Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


						Page
Report of Management on Internal Control Over Financial Reporting						81
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements (PCAOB ID No. 34)						82
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting						85
Consolidated Balance Sheets						86
Consolidated Statements of Operations						87
Consolidated Statements of Comprehensive Income						88
Consolidated Statements of Changes in Stockholders’ Equity						89
Consolidated Statements of Cash Flows						90
Notes to Consolidated Financial Statements						91
Note 1 - Basis of Presentation						91
Note 2 - Acquisitions						91
Note 3 - Cash and Due from Banks						92
Note 4 - Securities						92
Note 5 - Loans and Leases						96
Note 6 - Allowance for Credit Losses, Nonaccrual Loans and Leases, and Concentrations of Credit Risk						98
Note 7 - Premises, Equipment and Software						112
Note 8 - Mortgage Banking and Other						113
Note 9 - Leases						115
Note 10 - Goodwill and Intangible Assets						116
Note 1 1 - Variable Interest Entities						118
Note 1 2 - Deposits						119
Note 1 3 - Borrowed Funds						120
Note 1 4 - Derivatives						122
Note 1 5 - Employee Benefits						125
Note 1 6 - Accumulated Other Comprehensive Income (Loss)						127
Note 1 7 - Stockholders’ Equity						128
Note 1 8 - Share-Based Compensation						130
Note 1 9 - Commitments and Contingencies						132
Note 20 - Fair Value Measurements						133
Note 2 1 - Noninterest Income						140
Note 2 2 - Other Operating Expense						142
Note 2 3 - Income Taxes						142
Note 2 4 - Earnings Per Share						145
Note 2 5 - Regulatory Matters						145
Note 2 6 - Business Operating Segments						146
Note 2 7 - Parent Company Financials						149
Note 28 - Subsequent Events						151


						Citizens Financial Group, Inc. \| 80

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2021 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2021, the Company’s internal control over financial reporting is effective.

The Company’s internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their accompanying report, appearing on page 85, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.


						Citizens Financial Group, Inc. \| 81

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

Citizens Financial Group, Inc.

Providence, Rhode Island

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Citizens Financial Group, Inc. and its subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As described in Note 6 to the consolidated financial statements, the Company changed its method for estimating the allowance for credit losses on January 1, 2020 due to the adoption of Financial Instruments - Credit Losses (Topic 326).

Basis for Opinion

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

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

Critical Audit Matter

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


						Citizens Financial Group, Inc. \| 82

Allowance for Credit Losses - Refer to Note 6 to the consolidated financial statements

Critical Audit Matter Description

Management’s estimate of expected credit losses in the Company’s loan and lease portfolios is recorded in the allowance for loan and lease losses and the reserve for unfunded lending commitments (collectively, the “ACL”). The ACL is maintained at a level the Company believes 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. The determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments that are not unconditionally cancelable considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information. Key assumptions used in the ACL measurement process include the use of a two-year reasonable and supportable economic forecast period followed by a one-year reversion period to historical credit loss information.

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 probability of default, loss given default, and exposure at default (for commercial), timing and amount of expected draws (for unfunded lending commitments), FICO scores, loan-to-values ratios, 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 the Company considers to reflect current judgment of various events and risks that are not measured in the 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 affected by sensitivity analysis for certain industry sectors or loan classes, including CRE office.

Management continues to utilize the qualitative allowance framework to reassess and adjust ACL reserve levels. Macroeconomic forecast risk, driven by uncertainty around and volatility of key macroeconomic variables, is one of the primary factors influencing the qualitative reserve. As the economic recovery has continued, Management has assessed risks to the recovery, including potential for continuing impacts from COVID-19 variants, challenges in the global supply chain, inflationary trends, potential impacts from ending monetary and fiscal stimulus programs, and potential for longer-term changes in workforce and consumer behaviors. Management continued to apply management judgment to adjust the modeled reserves in the commercial industry sectors most impacted by the COVID-19 pandemic, including CRE office.

Given the size of the loan and lease portfolios and unfunded commitments and the subjective nature of estimating the ACL, including the estimated impact of COVID-19 and related economic forecasting uncertainty, auditing the ACL involved a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the ACL for the loan and lease portfolios and unfunded commitments included the following, among others:

We tested the effectiveness of controls over the (i) selection of the foundational economic forecast, (ii) development, execution, and monitoring of the econometric models, (iii) estimation of management’s adjustments to the modeled reserves for COVID-19 and other factors, (iv) determination of the qualitative allowance, and (v) overall calculation and disclosure of the ACL.
With the assistance of credit specialists, we (i) evaluated the reasonableness of the econometric models and related assumptions, (ii) assessed the reasonableness of design, theory, and logic of the econometric models for estimating expected credit losses, (iii) tested the accuracy of the data input into the econometric


						Citizens Financial Group, Inc. \| 83

models, and (iv) tested the arithmetic accuracy of the models’ calculations of the expected credit losses.

We (i) evaluated the reasonableness of the Company’s identification of the commercial industry sectors most severely impacted by COVID-19, (ii) assessed the reasonableness of management’s methodologies and assumptions used to estimate the impact of COVID-19 on the impacted sectors, (iii) tested the accuracy of the data used in management’s calculation of the adjustments to the modeled reserves for the sectors impacted by COVID-19, (iv) tested the arithmetic accuracy of the calculation of the adjustments, and (v) considered available information related to industry sectors and borrowers severely impacted by COVID-19.
We (i) evaluated the appropriateness and relevance of the qualitative factors, including management’s consideration of the economic forecasting uncertainty, and related quantitative measures included in the qualitative allowance, (ii) tested the accuracy and evaluated the relevance of the historical loss data used in determining the qualitative allowance, (iii) evaluated the reasonableness of the Company’s assessment and determination of the qualitative factors and related impact on the estimation of the qualitative allowance and (iv) tested the arithmetic accuracy of the calculation of the qualitative allowance.
We tested the arithmetic accuracy of the calculation of the overall ACL and assessed the reasonableness of the related disclosures.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 23, 2022

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


						Citizens Financial Group, Inc. \| 84

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

Citizens Financial Group, Inc.

