters of planned common stock dividends, subject to a floor of 2.5%. Under the SCB framework, the FRB will no longer object to capital plans on quantitative grounds and each firm will be required to maintain capital ratios above the sum of its minimum requirements and the SCB requirements to avoid restrictions on capital distributions and discretionary bonus payments. For Category IV firms, like us, the FRB has stated that the SCB will be re-calibrated with each biennial supervisory stress test and updated annually to reflect our planned common stock dividends and common share buy-backs. On October 1, 2020, our SCB of 3.4% became effective and will apply to our capital actions through September 30, 2021.

On September 30, 2020, the FRB issued a proposed rule to make conforming changes to its Capital Plan Rule, stress capital buffer requirements, and capital planning requirements to be consistent with the Tailoring Rules framework. Under the proposal, Category IV firms, like us, would have the ability to elect to participate in the supervisory stress test and receive an updated SCB requirement in a year in which they are not subject to the supervisory stress test. For purposes of calculating the SCB in 2021, the proposed rule would require us to notify the FRB of our intention to participate in the 2021 supervisory stress test by April 5, 2021.

In light of the heightened uncertainty related to the COVID-19 pandemic and associated lockdowns, the FRB took certain actions to preserve capital at banks. Among those actions, the FRB imposed certain limitations on firms for the third and fourth quarters of 2020, including mandatory suspension of share repurchases, and limiting common stock dividends to existing rates and the average quarterly net income for the prior four quarters. Further, the FRB required that CCAR firms, like us, conduct an additional round of stress tests and resubmit updated capital plans to reflect changes in the macroeconomic environment due to the COVID-19 pandemic. Consistent with the FRB’s mandate, we resubmitted our capital plan on November 2, 2020. The results of our resubmission, received on December 18, 2020, exceeded all capital requirements under the FRB’s severe stress scenarios and we reiterated key aspects of our 2020 Capital Plan, which include maintaining quarterly common dividends of $0.39 per common share through the SCB window period ending third quarter 2021. In December 2020, the FRB modified its limitations on capital distributions for the first quarter of 2021 such that firms that participate in CCAR, like us, may resume share repurchases provided that the aggregate of share repurchases and common stock dividends for the first quarter of 2021 do not exceed average quarterly net income for the trailing four quarters. The FRB can extend or modify its current capital distribution limitations in future quarters. In January 2021, our board of directors authorized us to repurchase up to $750 million of our common stock beginning in the first quarter of 2021. The timing and amount of future dividends and share


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repurchases will depend on various factors, including our capital position, financial performance, risk-weighted assets, capital impacts of strategic initiatives, market conditions and regulatory considerations. All future capital distributions are subject to consideration and approval by the board of directors prior to execution.

Regulations relating to capital planning, regulatory reporting, and stress capital buffer requirements applicable to firms like us are presently subject to rulemaking and potential further guidance and interpretation by the applicable federal regulators. We will continue to evaluate the impact of these and any other prudential regulatory changes, including their potential resultant changes in our regulatory and compliance costs and expenses.

Capital Framework

Under the current U.S. Basel III capital framework, we and our banking subsidiary must meet the following specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and tier 1 leverage ratio of 4.0%. As a bank holding company, our SCB of 3.4% is imposed on top of the three minimum risk-based capital ratios listed above and a CCB of 2.5% is imposed on top of the three minimum risk-based capital ratios listed above for our banking subsidiary.

Effective for us on April 1, 2020, the CET1 deduction threshold for MSRs, certain deferred tax assets and significant investments in the capital of unconsolidated institutions is 25%. As of December 31, 2020, we did not meet the threshold for these additional capital deductions. MSRs or deferred tax assets not deducted from CET1 capital are assigned a 250% risk weight and significant investments in the capital of unconsolidated financial institutions not deducted from CET1 capital are assigned an exposure category risk weight.

In reaction to the COVID-19 pandemic, the FRB and the other federal banking regulators adopted a final rule relative to regulatory capital treatment of ACL under CECL. This rule allowed electing banking organizations to delay the estimated impact of CECL on regulatory capital for a two-year period ending January 1, 2022, followed by a three-year transition period ending January 1, 2025 to phase-in the aggregate amount of the capital benefit provided during the initial two-year delay. As of December 31, 2020, $568 million of the capital benefit has been accumulated for application to the three-year transition period.


Table 26: Regulatory Capital Ratios Under the U.S. Basel III Standardized Rules
				Required Minimum plus Required Buffer for Non-Leverage Ratios(1)(2)
(in millions, except ratio data)	Amount	Ratio
December 31, 2020
CET1 capital	$14,607	10.0	%	7.9
Tier 1 capital	16,572	11.3		9.4
Total capital	19,602	13.4		11.4
Tier 1 leverage	16,572	9.4		4.0
Risk-weighted assets	146,781
Quarterly adjusted average assets	175,370
December 31, 2019
CET1 capital	$14,304	10.0	%	7.0	%
Tier 1 capital	15,874	11.1		8.5
Total capital	18,542	13.0		10.5
Tier 1 leverage	15,874	10.0		4.0
Risk-weighted assets	142,915
Quarterly adjusted average assets	158,782

(1) Required “Minimum Capital ratio” for 2020 and 2019 are: Common equity tier 1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%.

(2) “Minimum Capital ratio” includes stress capital buffer of 3.4% for 2020 and capital conservation buffer of 2.5% for 2019; N/A to Tier 1 leverage.

At December 31, 2020, our CET1 capital, tier 1 capital and total capital ratios were 10.0%, 11.3% and 13.4%, respectively, as compared with 10.0%, 11.1% and 13.0%, respectively, as of December 31, 2019. The CET1 capital ratio remained stable as $3.9 billion of risk-weighted asset (“RWA”) growth and the impact of the capital actions described in “—Capital Transactions” below were primarily offset by net income for the year ended December 31, 2020 and 25% of the increase in AACL subsequent to CECL adoption. The tier 1 capital ratio increased due to the changes in CET1 capital and the issuance of Series F preferred stock described in “—Capital Transactions” below. The total capital ratio increased due to the changes in CET1 and tier 1 capital and the net change in AACL attributable to CECL adoption, the modified transition amount and excess ACL, partially offset by


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the subordinated debt exchange offers described in “—Regulatory Capital Ratios and Capital Composition” below and an increase in non-qualifying subordinated debt. At December 31, 2020, our CET1 capital, tier 1 capital and total capital ratios were approximately 210 basis points, 190 basis points and 200 basis points, respectively, above their regulatory minimums plus our stress capital buffer. All ratios remained well above the U.S. Basel III minima.