Providence, Rhode Island

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Citizens Financial Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 23, 2022, expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company’s adoption of Financial Instruments - Credit Losses (ASC 326) on January 1, 2020.

Basis for Opinion

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

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

Definition and Limitations of Internal Control over Financial Reporting

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

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

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 23, 2022


						Citizens Financial Group, Inc. \| 85

CONSOLIDATED BALANCE SHEETS


(in millions, except share data)	December 31, 2021	December 31, 2020
ASSETS:
Cash and due from banks	$1,155	$1,037
Interest-bearing cash and due from banks	8,003	11,696
Interest-bearing deposits in banks	316	306
Debt securities available for sale, at fair value (including $640 and $549 pledged to creditors, respectively)(1)	26,067	22,942
Debt securities held to maturity (fair value of $2,289 and $3,357, respectively, and including $77 and $144 pledged to creditors, respectively)(1)	2,242	3,235
Loans held for sale, at fair value	2,733	3,564
Other loans held for sale	735	439
Loans and leases	128,163	123,090
Less: Allowance for loan and lease losses	(1,758)	(2,443)
Net loans and leases	126,405	120,647
Derivative assets	1,216	1,915
Premises and equipment, net	768	759
Bank-owned life insurance	2,843	1,756
Goodwill	7,116	7,050
Other assets	8,810	8,003
TOTAL ASSETS	$188,409	$183,349
LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
Deposits:
Noninterest-bearing	$49,443	$43,831
Interest-bearing	104,918	103,333
Total deposits	154,361	147,164
Short-term borrowed funds	74	243
Derivative liabilities	197	128
Deferred taxes, net	—	629
Long-term borrowed funds	6,932	8,346
Other liabilities	3,425	4,166
TOTAL LIABILITIES	164,989	160,676
Contingencies (refer to Note 19)
STOCKHOLDERS’ EQUITY:
Preferred Stock:
$25.00 par value,100,000,000 shares authorized; 2,050,000 and 2,000,000 shares issued and outstanding at December 31, 2021 and 2020, respectively	2,014	1,965
Common stock:
$0.01 par value, 1,000,000,000 shares authorized; 571,259,135 shares issued and 422,137,197 shares outstanding at December 31, 2021 and 569,876,133 shares issued and 427,209,831 shares outstanding at December 31, 2020	6	6
Additional paid-in capital	19,005	18,940
Retained earnings	7,978	6,445
Treasury stock, at cost, 149,121,938 and 142,666,302 shares at December 31, 2021 and 2020, respectively	(4,918)	(4,623)
Accumulated other comprehensive income (loss)	(665)	(60)
TOTAL STOCKHOLDERS’ EQUITY	23,420	22,673
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$188,409	$183,349

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

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


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CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended December 31,
(in millions, except share and per share data)	2021	2020	2019
INTEREST INCOME:
Interest and fees on loans and leases	$4,253	$4,719	$5,441
Interest and fees on loans held for sale, at fair value	82	75	63
Interest and fees on other loans held for sale	13	33	13
Investment securities	487	519	642
Interest-bearing deposits in banks	16	11	30
Total interest income	4,851	5,357	6,189
INTEREST EXPENSE:
Deposits	160	509	1,155
Short-term borrowed funds	1	2	10
Long-term borrowed funds	178	260	410
Total interest expense	339	771	1,575
Net interest income	4,512	4,586	4,614
Provision for credit losses	(411)	1,616	393
Net interest income after provision for credit losses	4,923	2,970	4,221
NONINTEREST INCOME:
Capital markets fees	428	250	216
Service charges and fees	409	403	505
Mortgage banking fees	434	915	302
Card fees	250	217	254
Trust and investment services fees	239	203	202
Letter of credit and loan fees	156	140	135
Foreign exchange and interest rate products	120	120	155
Securities gains, net	10	4	19
Other income	89	67	89
Total noninterest income	2,135	2,319	1,877
NONINTEREST EXPENSE:
Salaries and employee benefits	2,132	2,123	2,026
Equipment and software	610	565	514
Outside services	595	553	498
Occupancy	333	331	333
Other operating expense	411	419	476
Total noninterest expense	4,081	3,991	3,847
Income before income tax expense	2,977	1,298	2,251
Income tax expense	658	241	460
NET INCOME	$2,319	$1,057	$1,791
Net income available to common stockholders	$2,206	$950	$1,718
Weighted-average common shares outstanding:
Basic	425,669,451	427,062,537	449,731,453
Diluted	427,435,818	428,157,780	451,213,701
Per common share information:
Basic earnings	$5.18	$2.22	$3.82
Diluted earnings	5.16	2.22	3.81

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


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Year Ended December 31,
(in millions)	2021	2020	2019
Net income	$2,319	$1,057	$1,791
Other comprehensive income (loss):
Net unrealized derivative instruments gains (losses) arising during the periods, net of income taxes of $(17), $33 and $35, respectively	(49)	97	103
Reclassification adjustment for net derivative (gains) losses included in net income, net of income taxes of ($34), ($38) and $14, respectively	(101)	(111)	43
Net unrealized debt securities gains (losses) arising during the periods, net of income taxes of $(172), $124 and $165, respectively	(528)	382	501
Reclassification of net debt securities (gains) losses to net income, net of income taxes of ($2), ($1) and ($8), respectively	(8)	(3)	(15)
Employee benefit plans:
Actuarial gain (loss), net of income taxes of $19, $(10) and $12, respectively	55	(27)	36
Reclassification of actuarial loss to net income, net of income taxes of $7, $4 and $6, respectively	26	13	13
Amortization of prior service cost, net of income taxes of $0, $0 and $0, respectively	—	—	(1)
Total other comprehensive income (loss), net of income taxes	(605)	351	680
Total comprehensive income (loss)	$1,714	$1,408	$2,471