Regulatory Capital Ratios and Capital Composition

CET1 capital under U.S. Basel III Standardized rules totaled $14.6 billion at December 31, 2020, and increased $303 million from $14.3 billion at December 31, 2019, largely driven by net income for the year ended December 31, 2020 and 25% of the increase in AACL subsequent to CECL adoption, partially offset by dividends and common share repurchases. Tier 1 capital at December 31, 2020 totaled $16.6 billion, reflecting a $698 million increase from $15.9 billion at December 31, 2019, driven by the changes in CET1 capital and the issuance of Series F preferred stock. At December 31, 2020, we had $2.0 billion of non-cumulative perpetual preferred stock issued and outstanding, an increase of $395 million from $1.6 billion at December 31, 2019, given the second quarter 2020 issuance of 400,000 shares of Series F Preferred Stock that qualified as additional tier 1 capital. Total capital of $19.6 billion at December 31, 2020, increased $1.1 billion from December 31, 2019, driven by the changes in CET1 and tier 1 capital and the net change in AACL, partially offset by a decrease in qualifying subordinated debt.

RWA totaled $146.8 billion at December 31, 2020, based on U.S. Basel III Standardized rules, up $3.9 billion from December 31, 2019. This increase was driven by higher derivative valuations, increases in education loans, commercial real estate loans, MSR RWA, resulting from the finalization of the simplification rules which increased risk weight from 100% to 250%, and increases in residential mortgages, loans held for sale and commercial past due loans. These RWA increases were partially offset by decreases in high volatility commercial real estate, commercial loans, home equity loans and consumer personal loans.

As of December 31, 2020, the tier 1 leverage ratio was 9.4% decreasing from 10.0% at December 31, 2019 driven by the $16.6 billion increase in quarterly adjusted average assets, partially offset by higher tier one capital. The increase in quarterly adjusted average assets was primarily driven by the COVID-19 pandemic and associated lockdowns, resulting in increased cash level of $9.3 billion and an increase in total loans of $4.6 billion. The increased cash is a result of higher deposits caused by government stimulus and commercial clients building liquidity. The increase in total loans is primarily the result of an increase in commercial and industrial loans from PPP.


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Table 27: Capital Composition Under the U.S. Basel III Capital Framework
(in millions)	December 31, 2020	December 31, 2019
Total common stockholders’ equity	$20,708	$20,631
Exclusions:(1)
Modified CECL transitional amount	568	—
Net unrealized losses recorded in accumulated other comprehensive income, net of tax:
Debt and equity securities	(380)	(1)
Derivatives	11	(3)
Unamortized net periodic benefit costs	429	415
Deductions:
Goodwill	(7,050)	(7,044)
Deferred tax liability associated with goodwill	379	374
Other intangible assets	(58)	(68)
Total common equity tier 1	14,607	14,304
Qualifying preferred stock	1,965	1,570
Total tier 1 capital	16,572	15,874
Qualifying subordinated debt(2)	1,204	1,372
Allowance for credit losses	2,670	1,296
Exclusions from tier 2 capital:
Modified AACL transitional amount	(682)	—
Excess allowance for credit losses(2)	(162)	—
Adjusted allowance for credit losses	$1,826	$1,296
Total capital	$19,602	$18,542

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

(2) As of December 31, 2020 and 2019, the amount of non-qualifying subordinated debt excluded from regulatory capital was $348 million and $267 million, respectively.

On February 11, 2021, we completed $265 million in private exchange offers for five series of outstanding subordinated notes. Exchange offer participants received newly issued subordinated notes due 2031 which are redeemable by us five years prior to their maturity. In September 2020, we completed $621 million in private exchange offers for five series of outstanding subordinated notes. Exchange offer participants received a combination of our newly issued subordinated notes due 2032 and an additional cash payment. We also completed related cash tender offers which result in $11 million of subordinated notes being validly tendered and accepted for purchase by us and subsequently cancelled. The completion of these subordinated debt exchange offers will benefit our tier 2 and total capital going forward by increasing the amount of subordinated debt eligible for inclusion in tier 2 capital without increasing the aggregate principal amount of subordinated debt outstanding.

Capital Adequacy Process

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

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

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


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Capital Transactions

We completed the following capital actions during 2020:

Completed $621 million of subordinated debt private exchange offers in September 2020;
Issued $400 million or 400,000 shares, of 5.650% fixed-rate reset non-cumulative perpetual Series F Preferred Stock in June 2020;
Declared and paid quarterly common stock dividends of $0.39 per share for the first, second, third, and fourth quarters of 2020, aggregating to $672 million;
Declared a semi-annual dividend of $27.50 per share in first quarter 2020, a quarterly dividend of $13.48 per share in second quarter of 2020, a quarterly dividend of $10.90 per share in third quarter 2020 and a quarterly dividend of $10.72 per share in fourth quarter 2020 on the 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock, aggregating to $15 million;
Declared semi-annual dividends of $30.00 per share for the second and fourth quarter of 2020 on the 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, aggregating to $18 million;
Declared quarterly dividends of $15.94 per share on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $19 million;
Declared quarterly dividends of $15.88 per share on the 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, aggregating to $19 million;
Declared quarterly dividends of $12.50 per share on the 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock, aggregating to $23 million;
Declared quarterly dividends of $19.15 per share in third quarter of 2020 and a quarterly dividend of $14.13 per share in fourth quarter 2020 on the 5.650% fixed-rate non-cumulative perpetual Series F Preferred Stock, aggregating to $13 million; and
Repurchased $270 million of our outstanding common stock in the first quarter 2020.

Banking Subsidiary’s Capital


Table 28: CBNA's Capital Ratios Under the U.S. Basel III Standardized Rules
	December 31, 2020			December 31, 2019
(dollars in millions, except ratio data)	Amount	Ratio		Amount	Ratio
CET1 capital	$16,032	10.9	%	$15,610	11.0	%
Tier 1 capital	16,032	10.9		15,610	11.0
Total capital	18,980	13.0		17,937	12.6
Tier 1 leverage	16,032	9.2		15,610	9.9
Risk-weighted assets	146,558			142,555
Quarterly adjusted average assets	174,954			158,391

CBNA CET1 and tier 1 capital totaled $16.0 billion at December 31, 2020, up $422 million from $15.6 billion at December 31, 2019. The increase was primarily driven by net income for the year ended December 31, 2020 and 25% of the increase in AACL subsequent to CECL adoption, partially offset by dividend payments to the Parent Company. Total capital was $19.0 billion at December 31, 2020, an increase of $1.0 billion from $17.9 billion at December 31, 2019, driven by the change in CET1 capital, the net change in AACL and an increase in qualifying subordinated debt.