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


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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


	Preferred Stock		Common Stock		Additional Paid-in Capital	Retained Earnings	Treasury Stock, at Cost	Accumulated Other Comprehensive Income (Loss)	Total
(in millions)	Shares	Amount	Shares	Amount
Balance at December 31, 2018	1	$840	466	$6	$18,815	$5,385	($3,133)	($1,096)	$20,817
Dividends to common stockholders	—	—	—	—	—	(617)	—	—	(617)
Dividends to preferred stockholders	—	—	—	—	—	(73)	—	—	(73)
Preferred stock issued	1	730	—	—	—	—	—	—	730
Treasury stock purchased	—	—	(34)	—	—	—	(1,220)	—	(1,220)
Share-based compensation plans	—	—	1	—	59	—	—	—	59
Employee stock purchase plan purchased	—	—	—	—	17	—	—	—	17
Cumulative effect of change in accounting principle	—	—	—	—	—	12	—	5	17
Total comprehensive income (loss):
Net income	—	—	—	—	—	1,791	—	—	1,791
Other comprehensive income (loss)	—	—	—	—	—	—	—	680	680
Total comprehensive income (loss)	—	—	—	—	—	1,791	—	680	2,471
Balance at December 31, 2019	2	$1,570	433	$6	$18,891	$6,498	($4,353)	($411)	$22,201
Dividends to common stockholders	—	—	—	—	—	(672)	—	—	(672)
Dividends to preferred stockholders	—	—	—	—	—	(107)	—	—	(107)
Preferred stock issued	—	395	—	—	—	—	—	—	395
Treasury stock purchased	—	—	(8)	—	—	—	(270)	—	(270)
Share-based compensation plans	—	—	1	—	30	—	—	—	30
Employee stock purchase plan	—	—	1	—	19	—	—	—	19
Cumulative effect of change in accounting principle	—	—	—	—	—	(331)	—	—	(331)
Total comprehensive income (loss):
Net income	—	—	—	—	—	1,057	—	—	1,057
Other comprehensive income (loss)	—	—	—	—	—	—	—	351	351
Total comprehensive income (loss)	—	—	—	—	—	1,057	—	351	1,408
Balance at December 31, 2020	2	$1,965	427	$6	$18,940	$6,445	($4,623)	($60)	$22,673
Dividends to common stockholders	—	—	—	—	—	(670)	—	—	(670)
Dividends to preferred stockholders	—	—	—	—	—	(113)	—	—	(113)
Preferred stock issued	—	296	—	—	—	—	—	—	296
Preferred stock redemption	—	(247)	—	—	—	(3)	—	—	(250)
Treasury stock purchased	—	—	(6)	—	—	—	(295)	—	(295)
Share-based compensation plans	—	—	1	—	43	—	—	—	43
Employee stock purchase plan	—	—	—	—	22	—	—	—	22

Total comprehensive income (loss):
Net income	—	—	—	—	—	2,319	—	—	2,319
Other comprehensive income (loss)	—	—	—	—	—	—	—	(605)	(605)
Total comprehensive income (loss)	—	—	—	—	—	2,319	—	(605)	1,714
Balance at December 31, 2021	2	$2,014	422	$6	$19,005	$7,978	($4,918)	($665)	$23,420

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


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CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
(in millions)	2021	2020	2019
OPERATING ACTIVITIES
Net income	$2,319	$1,057	$1,791
Adjustments to reconcile net income to net change in cash due to operating activities:
Provision for credit losses	(411)	1,616	393
Net change in loans held for sale	1,085	32	(672)
Depreciation, amortization and accretion	625	578	633




Deferred income taxes	(429)	(238)	64
Share-based compensation	59	48	41



Net gain on sale of assets	(11)	(4)	(31)



Net (increase) decrease in other assets	(1,719)	(3,979)	(853)
Net increase (decrease) in other liabilities	757	1,001	331
Net change due to operating activities	2,275	111	1,697
INVESTING ACTIVITIES
Investment securities:
Purchases of debt securities available for sale	(12,406)	(9,271)	(8,422)
Proceeds from maturities and paydowns of debt securities available for sale	7,810	6,943	3,946
Proceeds from sales of debt securities available for sale	790	585	5,016

Proceeds from maturities and paydowns of debt securities held to maturity	1,006	897	398

Net (increase) decrease in interest-bearing deposits in banks	(10)	(9)	(149)
Acquisitions, net of cash acquired	(165)	(3)	(129)
Purchases of loans	(3,778)	(3,315)	(1,592)
Sales of loans	934	3,014	1,082
Net (increase) decrease in loans and leases	(3,177)	(4,794)	(3,824)
Capital expenditures, net	(124)	(118)	(95)
Purchases of bank-owned life insurance	(1,050)	—	—
Other	(316)	(65)	(106)
Net change due to investing activities	(10,486)	(6,136)	(3,875)
FINANCING ACTIVITIES
Net increase (decrease) in deposits	7,197	21,851	5,738
Net increase (decrease) in short-term borrowed funds	(154)	(39)	(1,048)
Proceeds from issuance of long-term borrowed funds	—	8,323	12,850
Repayments of long-term borrowed funds	(1,352)	(14,022)	(14,857)
Treasury stock purchased	(295)	(270)	(1,220)
Net proceeds from issuance of preferred stock	296	395	730
Redemption of preferred stock	(250)	—	—
Dividends declared and paid to common stockholders	(670)	(672)	(617)
Dividends declared and paid to preferred stockholders	(113)	(98)	(65)
Premium paid to exchange debt	(1)	(80)	—
Payments of employee tax withholding for share-based compensation	(22)	(16)	(21)
Net change due to financing activities	4,636	15,372	1,490
Net change in cash and cash equivalents(a)	(3,575)	9,347	(688)
Cash and cash equivalents at beginning of period(a)	12,733	3,386	4,074
Cash and cash equivalents at end of period(a)	$9,158	$12,733	$3,386