CBNA had RWA of $146.6 billion at December 31, 2020, an increase of $4.0 billion from December 31, 2019, driven by higher derivative valuations, increases in education loans, commercial real estate loans, MSR RWA, resulting from the finalization of the simplification rules which increased risk weight from 100% to 250%, and increases in residential mortgages, loans held for sale and commercial past due loans. These RWA increases were partially offset by decreases in high volatility commercial real estate, commercial loans, home equity loans and consumer personal loans.

As of December 31, 2020, the CBNA tier 1 leverage ratio decreased to 9.2% from 9.9% at December 31, 2019, driven by the $16.6 billion increase in quarterly adjusted average assets, partially offset by higher tier one capital. The increase in quarterly adjusted average assets was primarily driven by COVID-19 and the associated lockdowns, resulting in increased cash level of $9.3 billion and an increase in total loans of $4.6 billion. The


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increased cash is a result of higher deposits caused by government stimulus and commercial clients building liquidity. The increase in total loans is primarily the result of an increase in commercial and industrial loans from PPP.

LIQUIDITY

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

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

Parent Company Liquidity

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

During the year ended December 31, 2020, the Parent Company completed the following transactions:

Issued $400 million, or 400,000 shares, of 5.650% fixed-rate reset non-cumulative perpetual Series F Preferred Stock on June 4, 2020;
Issued $750 million in ten-year 3.250% fixed-rate senior notes on April 30, 2020; and
Issued $300 million in ten-year 2.500% fixed-rate senior notes on February 6, 2020.

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

During the years ended December 31, 2020 and 2019, the Parent Company declared and paid dividends on common stock of $672 million and $617 million, respectively, and declared dividends on preferred stock of $107 million and $73 million, respectively. In addition, the Parent Company repurchased $270 million and $1.2 billion of its outstanding common stock, respectively.

Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $2.7 billion as of December 31, 2020 compared with $1.4 billion as of December 31, 2019. The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At December 31, 2020, the Parent Company’s double-leverage ratio was 98%.

CBNA Liquidity

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

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


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

On April 30, 2020 CBNA issued $750 million in five-year 2.250% fixed-rate senior notes.

Liquidity Risk

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

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

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

Factors Affecting Liquidity

Given the composition of assets and borrowing sources, contingent liquidity risk at CBNA would be materially affected by events such as deterioration of financing markets for high-quality securities (e.g., mortgage-backed securities and other instruments issued by the GNMA, FNMA and the FHLMC), by any inability of the FHLBs to provide collateralized advances and/or by a refusal of the FRB to act as a lender of last resort in systemic stress.

Similarly, given the structure of its balance sheet, the funding liquidity risk of CBNA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our contingent liquidity risk and our funding liquidity risk to be relatively modest.

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


Table 29: Credit Ratings
	December 31, 2020
	Moody’s	Standard and Poor’s	Fitch

Citizens Financial Group, Inc.:
Long-term issuer	NR	BBB+	BBB+
Short-term issuer	NR	A-2	F1
Subordinated debt	NR	BBB	BBB
Preferred Stock	NR	BB+	BB
Citizens Bank, National Association:
Long-term issuer	Baa1	A-	BBB+
Short-term issuer	NR	A-2	F1
Long-term deposits	A1	NR	A-
Short-term deposits	P-1	NR	F1

NR = Not Rated

Changes in our public credit ratings could affect both the cost and availability of our wholesale funding. As a result and in order to maintain a conservative funding profile, CBNA continues to minimize reliance on unsecured wholesale funding. At December 31, 2020, our wholesale funding consisted primarily of secured borrowings from the FHLBs collateralized by high-quality residential mortgages and term debt issued by the Parent Company and CBNA.

Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB, the OCC and the FDIC regularly evaluate our liquidity as


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part of the overall supervisory process. In addition we are subject to existing and evolving regulatory liquidity requirements, some of which are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. For further discussion, see the “Regulation and Supervision — Financial Regulatory Reform” and “—Liquidity Requirements” sections in Item 1.

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

Liquidity Risk Management and Governance

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

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

We seek to accomplish this goal by funding loans with stable deposits; by prudently controlling dependence on wholesale funding, particularly short-term unsecured funding; and by maintaining ample available liquidity, including a contingent liquidity buffer of unencumbered high-quality loans and securities. As of December 31, 2020:

Core deposits continued to be our primary source of funding and our consolidated year-end loans-to-deposits ratio, which excludes LHFS, was 83.6%;
Our cash position (which is defined as cash balance held at the FRB) totaled $11.7 billion;
Contingent liquidity was $47.3 billion, consisting of unencumbered high-quality liquid securities of $21.8 billion, unused FHLB capacity of $13.9 billion, and our cash position of $11.7 billion. Asset liquidity (a component of contingent liquidity) was $33.5 billion, consisting of our cash position of $11.7 billion and unencumbered high-quality liquid securities of $21.8 billion;
Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $28.9 billion. Use of this borrowing capacity would be considered only during exigent circumstances; and
For a summary of our sources and uses of cash by type of activity for the years ended December 31, 2020 and 2019, see the Consolidated Statements of Cash Flows in Item 8.

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

Current liquidity sources and capacities, including cash at the FRBs, free and liquid securities and available and secured FHLB borrowing capacity;
Liquidity stress sources, including idiosyncratic, systemic and combined stresses, in addition to evolving regulatory requirements; and
Current and prospective exposures, including secured and unsecured wholesale funding and spot and cumulative cash-flow gaps across a variety of horizons.

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


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CONTRACTUAL OBLIGATIONS


Table 30: Outstanding Contractual Obligations as of December 31, 2020
(in millions)	Total	Less than 1 year	1 to 3 years	3 to 5 years	More than 5 years
Deposits with a stated maturity of less than one year (1) (2)	$137,648	$137,648	$—	$—	$—
Term deposits (1)	9,516	8,474	828	211	3
Long-term borrowed funds (1) (3)	8,346	1,361	2,746	1,586	2,653
Contractual interest payments (4)	895	224	287	217	167
Lease liabilities maturing under non-cancelable operating leases	921	149	277	201	294
Purchase obligations (5)	944	411	396	116	21
Total outstanding contractual obligations	$158,270	$148,267	$4,534	$2,331	$3,138

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

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

(3) Includes obligations under capital leases.

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

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

OFF-BALANCE SHEET ARRANGEMENTS


Table 31: Outstanding Off-Balance Sheet Arrangements
	December 31,
(in millions)	2020	2019	Change	Percent
Commitments to extend credit	$74,160	$72,743	$1,417	2	%



Letters of credit	2,239	2,190	49	2
Risk participation agreements	98	37	61	165
Loans sold with recourse	54	37	17	46
Marketing rights	29	33	(4)	(11)
Total	$76,580	$75,040	$1,540	2	%

CRITICAL ACCOUNTING ESTIMATES

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

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

Allowance for Credit Losses

We reserve for expected credit losses on our loan and lease portfolio through the ALLL and for expected credit losses in our unfunded lending commitments through other liabilities. Collectively, the ALLL and reserves for expected credit losses in unfunded lending commitments are referred to as the ACL.