Supplemental disclosures:
Interest paid	$347	$837	$1,560
Income taxes paid	1,247	261	326
Non-cash items:
Transfer of securities from available for sale to held to maturity	$—	$813	$192
Transfer of securities from held to maturity to available for sale	—	—	734
Loans securitized and transferred to securities available for sale	260	956	150
Loans securitized and transferred to securities held to maturity	—	111	—
Stock issued for share-based compensation plans	43	30	59
Stock issued for Employee Stock Purchase Plan	$22	$19	$17

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

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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

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

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

Significant Accounting Policies

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


	Note	Page
Cash and Due From Banks	3	92
Securities	4	92
Loans and Leases	5	96
Allowance for Credit Losses	6	98
Premises, Equipment and Software	7	112
Mortgage Servicing Rights	8	113
Leases	9	115
Goodwill and Intangible Assets	10	116
Variable Interest Entities	11	118
Derivative Instruments	14	122
Employee Benefits	15	125
Treasury Stock	17	128
Employee Share-Based Compensation	18	130
Fair Value Measurement	20	133
Revenue Recognition	21	140
Income Taxes	23	142
Earnings Per Share	24	145

NOTE 2 - ACQUISITIONS

Completed Acquisitions

On September 1, 2021, the Company closed its acquisition of Willamette, a valuation consulting and forensic analysis firm with offices in Chicago, Atlanta and Portland, Oregon.

On November 15, 2021, the Company closed its acquisition of JMP, a capital markets firm that provides investment banking services, including strategic advisory, equity research and sales and trading focused primarily on the healthcare, technology, financial services and real estate sectors.

The Company expects that some adjustments of the fair values assigned to the assets acquired and liabilities assumed may subsequently be recorded, although any such adjustments are not expected to be material.


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Pending Acquisitions

On May 26, 2021, CBNA entered into an agreement to acquire 80 East Coast branches and the national online deposit business from HSBC. The HSBC branch acquisition includes 66 locations in the New York City Metro area, 9 locations in the Mid-Atlantic/Washington D.C. area, and 5 locations in Southeast Florida. The acquisition closed on February 18, 2022.

On July 28, 2021, the Company entered into a definitive agreement and plan of merger under which the Company will acquire all of the outstanding shares of Investors for a combination of stock and cash. Pursuant to the terms of the agreement, Investors shareholders will receive 0.297 of a share of the Company’s common stock and $1.46 in cash for each share of Investors they own. The acquisition of Investors builds our physical presence in the northeast with the addition of 154 branches located in the greater New York City and Philadelphia metropolitan areas and across New Jersey. The merger is expected to close in early second quarter 2022, subject to regulatory approvals and other customary closing conditions.

NOTE 3 - CASH AND DUE FROM BANKS

For the purpose of reporting cash flows, cash and cash equivalents have original maturities of three months or less and include cash and due from banks and interest-bearing cash and due from banks, primarily at the FRB. The Company had no material restrictions on the use or availability of its cash as of December 31, 2021 or 2020.

NOTE 4 - SECURITIES

Investments include debt and equity securities and other investment securities. Citizens classifies debt securities as AFS, HTM, or trading based on management’s intent to hold to maturity at the time of purchase. Management reserves the right to change the initial classification of debt and equity securities purchased based on its intent to hold to maturity or as permitted by periodic changes in accounting guidance. Equity securities are recorded at fair value or at cost if there is not a readily determinable fair value.

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

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

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

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

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


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


	December 31, 2021				December 31, 2020
(in millions)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
U.S. Treasury and other	$11	$—	$—	$11	$11	$—	$—	$11
State and political subdivisions	2	—	—	2	3	—	—	3
Mortgage-backed securities, at fair value:
Federal agencies and U.S. government sponsored entities	24,607	210	(375)	24,442	21,954	571	(19)	22,506
Other/non-agency	397	9	(1)	405	396	26	—	422
Total mortgage-backed securities, at fair value	25,004	219	(376)	24,847	22,350	597	(19)	22,928
Collateralized loan obligations, at fair value	1,208	—	(1)	1,207	—	—	—	—
Total debt securities available for sale, at fair value	$26,225	$219	($377)	$26,067	$22,364	$597	($19)	$22,942
Federal agencies and U.S. government sponsored entities	$1,505	$52	$—	$1,557	$2,342	$122	$—	$2,464

Total mortgage-backed securities, at cost	1,505	52	—	1,557	2,342	122	—	2,464
Asset-backed securities, at cost	737	2	(7)	732	893	—	—	893
Total debt securities held to maturity	$2,242	$54	($7)	$2,289	$3,235	$122	$—	$3,357
Equity securities, at fair value	$109	$—	$—	$109	$66	$—	$—	$66
Equity securities, at cost	624	—	—	624	604	—	—	604

Accrued interest receivable on debt securities totaled $56 million and $55 million as of December 31, 2021 and 2020, respectively, and is included in other assets in the Consolidated Balance Sheets.


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The following table presents the amortized cost and fair value of debt securities by contractual maturity as of December 31, 2021. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.