Changes in the ACL are reflected in net income through provision for credit losses. Changes in the credit risk profile of our loans and leases result in changes in provision expense with a resulting change, net of charge-offs and recoveries, in the ACL balance.

The ACL is often the most critical of all the accounting estimates for banking institutions like us. The ACL is maintained at a level we believe to be appropriate to absorb expected lifetime credit losses over the contractual life of the loan and lease portfolios and on the unfunded lending commitments. Our determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments that are not unconditionally cancellable considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information.


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Key assumptions used in our ACL measurement process include the use of a two-year reasonable and supportable economic forecast period followed by a one-year period during which the expected credit losses revert to long-term historical macroeconomic inputs.

The evaluation of quantitative and qualitative information is performed through assessments of groups of assets that share similar risk characteristics and certain individual loans and leases that do not share similar risk characteristics with the collective group. Loans are grouped generally by product type (e.g., commercial and industrial, commercial real estate, residential mortgage, etc.), and significant loan portfolios are assessed for credit losses using econometric models. The evaluation process is inherently imprecise and subjective as it requires significant management judgment based on underlying factors that are susceptible to change, sometimes materially and rapidly.

The quantitative evaluation of the adequacy of the ACL utilizes a single economic forecast as its foundation, and is primarily based on econometric models that use known or estimated data as of the balance sheet date and forecasted data over the reasonable and supportable period. Known and estimated data include current PD, LGD and EAD (for commercial), timing and amount of expected draws (for unfunded lending commitments), FICO, LTV, term and time on books (for retail loans), mix and level of loan balances, delinquency levels, assigned risk ratings, previous loss experience, current business conditions, amounts and timing of expected future cash flows, and factors particular to a specific commercial credit such as competition, business and management performance. Forward-looking economic assumptions include real gross domestic product, unemployment rate, interest rate curve, and changes in collateral values. This data is aggregated to estimate expected credit losses over the contractual life of the loans and leases, adjusted for expected prepayments. In highly volatile economic environments historical information, such as commercial customer financial statements or consumer credit ratings, may not be as important to estimating future expected losses as forecasted inputs to the models.

The ACL may also be affected materially by a variety of qualitative factors that we consider to reflect our current judgment of various events and risks that are not measured in our statistical procedures including uncertainty related to the economic forecasts used in the modeled credit loss estimates, loan growth, back testing results, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons. The qualitative allowance is further informed for certain industry sectors or loan classes by alternative scenarios to support the period-end ACL balance. We recognize that this approach may not be suitable in certain economic environments and differing analysis may be requested at management’s discretion. Due in part to its subjectivity, the qualitative evaluation may be materially impacted during periods of economic uncertainty and late breaking events could lead to revision of reserves to reflect management’s best estimate of expected credit losses.

The measurement process results in specific or pooled allowances for loans, leases and unfunded lending commitments, and qualitative allowances that are judgmentally determined and applied across the portfolio.

There are certain loan portfolios that may not need an econometric model to enable us to calculate management’s best estimate of the expected credit losses. Less data intensive, non-modeled approaches to estimating losses are considered more efficient and practical for portfolios that have lower levels of outstanding balances (e.g., runoff or closed portfolios, and new products or products that are not significant to our overall credit risk exposure).

The difference in ACL as of December 31, 2020 as compared to December 31, 2019 continues to be driven by the COVID-19 pandemic and associated lockdowns and the resulting economic impacts from March to December 31, 2020, as well as our adoption of CECL on January 1, 2020. We added $451 million in ACL upon adoption of CECL, and have added an additional $923 million over 2020, resulting in an ending ACL balance of $2.7 billion.

To determine the ACL as of December 31, 2020, we utilized an economic scenario that generally reflects real GDP growth of approximately 4% over 2021, returning to fourth quarter 2019 real GDP levels by the last quarter of 2021. The scenario also projects the unemployment rate to be in the range of approximately 7% to 7.5% throughout 2021. While the macroeconomic forecast was slightly improved relative to the third quarter 2020 forecast, we continued to apply management judgment to adjust the modeled reserves in the commercial industry sectors most impacted by the COVID-19 pandemic and associated lockdowns, including retail and hospitality, casual dining, retail trade, price-sensitive energy and related, and educational services, as well as in certain retail products.

Our determination of the ACL is sensitive to changes in forecasted macro-economic conditions during the reasonable and supportable period. To illustrate, we applied a more pessimistic scenario than that described


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above which assumes vaccinations taking longer and COVID-19 cases being approximately 50% higher than our current expectations. This pessimistic scenario reflects real GDP growth of approximately 2.5% and unemployment in the range of 8% to 8.5% over 2021. Excluding consideration of qualitative adjustments, this scenario would result in a quantitative lifetime loss estimate of approximately 1.2x our period end ACL, or an increase of $450 million.

Because several quantitative and qualitative factors are considered in determining the ACL, this sensitivity analysis does not necessarily reflect the nature and extent of future changes in the ACL or even what the ACL would be under these economic circumstances. The sensitivity is intended to provide insights into the impact of adverse changes in the macro-economic environment and the corresponding impact to modeled loss estimates. The hypothetical determination does not incorporate the impact of management judgment or other qualitative factors that could be applied in the actual estimation of the ACL, and does not imply any expectation of future deterioration in our loss rates.

To provide additional context regarding sensitivity to more pessimistic scenarios, our ACL balance of $2.7 billion represents 31% of the $8.6 billion of nine-quarter losses projected in the Federal Reserve run of the December 2020 Supervisory Severely Adverse scenario (the “Supervisory Severely Adverse scenario”), which forecasted more protracted unemployment and GDP declines compared with our ACL calculation. Our ACL calculation also included the impacts of government stimulus.

Comparatively, our ACL represents 53% of the $5.1 billion of projected losses in the Company run results of the Supervisory Severely Adverse scenario. Losses projected under the Company run Supervisory Severely Adverse scenario are lower than the Federal Reserve run results due to methodology and modeling differences. As an example, the Federal Reserve’s models did not recognize contractual loss sharing arrangements in the merchant loan portfolio. In addition, both the Company run and Federal Reserve run results include incremental losses associated with loan originations assumed post-June 30, 2020. In contrast, our December 31, 2020 ACL balance considers only existing loans and lines of credit as of the reporting date.

While the recovery path is clearer than it was at the end of the third quarter 2020, significant future uncertainty still exists, including size and timing of further monetary and fiscal stimulus, and progress in the rollout of COVID-19-related vaccines. It remains difficult to estimate how changes in economic forecasts might affect our ACL because such forecasts consider a wide variety of variables and inputs, and changes in the variables and inputs may not occur at the same time or in the same direction, and such changes may have differing impacts by product types. Further, the variables and inputs may be idiosyncratically affected by existing or future monetary and fiscal stimulus programs and forbearance and other customer accommodation efforts. Nevertheless, changes in one or multiple of the key variables may have a material impact to our estimation of expected credit losses.

We continue to monitor the impact of the COVID-19 pandemic, vaccination efforts, and related policy measures on the economy and the resulting potentially material effects on the ACL.

For additional information regarding the ALLL and reserve for unfunded lending commitments, see Note 1 and Note 5 in Item 8.

Goodwill

Goodwill is initially recorded as the excess of the purchase price over the fair value of net assets acquired in a business combination and is assigned to our reporting units at the acquisition date. Our reporting units align to our operating segments identified in Note 25 in Item 8. We have identified and assigned goodwill totaling $7.1 billion at December 31, 2020, to our reporting units as follows: $2.3 billion to Consumer Banking and $4.8 billion to Commercial Banking.

Goodwill is not amortized but is subject to annual impairment tests. We review goodwill for impairment annually as of October 31 and in interim periods when events or changes indicate the carrying value of one or more reporting units may not be recoverable. If it is more likely than not that the fair value exceeds the carrying value, no further testing is necessary, otherwise a quantitative assessment of goodwill is required.

The quantitative assessment 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 inclusive of goodwill, the applicable goodwill is not considered impaired. If the carrying value of the reporting unit inclusive of goodwill exceeds its fair value, an impairment charge against net income is recorded equal to the excess amount. Under the quantitative impairment assessment, the fair values of our reporting units are determined using a combination of income and market-based approaches. We rely on the income approach


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(discounted cash flow method, or “DCF”) as our primary method to determine a range of values for each reporting unit, with the market and transaction approaches used to inform management of the best estimate of value within that range.

Significant management judgment is necessary in the determination of the fair value of a reporting unit as the income approach requires an estimation of future cash flows, considering the after-tax results of operations, the extent and timing of credit losses, and appropriate discount and capital retention rates. The determination of fair value is a highly subjective process, and actual future cash flows may differ from forecasted results.

Cash flow projections rely upon multi-year financial forecasts developed for each reporting unit that consider key business drivers such as new business initiatives, customer retention standards, market share changes, anticipated loan and deposit growth, fees and expenses, forward interest rates, historical performance, credit 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, unemployment and inflation.

Our discount rate was based on the estimated cost of equity under the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, and beta 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.

Under the market approach, valuation of our reporting units considers a combination of earnings and equity multiples from companies with characteristics similar to the reporting unit. Since the fair values determined under the market approach are representative of non-controlling interests, the valuations incorporate a control premium.

We performed our annual goodwill impairment assessment on a quantitative basis in the fourth quarter of 2020. When calculating the fair value of our reporting units under the income approach, short and medium-term forecasts incorporated current economic conditions and ongoing impacts of the COVID-19 pandemic and associated lockdowns, including a federal funds target near zero and near-term elevated ACL, offset by significant monetary and fiscal stimulus. Long-term cash flow projections reflected normalized rate and credit environments, as well as a long-term rate of return for each reporting unit. At the conclusion of the quantitative assessment it was determined that the estimated fair value of the Commercial Banking and Consumer Banking reporting units substantially exceed their carrying values due primarily to an improvement in the short and medium-term economic forecasts.

When performing the quantitative goodwill impairment assessment in the fourth quarter of 2020, we corroborated the fair value of our reporting units determined by the DCF method by adding the aggregated sum of these fair value measurements to the fair value of our Other non-segment operations and comparing this total to our observed market capitalization. The excess of the sum of the fair values of the reporting units over the market capitalization of Citizens decreased from third quarter of 2020 to October 31, 2020, and decreased significantly to December 31, 2020 as our per share price rose from $25.28 to $35.76. The increase in our market capitalization resulted in a corresponding decrease in our implied control premium.

Fair Value

We measure fair value of assets and liabilities 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 also used on a recurring and nonrecurring basis to evaluate certain assets for impairment or for financial statement disclosure purposes. Examples of nonrecurring uses of fair value include impairment for certain loans, leases and goodwill. Examples of recurring uses of fair value for financial statement disclosure purposes include disclosure of the fair value of certain financial assets and liabilities accounted for on an amortized cost basis, such as HTM securities. For certain assets or liabilities, the application of management judgment in the determination of the fair value is more significant due to the lack of observable market data.

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 MSR fair value was calculated using a discounted cash flow model which used assumptions, including weighted-average life, prepayment assumptions and weighted-average option adjusted spread. It is important to note that changes in our assumptions may not be


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independent of each other; changes in one assumption may result in changes to another (e.g., changes in interest rates, which are inversely correlated to changes in prepayment rates, may result in changes to discount rates). 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.

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

RISK GOVERNANCE

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

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

Risk Framework

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

First Line of Defense

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

Second Line of Defense

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

Third Line of Defense

Our Internal Audit function is the third line of defense providing independent assurance with a view of the effectiveness of our internal controls, governance practices, and culture so that risk is managed appropriately for the size, complexity, and risk profile of the organization. Internal Audit has complete and unrestricted access to any and all of our records, physical properties and personnel. Internal Audit issues a report following each internal review and provides an audit opinion to the Board’s Audit Committee on a quarterly basis.

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


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Risk Appetite

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

Our principal non-market risks include credit, operational, regulatory, reputational, liquidity and strategic risks. We are also subject to certain market risks which include potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Market risk in our business arises from trading activities that serve customer needs, including hedging of interest rates, foreign exchange risk and non-trading activities within capital markets. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report on market risk. We actively manage both trading and non-trading market risks. See “—Market Risk” for further information. Our risk appetite is reviewed and approved annually by the Board Risk Committee.

Credit Risk

Overview

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

Objective

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

Organizational Structure

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

Governance

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

Key Management Processes

We employ a comprehensive and integrated risk control program to proactively identify, measure, monitor, and mitigate existing and emerging credit risks across the credit life cycle (origination, account management/portfolio management, and loss mitigation and recovery).

Consumer

On the Consumer Banking side of credit risk, our teams use models to evaluate consumer loans across the life cycle of the loan. Starting at origination, credit scoring models are used to forecast the probability of default


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of an applicant. When approving customers for a new loan or extension of an existing credit line, credit scores are used in conjunction with other credit risk variables such as affordability, length of term, collateral value, collateral type, and lien subordination.