	Distribution of Maturities
(in millions)	1 Year or Less	After 1 Year through 5 Years	After 5 Years through 10 Years	After 10 Years	Total
Amortized cost:
U.S. Treasury and other	$11	$—	$—	$—	$11
State and political subdivisions	—	—	—	2	2
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	7	66	1,914	22,620	24,607
Other/non-agency	—	—	—	397	397
Collateralized loan obligations	—	—	24	1,184	1,208
Total debt securities available for sale	18	66	1,938	24,203	26,225
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—	—	—	1,505	1,505

Asset-backed securities	—	—	737	—	737
Total debt securities held to maturity	—	—	737	1,505	2,242
Total amortized cost of debt securities	$18	$66	$2,675	$25,708	$28,467

Fair value:
U.S. Treasury and other	$11	$—	$—	$—	$11
State and political subdivisions	—	—	—	2	2
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	7	68	1,957	22,410	24,442
Other/non-agency	—	—	—	405	405
Collateralized loan obligations	—	—	24	1,183	1,207
Total debt securities available for sale	18	68	1,981	24,000	26,067
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—	—	—	1,557	1,557

Asset-backed securities	—	—	732	—	732
Total debt securities held to maturity	—	—	732	1,557	2,289
Total fair value of debt securities	$18	$68	$2,713	$25,557	$28,356

Taxable interest income from investment securities as presented in the Consolidated Statements of Operations was $487 million, $519 million and $642 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The following table presents realized gains and losses on securities:


	Year Ended December 31,
(in millions)	2021	2020	2019
Gains on sale of debt securities(1)	$15	$6	$41
Losses on sale of debt securities	(5)	(2)	(16)
Debt securities gains, net	$10	$4	$25

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


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


	December 31, 2021		December 31, 2020
(in millions)	Amortized Cost	Fair Value	Amortized Cost	Fair Value
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law	$4,816	$4,782	$3,818	$3,937
Pledged against FHLB borrowed funds	325	333	394	423
Pledged against repurchase agreements	1	1	224	231

The Company regularly enters into security repurchase agreements with unrelated counterparties, which involve the transfer of a security from one party to another, and a subsequent transfer of substantially the same security back to the original party. These repurchase agreements are typically short-term in nature and are accounted for as secured borrowed funds in the Company’s Consolidated Balance Sheets. The Company recognized no offsetting of short-term receivables or payables as of December 31, 2021 or 2020. The Company offsets certain derivative assets and derivative liabilities in the Consolidated Balance Sheets. For further information see Note 14.

Securitizations of mortgage loans retained in the investment portfolio for the years ended December 31, 2021, 2020 and 2019, were $260 million, $144 million and $150 million, respectively. These securitizations include a substantive guarantee by a third party. In 2021, 2020 and 2019 the guarantors were FNMA, FHLMC, and GNMA. The debt securities received from the guarantors are classified as AFS.

Impairment

Upon purchase of HTM investment securities and at each subsequent measurement date, Citizens is required to evaluate the securities for risk of loss over their life and, if necessary, establish an associated reserve. Recognition of a reserve for expected credit losses is not required if the amount the Company expects to realize is zero (commonly referred to as “zero expected credit losses”). The Company evaluated its existing HTM portfolio as of December 31, 2021 and concluded that 67% of HTM securities met the zero expected credit loss criteria; therefore, no ACL was recognized. For the remainder, the lifetime expected credit losses were determined to be insignificant based on the modeling of the Company’s credit loss position in the securities. The Company monitors the credit exposure through the use of credit quality indicators. For these securities, the Company uses external credit ratings or an internally derived credit rating when an external rating is not available. All securities were determined to be investment grade at December 31, 2021.

Citizens reviews its AFS debt securities for impairment at the individual security level on a quarterly basis, or more frequently if a potential loss triggering event occurs. The initial indicator of impairment for debt securities classified as AFS is a decline in fair value below its amortized cost basis. For any security that has declined in fair value below the amortized cost basis, the Company recognizes an impairment loss in current period earnings if management has the intent to sell the security or if it is more likely than not it will be required to sell the security before recovery of its amortized cost basis.

Estimating the recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of cash flows expected to be collected, discounted at the security’s original effective yield, is less than the amortized cost basis, impairment equal to the shortfall in cash flows has occurred. Citizens evaluates whether any portion of the impairment is attributable to credit-related factors or various other market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), and the public credit rating of the security. If credit-related factors exist, credit-related impairment has occurred regardless of the Company’s intent to hold the security until it recovers.

The credit-related portion of impairment is recognized in current period earnings as provision expense through the establishment of an allowance for AFS securities, to the extent the allowance does not reduce the value of the AFS security below its current fair value. The remaining non-credit related portion of impairment is recognized in OCI. Improvement in credit losses in subsequent periods results in a reversal of the allowance for AFS securities and a corresponding decrease to provision expense, to the extent the allowance does not become negative. Accrued interest receivable on AFS debt securities is excluded from the balances used to calculate the allowance for AFS securities. All accrued and uncollected interest is immediately reversed against interest income when it is deemed uncollectible. The Company has evaluated any AFS security in an unrealized loss position at December 31, 2021 and concluded that all unrealized losses are due to non-credit related factors. As such, the Company does not have an allowance for AFS securities as of December 31, 2021.


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


	December 31, 2021
	Less than 12 Months		12 Months or Longer		Total
(dollars in millions)	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses


Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	$14,131	($320)	$1,236	($55)	$15,367	($375)
Other/non-agency	123	(1)	—	—	123	(1)
Total mortgage-backed securities	14,254	(321)	1,236	(55)	15,490	(376)
Collateralized loan obligations, at fair value	736	(1)	—	—	736	(1)
Total	$14,990	($322)	$1,236	($55)	$16,226	($377)


	December 31, 2020
	Less than 12 Months		12 Months or Longer		Total
(dollars in millions)	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses



Federal agencies and U.S. government sponsored entities	$1,991	($19)	$—	$—	$1,991	($19)

Citizens does not currently have the intent to sell these debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to recovery of their amortized cost bases. Citizens has determined that credit losses are not expected to be incurred on the agency MBS, non-agency MBS, and CLOs identified with unrealized losses as of December 31, 2021. The unrealized losses on these debt securities reflect non-credit-related factors driven by changes in interest rates. Therefore, the Company has determined that these debt securities are not impaired.