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

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

Commercial

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

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

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

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

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

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

MARKET RISK

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Modest market risk arises from trading activities that serve customer needs, including hedging of interest rate and foreign exchange risk. As


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described below, more material market risk arises from our non-trading banking activities, such as loan origination and deposit-gathering. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. We actively manage market risk for both trading and non-trading activities.

Non-Trading Risk

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

Interest Rate Risk

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

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

Another important source of structural interest rate risk relates to the potential exercise of explicit or embedded options. For example, most consumer loans can be prepaid without penalty and most consumer deposits can also be withdrawn without penalty. The exercise of such options by customers can exacerbate the timing differences discussed above.

A primary source of our structural interest rate risk relates to faster repricing of floating-rate loans relative to core deposit funding. This source of asset sensitivity is more biased toward the short end of the yield curve.

The secondary source of our interest rate risk is driven by longer term rates comprising the rollover or reinvestment risk on fixed-rate loans, as well as prepayment risk on mortgage-related loans and securities funded by non-rate sensitive deposits and equity.

The primary goal of interest rate risk management is to control exposure to interest rate risk within policy limits approved by our Board. These limits and guidelines reflect our tolerance for interest rate risk over both short-term and long-term horizons. To ensure that exposure to interest rate risk is managed within our risk appetite, we must measure the exposure and hedge it, as necessary. The Treasury Asset and Liability Management team is responsible for measuring, monitoring and reporting on our structural interest rate risk position. These exposures are reported on a monthly basis to the Asset Liability Committee and at Board meetings.

We measure structural interest rate risk through a variety of metrics intended to quantify both short-term and long-term exposures. The primary method we use to quantify interest rate risk is simulation analysis in which we model net interest income from assets, liabilities and hedge derivative positions under various interest rate scenarios over a three-year horizon. Exposure to interest rate risk is reflected in the variation of forecasted net interest income across the scenarios.

Key assumptions in this simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances and the behavior of loan and deposit clients in different rate environments. The most material of these behavioral assumptions relate to the repricing characteristics and balance fluctuations of deposits with indeterminate (i.e., non-contractual) maturities, as well as the pace of mortgage prepayments. Assessments are periodically made by running sensitivity analyses to determine the impact of key assumptions. The results of these analyses are reported to the Asset Liability Committee.

As the future path of interest rates cannot be known in advance, we use simulation analysis to project net interest income under various interest rate scenarios including a “most likely” (implied forward) scenario, as well as a variety of deliberately extreme and perhaps unlikely scenarios. These scenarios may assume gradual


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ramping of the overall level of interest rates, immediate shocks to the level of rates and various yield curve twists in which movements in short- or long-term rates predominate. Generally, projected net interest income in any interest rate scenario is compared to net interest income in a base case where market forward rates are realized.

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


Table 32: Sensitivity of Net Interest Income
	Estimated % Change in Net Interest Income over 12 Months
	December 31,
Basis points	2020		2019
Instantaneous Change in Interest Rates
200	21.2	%	6.9	%
100	11.2		3.6
-25	(2.7)		(1.3)
Gradual Change in Interest Rates
200	10.8	%	3.2	%
100	5.5		1.5
-25	(1.5)		(0.5)

We continue to manage asset sensitivity within the scope of our policy and changing market conditions. Asset sensitivity against a 200 basis point gradual increase in rates was 10.8% at December 31, 2020, compared with 3.2% at December 31, 2019. Current levels of asset sensitivity are elevated relative to our core sensitivity profile due to meaningful increases in cash and deposit balances as a result of monetary and fiscal stimulus programs. This increase in asset sensitivity is recognition of the current level of historically low interest rates and is consistent with our positioning in prior periods of policy rates between zero and 25 basis points. The risk position can be affected by changes in interest rates which impact the repricing sensitivity or beta of the deposit base as well as the cash flows on assets that allow for early payoff without a penalty. The risk position is managed within our risk limits, and long term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding.

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

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


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Table 33: Interest Rate Swap Contracts Used to Manage Non-Trading Interest Rate Exposure
	December 31, 2020						December 31, 2019
		Weighted Average							Weighted Average
(dollars in millions)	Notional Amount	Maturity (Years)	Receive Rate		Pay Rate			Notional Amount		Maturity (Years)	Receive Rate		Pay Rate
Cash flow - receive-fixed/pay-variable - conventional ALM	$12,350	1.0	1.5	%	0.2	%		$19,350		1.5	1.7	%	1.7	%
Fair value - receive-fixed/pay-variable - conventional debt	3,200	1.7	2.1		0.2			4,650		2.0	2.0		1.9
Cash flow - pay-fixed/receive-variable - conventional ALM(1)	4,750	3.9	0.2		1.4			3,000		4.5	1.7		1.7
Fair value - pay-fixed/receive-variable - conventional ALM	2,000	3.7	0.2		1.5			2,846		4.5	1.8		1.8
Total portfolio swaps	$22,300	2.0	1.2	%	0.6	%		$29,846		2.2	1.8	%	1.8	%

(1) Includes $1.8 billion of forward-starting, pay-fixed interest rate swaps.

Using the interest rate curve at December 31, 2020, the estimated net contribution to net interest income related to the ALM interest rate swap contracts we use to manage the interest rate exposure to the variability in the interest cash flows on our floating-rate commercial loans and floating-rate wholesale funding, as well as the variability in the fair value of AFS securities is approximately $58 million for the full-year 2021. 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, 2020.


Table 34: Pre-Tax Gains (Losses) Recorded in the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income
	Amounts Recognized for the Year Ended December 31,
(in millions)	2020	2019
Amount of pre-tax net gains recognized in OCI	$130	$138
Amount of pre-tax net gains (losses) reclassified from OCI into interest income	184	(68)
Amount of pre-tax net (losses) gains reclassified from OCI into interest expense	(35)	11

LIBOR Transition

As previously disclosed, many of our lending products, securities, derivatives, and other financial transactions utilize the LIBOR benchmark rate and will be impacted by its planned discontinuance. In late 2018, we formed a LIBOR Transition Program designed to guide the organization through the planned discontinuation of LIBOR. The Program, with direction and oversight from our Chief Financial Officer, is responsible for developing, maintaining and executing against a coordinated strategy to ensure a timely and orderly transition from LIBOR. The Program is structured to address various initiatives including program governance, transition management, communications, exposure management, new alternative reference rate product delivery, risk management, contract remediation, operations and technology readiness, accounting and reporting, as well as tax and regulation impacts. We have identified and are monitoring the risks associated with the LIBOR transition on a quarterly basis.