NOTE 5 - LOANS AND LEASES

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

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

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

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


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The following table presents loans and leases, excluding LHFS:


	December 31,
(in millions)	2021	2020
Commercial and industrial(1)	$44,500	$44,173
Commercial real estate	14,264	14,652
Leases	1,586	1,968
Total commercial	60,350	60,793
Residential mortgages	22,822	19,539
Home equity	12,015	12,149
Automobile	14,549	12,153
Education	12,997	12,308
Other retail	5,430	6,148
Total retail	67,813	62,297
Total loans and leases	$128,163	$123,090

(1) Includes $787 million and $4.2 billion of PPP loans fully guaranteed by the SBA as of December 31, 2021 and 2020, respectively.

Accrued interest receivable on loans and leases held for investment totaled $450 million and $449 million as of December 31, 2021 and 2020, respectively, and is included in other assets in the Consolidated Balance Sheets.

Loans pledged as collateral for FHLB borrowed funds, primarily residential mortgages and home equity products, totaled $26.1 billion and $25.5 billion at December 31, 2021 and 2020, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, were primarily comprised of education, automobile, commercial and industrial, and commercial real estate loans, and totaled $35.8 billion and $40.0 billion at December 31, 2021 and 2020, respectively.

The following table presents the composition of LHFS:


	December 31, 2021			December 31, 2020
(in millions)	Residential Mortgages(1)	Commercial(2)	Total	Residential Mortgages(1)	Commercial(2)	Total
Loans held for sale at fair value	$2,657	$76	$2,733	$3,416	$148	$3,564
Other loans held for sale	—	735	735	—	439	439

(1) Residential mortgage LHFS are originated for sale.

(2) Commercial LHFS at fair value consist of loans managed by the Company’s commercial secondary loan desk. Other commercial LHFS generally consist of loans associated with the Company’s syndication business.

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

A lessee is evaluated from a credit perspective using the same underwriting standards and procedures as for a loan borrower. A lessee is expected to make rental payments based on its cash flows and the viability of its operations. Leases are usually not evaluated as collateral-based transactions, and therefore the lessee’s overall financial strength is the most important credit evaluation factor.

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


(in millions)	December 31, 2021	December 31, 2020
Total future minimum lease rentals	$1,195	$1,381
Estimated residual value of leased equipment (non-guaranteed)	521	746
Initial direct costs	6	7
Unearned income	(136)	(166)
Total leases	$1,586	$1,968


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Interest income on direct financing and sales-type leases for the years ended December 31, 2021, 2020 and 2019 was $49 million, $64 million and $77 million, respectively, and is reported within interest and fees on loans and leases in the Consolidated Statements of Operations.

A maturity analysis of direct financing and sales-type lease receivables at December 31, 2021 is presented below:


(in millions)
2022			$315
2023			267
2024			203
2025			151
2026			105
Thereafter			154
Total undiscounted future minimum lease rentals			$1,195

NOTE 6 - ALLOWANCE FOR CREDIT LOSSES, NONACCRUAL LOANS AND LEASES, AND CONCENTRATIONS OF CREDIT RISK

Allowance for Credit Losses

Management’s estimate of expected credit losses in the Company’s loan and lease portfolios is recorded in the ALLL and the allowance for unfunded lending commitments (collectively the ACL). Through December 31, 2019 the ACL reserve was management’s best estimate of incurred probable losses in the Company’s loan and lease portfolios based on reviews of certain individual loans and leases, analyzing changes in the composition, size and delinquency of the portfolio, reviewing previous loss experience and considering current and anticipated economic factors. The Company’s methodology for determining the qualitative component through December 31, 2019 included a statistical analysis of prior charge-off rates and an assessment of factors affecting the determination of incurred losses in the loan and lease portfolio. Such factors included trends in economic conditions, loan growth, back testing results, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons. Upon adoption of CECL effective January 1, 2020, the Company’s ACL reserve methodology changed to estimate expected credit losses over the contractual life of loans and leases. Adoption resulted in a cumulative-effect reduction of $337 million, net of taxes of $114 million, to retained earnings and a corresponding increase to the ACL of $451 million.

The ACL is maintained at a level the Company believes 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. The 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.

Key assumptions used in the ACL measurement process include the use of a two-year reasonable and supportable economic forecast period followed by a one-year reversion period to historical credit loss information.

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), and significant loan portfolios are assessed for credit losses using econometric models.

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


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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 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 the Company 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, new products or products that are not significant to the Company’s overall credit risk exposure).

Loans and leases that do not share similar risk characteristics are individually assessed for expected credit losses. Nonaccrual commercial and industrial, and commercial real estate loans with an outstanding balance of $5 million or greater and all commercial and industrial, and commercial real estate TDRs (regardless of size) are assessed on an individual loan level basis. Generally, the measurement of ACL on individual loans and leases is the present value of its future cash flows or the fair value of its underlying collateral, if the loan or lease is collateral dependent. A loan is considered to be collateral dependent when repayment of the loan is expected to be provided solely by the underlying collateral, rather than by cash flows from the borrower’s operations, income or other resources. Loans that are deemed to be collateral dependent are written down to the fair value, less costs to sell, as of the evaluation date and are reassessed each subsequent period to determine if a change to the ACL is required. Subsequent evaluations may result in an increase or decrease to the ACL, based on a corresponding change in the fair value of the collateral during the period. Any subsequent decrease to the ACL (because of an increase to the collateral-dependent loan’s fair value) is limited to the total amount previously written off for that loan. For retail TDRs that are not collateral dependent, the ACL is developed using the present value of expected future cash flows compared to the amortized cost basis in the loans. Expected re-default factors are considered in this analysis. Retail TDRs that are deemed collateral dependent are written down to fair market value less cost to sell.

Expected recoveries are considered in management’s estimate of the ACL and may result in a negative adjustment (i.e., reduction) to the ACL balance. A loan is collateral dependent if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty as of the evaluation date. Generally, repayment would be expected to be provided substantially by the sale or continued operation of the underlying collateral if cash flows to repay the loan from all other available sources (including guarantors) are expected to be no more than nominal. If repayment is dependent only on the operation of the collateral, the fair value of the collateral would not be adjusted for estimated costs to sell. If a loan is considered collateral dependent, the ACL is calculated as the difference between the fair value of collateral (adjusted for the costs to sell if the sale of the collateral is expected) and the amortized cost basis as of the evaluation date. It is possible to have a negative ACL for a collateral dependent loan if the fair value of the collateral increases in a subsequent reporting period. The negative ACL cannot exceed the total amount previously charged off.

Accrued interest receivable on loans and leases is excluded from asset balances used to calculate the ACL. All accrued and uncollected interest is immediately reversed against interest income when a loan or lease is placed on nonaccrual status. Uncollectible interest is written off timely in accordance with regulatory guidelines. Generally, loans and leases are placed on nonaccrual status when contractually past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Residential mortgages are placed on nonaccrual status when contractually past due 120 days or more, or sooner if deemed collateral dependent, unless guaranteed by the FHA, VA or USDA. Residential mortgages that received extended forbearance and were subsequently modified as a result of COVID-19 will be placed on nonaccrual sooner than those that were not on extended forbearance, and will return to accrual status only following a sustained period of repayment performance. Loans in COVID-19 pandemic-related forbearance programs continue


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to accrue interest during the forbearance period; a reserve is established for interest income expected to be uncollectible following forbearance.

The Company estimates expected credit losses associated with off-balance sheet financial instruments such as standby letters of credit, financial guarantees and unfunded loan commitments that are not unconditionally cancellable. Off-balance sheet financial instruments are subject to individual reviews and are analyzed and segregated by risk according to the Company’s internal risk rating scale. These risk classifications, in conjunction with historical loss experience, current and future economic conditions, timing and amount of expected draws, and performance trends within specific portfolio segments, result in the estimate of the allowance for unfunded lending commitments. The Company does not recognize a reserve for future draws from credit lines that are unconditionally cancellable (e.g., credit cards).

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

Loan Charge-Offs

Commercial loans are charged off when available information indicates that a loan or portion thereof is determined to be uncollectible. The determination of whether to recognize a charge-off involves many factors, including the prioritization of the Company’s claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity or the loan collateral.

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

Loans modified in a TDR that are determined to be collateral-dependent.
Residential real estate loans that received extended forbearance and were subsequently modified as a result of COVID-19
Loans to borrowers who have experienced an event (e.g., bankruptcy) that suggests a loss is either known or highly certain.

◦Residential real estate and auto loans are charged down to fair value less costs to sell within 60 days of receiving notification of the bankruptcy filing, unless repayment is likely to occur, or when the loan subsequently becomes 60 days past due.

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

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

Auto loans are written down to fair value less costs to sell upon repossession of the collateral.


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The following table presents a summary of changes in the ALLL and the allowance for unfunded lending commitments for the year ended December 31, 2021:


	Year Ended December 31, 2021
(in millions)	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$1,233	$1,210	$2,443
Charge-offs	(218)	(321)	(539)
Recoveries	54	160	214
Net charge-offs	(164)	(161)	(325)
Provision expense (benefit) for loans and leases	(248)	(112)	(360)
Allowance for loan and lease losses, end of period	821	937	1,758
Allowance for unfunded lending commitments, beginning of period	186	41	227
Provision expense (benefit) for unfunded lending commitments	(33)	(18)	(51)
Allowance for unfunded lending commitments, end of period	153	23	176
Total allowance for credit losses, end of period	$974	$960	$1,934

The difference in the ending ACL balance of $1.9 billion at December 31, 2021 compared to $2.7 billion at December 31, 2020 was due to net charge-offs of $325 million and a credit provision benefit of $411 million driven by strong credit performance across the retail and commercial loan portfolios, and improvement in the macroeconomic outlook.

The decrease in commercial net charge-offs of $261 million in the year ended December 31, 2021 as compared to the year ended December 31, 2020 reflects the economic recovery following the onset of the COVID-19 pandemic and associated lockdowns. Retail net charge-offs were down $107 million in the year ended December 31, 2021 as compared to the year ended December 31, 2020 as a result of government stimulus and forbearance programs as well as strong collateral values in residential real estate and automobile.

To determine the ACL as of December 31, 2021, Citizens utilized an economic forecast that generally reflects real GDP growth of approximately 1.3% over 2022 and projects the unemployment rate to be in the range of 5.2% to 6.6% throughout 2022. This forecast reflects an overall improved macroeconomic outlook as compared to December 31, 2020, which reflected real GDP growth of approximately 4% over 2021 and unemployment in the range of approximately 7% to 7.5% throughout 2021. While the U.S. economy has continued to improve, with the benefits of vaccination and herd resiliency muting, in part, the ongoing impact of the COVID-19 pandemic, uncertainty remains. We continue to utilize our qualitative allowance framework to reassess and adjust ACL reserve levels. Macroeconomic forecast risk, driven by uncertainty around and volatility of key macroeconomic variables, is one of the primary factors influencing our qualitative reserve. As the economic recovery has continued, we have assessed risks to the recovery, including potential for continuing impacts from COVID-19 variants, challenges in the global supply chain, inflationary trends, potential impacts from ending monetary and fiscal stimulus programs, and potential for longer-term changes in workforce and consumer behaviors. Citizens continued to apply management judgment to adjust the modeled reserves in the commercial industry sectors most impacted by the COVID-19 pandemic, including CRE office.