The ARRC recommended that banks be systemically and operationally capable of supporting transactions in alternative reference rates, such as SOFR, by the end of September 2020. Guided by this milestone, we are systemically and operationally prepared to support alternative reference rate transactions. In light of announcements from the ICE Benchmark Administration regarding their proposal to extend the availability of U.S. dollar LIBOR for most tenors through June 20, 2023 and the support for this proposal from the official sector in the U.S., we are now engaged in determining the impact that this change may have on our LIBOR transition activities. Remaining mindful that regulators are still urging market participants to stop entering into new U.S. dollar LIBOR contracts as soon as practicable, but no later than the end of 2021, we will continue all efforts to move new originations to alternative reference rates over the course of 2021. However, plans for legacy contract remediation will extend through mid-2023 should the proposal become final in its current form. More broadly, program governance remains robust, and progress has been made in the above-outlined initiatives as management closely monitors the consultations and waits for timelines to be finalized.


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For a further discussion of how the discontinuance of LIBOR may impact our business, see Item 1A “Risk Factors."

Capital Markets

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

Mortgage Servicing Rights

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

As part of our overall risk management strategy relative to the fair market value of the MSRs we enter into various free-standing derivatives, such as interest rate swaps, interest rate swaptions, interest rate futures, and forward contracts to purchase mortgage-backed securities to economically hedge the changes in fair value. As of December 31, 2020 and 2019, the fair value of our MSRs was $658 million and $642 million, respectively, and the total notional amount of related derivative contracts was $11.4 billion and $8.6 billion, respectively. Gains and losses on MSRs and the related derivatives used for hedging are included in mortgage banking fees on the Consolidated Statements of Operations.

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

Trading Risk

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

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

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

Market Risk Governance

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


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currency positions and single name risk, are monitored on a daily basis and reported against tolerances consistent with our risk appetite and business strategy to relevant business line management and risk counterparts.

Market Risk Measurement

We use VaR as a statistical measure for estimating potential exposure of our traded market risk in normal market conditions. Our VaR framework for risk management and regulatory reporting is the same. Risk management VaR is based on a one day holding period to a 99% confidence level, whereas regulatory VaR is based on a ten day holding period to the same confidence level. In addition to VaR, non-statistical measurements for measuring risk are employed, such as sensitivity analysis, market value and stress testing.

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

VaR Overview

The market risk measurement model is based on historical simulation. The VaR measure estimates the extent of any fair value losses on trading positions that may occur due to broad market movements (General VaR) such as changes in the level of interest rates, foreign exchange rates, equity prices and commodity prices. It is calculated on the basis that current positions remain broadly unaltered over the course of a given holding period. It is assumed that markets are sufficiently liquid to allow the business to close its positions, if required, within this holding period. VaR’s benefit is that it captures the historic correlations of a portfolio. Based on the composition of our “covered positions,” we also use a standardized add-on approach for the loan trading and high yield bond desks’ Specific Risk capital which estimates the extent of any losses that may occur from factors other than broad market movements. The General VaR approach is expressed in terms of a confidence level over the past 500 trading days. The internal VaR measure (used as the basis of the main VaR trading limits) is a 99% confidence level with a one day holding period, meaning that a loss greater than the VaR is expected to occur, on average, on only one day in 100 trading days (i.e., 1% of the time). Theoretically, there should be a loss event greater than VaR two to three times per year. The regulatory measure of VaR is done at a 99% confidence level with a ten-day holding period. The historical market data applied to calculate the VaR is updated on a two business day lag. Refer to “Market Risk Regulatory Capital” below for details of our ten-day VaR metrics for the quarters ended December 31, 2020 and 2019, respectively, including high, low, average and period end VaR for interest rate and foreign exchange rate risks, as well as total VaR.


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Market Risk Regulatory Capital

The U.S. banking regulators’ “Market Risk Rule” covers the calculation of market risk capital. For the purposes of the Market Risk Rule, all of our client facing trades and associated hedges maintain a net low risk and do qualify, as “covered positions.” The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR.


Table 35: Results of Modeled and Non-Modeled Measures for Regulatory Capital Calculations
(in millions)	For the Three Months Ended December 31, 2020				For the Three Months Ended December 31, 2019
Market Risk Category	Period End	Average	High	Low	Period End	Average	High	Low
Interest Rate	$2	$2	$4	$—	$1	$—	$1	$—
Foreign Exchange Currency Rate	—	—	—	—	—	—	—	—
Credit Spread	9	10	12	3	5	4	5	3
Commodity	—	—	—	—	—	—	—	—
General VaR	9	8	13	4	5	4	5	3
Specific Risk VaR	—	—	—	—	—	—	—	—
Total VaR	$9	$8	$13	$4	$5	$4	$5	$3
Stressed General VaR	$13	$10	$16	$6	$13	$10	$13	$7
Stressed Specific Risk VaR	—	—	—	—	—	—	—	—
Total Stressed VaR	$13	$10	$16	$6	$13	$10	$13	$7
Market Risk Regulatory Capital	$56				$42
Specific Risk Not Modeled Add-on	14				14
de Minimis Exposure Add-on	—				—
Total Market Risk Regulatory Capital	$70				$56
Market Risk-Weighted Assets (calculated)	$871				$695
Market Risk-Weighted Assets (included in our FR Y-9C regulatory filing)	$871				$695

Stressed VaR

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

Sensitivity Analysis

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

Stress Testing

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


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the worst 20-trading day peak to trough moves for the various risk factors that go into VaR from that period, and assumes they occurred simultaneously.

VaR Model Review and Validation

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

VaR Backtesting

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

The following graph shows our daily net trading revenue and total internal, modeled VaR for the year ended December 31, 2020.

Daily VaR Backtesting


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NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS

For more information on the computation of non-GAAP financial measures, see “—Introduction — Non-GAAP Financial Measures,” included in this Report. The following tables present computations of non-GAAP financial measures representing our “Underlying” results used throughout the MD&A:

Table 36: Reconciliations of Non-GAAP Measures


		Year Ended December 31,
(in millions, except share, per share and ratio data)	Ref.	2020		2019




Total revenue, Underlying:
Total revenue (GAAP)	A	$6,905		$6,491
Less: Notable items		—		—
Total revenue, Underlying (non-GAAP)	B	$6,905		$6,491
Noninterest expense, Underlying:
Noninterest expense (GAAP)	C	$3,991		$3,847
Less: Notable items		125		68
Noninterest expense, Underlying (non-GAAP)	D	$3,866		$3,779
Pre-provision profit:
Total revenue (GAAP)	A	6,905		$6,491
Less: Noninterest expense (GAAP)	C	3,991		3,847
Pre-provision profit (GAAP)		$2,914		$2,644
Pre-provision profit, Underlying:
Total revenue, Underlying (non-GAAP)	B	$6,905		$6,491
Less: Noninterest expense, Underlying (non-GAAP)	D	3,866		3,779
Pre-provision profit, Underlying (non-GAAP)		$3,039		$2,712