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The following tables present a summary of changes in the ALLL and the allowance for unfunded lending commitments for the years ended December 31, 2020 and 2019:


	Year Ended December 31, 2020
(in millions)	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$674	$578	$1,252
Cumulative effect of change in accounting principle	(176)	629	453
Allowance for loan and lease losses, beginning of period, adjusted	498	1,207	1,705
Charge-offs	(437)	(406)	(843)
Recoveries	12	138	150
Net charge-offs	(425)	(268)	(693)
Provision expense (benefit) for loans and leases	1,160	271	1,431
Allowance for loan and lease losses, end of period	1,233	1,210	2,443
Allowance for unfunded lending commitments, beginning of period	44	—	44
Cumulative effect of change in accounting principle	(3)	1	(2)
Allowance for unfunded lending commitments, beginning of period, adjusted	41	1	42
Provision expense (benefit) for unfunded lending commitments	145	40	185
Allowance for unfunded lending commitments, end of period	186	41	227
Total allowance for credit losses, end of period	$1,419	$1,251	$2,670


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

Credit Quality Indicators

The Company presents loan and lease portfolio segments and classes by credit quality indicator and vintage year. Citizens defines the vintage date for the purpose of this disclosure as the date of the most recent credit decision. In general, renewals are categorized as new credit decisions and reflect the renewal date as the vintage date. Loans modified in a TDR are considered a continuation of the original loan and vintage date corresponds with the most recent credit decision.

For commercial loans and leases, Citizens utilizes regulatory classification ratings to monitor credit quality. The assignment of regulatory classification ratings occurs at loan origination and are periodically re-evaluated by Citizens utilizing a risk-based approach, including any time management becomes aware of information affecting the borrowers' ability to fulfill their obligations. The review process considers both quantitative and qualitative factors. Loans with a “pass” rating are those that the Company believes will fully repay in accordance with the contractual loan terms. Commercial loans and leases identified as “criticized” have some weakness or potential weakness that indicate an increased probability of future loss. Citizens groups “criticized” loans into three categories, “special mention,” “substandard,” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of the Company’s credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection of the debt. Doubtful loans have the same weaknesses as substandard, with the added characteristic that the possibility of loss is high and collection of the full amount of the loan is improbable. Additional credit quality information is discussed below for each loan class.


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For commercial and industrial loans, Citizens monitors the performance of the borrower in a disciplined and regular manner based upon the level of credit risk inherent in the loan. To evaluate the level of credit risk, management assigns an internal risk rating reflecting the borrower’s PD and LGD. This two-dimensional credit risk rating methodology provides granularity in the risk monitoring process. These ratings are generally reviewed at least annually. The combination of the PD and LGD ratings assigned to commercial and industrial loans, capturing both the combination of expectations of default and loss severity in the event of default, reflects credit quality characteristics as of the reporting date and are used as inputs into the loss forecasting process. Based upon the amount of the lending arrangement and risk rating assessment, management periodically reviews each loan, prioritizing those loans which are perceived to be of higher risk, based upon PDs and LGDs, or loans for which credit quality is weakening (e.g., payment delinquency). Citizens proactively manages loans by using various procedures that are customized to the risk of a given loan, including ongoing outreach to the borrower, assessment of the borrower’s financial conditions and appraisal of the collateral.

Credit risk associated with commercial real estate projects and commercial mortgages are managed similar to commercial and industrial loans by evaluating PD and LGD. Risks associated with commercial real estate activities tend to be correlated to the loan structure and collateral location, project progress and business environment. As a result, these attributes are also monitored and utilized in assessing credit risk. As with the commercial and industrial loan class, periodic reviews are also performed to assess market/geographic risk and business unit/industry risk, which may result in increased scrutiny on loans that are perceived to be of higher risk, had adverse changes in risk ratings and/or areas that concern management. These reviews are designed to assess risk and facilitate actions to mitigate such risks.

Citizens manages credit risk associated with financing leases similar to commercial and industrial loans by analyzing PD and LGD. Reviews are generally performed annually based upon the dollar amount of the lease and the level of credit risk, and may be more more frequent if circumstances warrant. The review process includes analysis of the following factors: equipment value/residual value, exposure levels, jurisdiction risk, industry risk, guarantor requirements, and regulatory compliance as applicable.

Commercial loans with renewal terms in the original contract are recognized as current year originations upon renewal unless the loan automatically renewed with no new credit decision. Citizens generally reserves the right to not renew the loan or lease until current underwriting has been completed and approved.


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The following table presents the amortized cost basis of commercial loans and leases, by vintage date and regulatory classification rating, as of December 31, 2021:


	Term Loans by Origination Year						Revolving Loans
(in millions)	2021	2020	2019	2018	2017	Prior to 2017	Within the Revolving Period	Converted to Term	Total
Commercial and industrial
Pass(1)	$10,218	$3,336	$3,599	$2,284	$1,426	$1,863	$19,406	$122	$42,254
Special Mention	47	71	155	114	41	64	316	1	809
Substandard	97	112	215	81	50	201	521	17	1,294
Doubtful	1	9	9	22	10	16	74	2	143
Total commercial and industrial	10,363	3,528	3,978	2,501	1,527	2,144	20,317	142	44,500
Commercial real estate
Pass	2,766	2,417	3,181	1,756	626	1,119	1,451	3	13,319
Special Mention	45	42	113	100	27	79	—	—	406
Substandard	27	—	88	267	78	59	9	—	528
Doubtful	1	9	—	—	—	1	—	—	11
Total commercial real estate	2,839	2,468	3,382	2,123	731	1,258	1,460	3	14,264
Leases
Pass	447	262	134	144	66	459	—	—	1,512
Special Mention	10	15	—	5	3	16	—	—	49
Substandard	1	16	5	2	—	—	—	—	24
Doubtful	—	—	—	—	—	1	—	—	1
Total leases	458	293	139	151	69	476	—	—	1,586
Total commercial
Pass(1)	13,431	6,015	6,914	4,184	2,118	3,441	20,857	125	57,085
Special Mention	102	128	268	219	71	159	316	1	1,264
Substandard	125	128	308	350	128	260	530	17	1,846
Doubtful	2	18	9	22	10	18	74	2	155
Total commercial	$13,