Income before income tax expense, Underlying:
Income before income tax expense (GAAP)	E	$1,298		$2,251
Less: Expense before income tax benefit related to notable items		(125)		(68)
Income before income tax expense, Underlying (non-GAAP)	F	$1,423		$2,319
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP)	G	$241		$460
Less: Income tax benefit related to notable items		(42)		(51)
Income tax expense, Underlying (non-GAAP)	H	$283		$511
Effective income tax rate (GAAP)	G/E	18.54	%	20.43	%
Effective income tax rate, Underlying (non-GAAP)	H/F	19.92		22.03
Net income, Underlying:
Net income (GAAP)	I	$1,057		$1,791
Add: Notable items, net of income tax benefit		83		17
Net income, Underlying (non-GAAP)	J	$1,140		$1,808
Net income available to common stockholders, Underlying:
Net income available to common stockholders (GAAP)	K	$950		$1,718
Add: Notable items, net of income tax benefit		83		17
Net income available to common stockholders, Underlying (non-GAAP)	L	$1,033		$1,735
Return on average common equity and return on average common equity, Underlying:
Average common equity (GAAP)	M	$20,438		$20,325
Return on average common equity	K/M	4.65	%	8.45	%
Return on average common equity, Underlying (non-GAAP)	L/M	5.05		8.53
Return on average tangible common equity and return on average tangible common equity, Underlying:
Average common equity (GAAP)	M	$20,438		$20,325
Less: Average goodwill (GAAP)		7,049		7,036
Less: Average other intangibles (GAAP)		64		71
Add: Average deferred tax liabilities related to goodwill (GAAP)		376		371
Average tangible common equity	N	$13,701		$13,589
Return on average tangible common equity	K/N	6.93	%	12.64	%
Return on average tangible common equity, Underlying (non-GAAP)	L/N	7.53		12.76


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		Year Ended December 31,
(in millions, except share, per share and ratio data)	Ref.	2020		2019
Return on average total assets and return on average total assets, Underlying:
Average total assets (GAAP)	O	$176,442		$162,176
Return on average total assets	I/O	0.60	%	1.10	%
Return on average total assets, Underlying (non-GAAP)	J/O	0.65		1.11
Return on average total tangible assets and return on average total tangible assets, Underlying:
Average total assets (GAAP)	O	$176,442		$162,176
Less: Average goodwill (GAAP)		7,049		7,036
Less: Average other intangibles (GAAP)		64		71
Add: Average deferred tax liabilities related to goodwill (GAAP)		376		371
Average tangible assets	P	$169,705		$155,440
Return on average total tangible assets	I/P	0.62	%	1.15	%
Return on average total tangible assets, Underlying (non-GAAP)	J/P	0.67		1.16
Efficiency ratio and efficiency ratio, Underlying:
Efficiency ratio	C/A	57.80	%	59.28	%
Efficiency ratio, Underlying (non-GAAP)	D/B	55.99		58.23
Operating leverage and operating leverage, Underlying:
Increase in total revenue		6.38	%	5.91	%
Increase in noninterest expense		3.73		6.30
Operating Leverage		2.65	%	(0.39)	%
Increase in total revenue, Underlying (non-GAAP)		6.39	%	5.83	%
Increase in noninterest expense, Underlying (non-GAAP)		2.30		6.00
Operating Leverage, Underlying (non-GAAP)		4.09	%	(0.17)	%
Tangible book value per common share:
Common shares - at period end (GAAP)	Q	427,209,831		433,121,083
Common stockholders’ equity (GAAP)		$20,708		$20,631
Less: Goodwill (GAAP)		7,050		7,044
Less: Other intangible assets (GAAP)		58		68
Add: Deferred tax liabilities related to goodwill (GAAP)		379		374
Tangible common equity	R	$13,979		$13,893
Tangible book value per common share	R/Q	$32.72		$32.08
Net income per average common share - basic and diluted and net income per average common share - basic and diluted, Underlying:
Average common shares outstanding - basic (GAAP)	S	427,062,537		449,731,453
Average common shares outstanding - diluted (GAAP)	T	428,157,780		451,213,701
Net income per average common share - basic (GAAP)	K/S	$2.22		$3.82
Net income per average common share - diluted (GAAP)	K/T	2.22		3.81
Net income per average common share-basic, Underlying (non-GAAP)	L/S	2.42		3.86
Net income per average common share-diluted, Underlying (non-GAAP)	L/T	2.41		3.84
Dividend payout ratio and dividend payout ratio, Underlying:
Cash dividends declared and paid per common share	U	$1.56		$1.36
Dividend payout ratio	U/(K/S)	70	%	36	%
Dividend payout ratio, Underlying (non-GAAP)	U/(L/S)	65		35


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The following table presents computations of non-GAAP financial measures representing certain metrics excluding the impact of PPP loans used throughout the MD&A:


Table 37: Reconciliations of Non-GAAP Measures - Excluding PPP
(in millions, except share, per share and ratio data)	Ref.	December 31, 2020		December 31, 2019
Allowance for credit losses to total loans and leases, excluding the impact of PPP loans:
Total loans and leases (GAAP)	A	$123,090		$119,088
Less: PPP loans		4,155		—
Total loans and leases, excluding the impact of PPP loans (non-GAAP)	B	$118,935		$119,088
Allowance for credit losses (GAAP)	C	$2,670		$1,296
Allowance for credit losses to total loans and leases (GAAP)	C/A	2.17	%	1.09	%
Allowance for credit losses to total loans and leases, excluding the impact of PPP loans (non-GAAP)	C/B	2.24	%	1.09	%

The following table presents computations of non-GAAP financial measures representing certain metrics excluding the impact of elevated cash levels used in “—Net Interest Income”:


Table 38: Reconciliations of Non-GAAP Measures - Excluding Elevated Cash
(in millions, except ratio data)	Ref.	December 31, 2020		December 31, 2019
Net interest income, FTE, excluding the impact of elevated cash:
Net interest income, FTE	A	$4,599		$4,635
Less: Net interest income associated with elevated cash		—		—
Net interest income, FTE, excluding the impact of elevated cash (non-GAAP)	B	$4,599		$4,635
Average interest-earning assets, excluding the impact of elevated cash:
Total interest-earning assets (GAAP)	C	$159,275		$146,814
Less: Elevated cash		4,322		—
Total average interest-earning assets, excluding the impact of elevated cash (non-GAAP)	D	$154,953		$146,814
Ratios:
Net interest margin, FTE	A/C	2.89	%	3.16	%
Net interest margin, FTE, excluding the impact of elevated cash (non-GAAP)	B/D	2.97	%	3.16	%

Previous: Item 6. SELECTED CONSOLIDATED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK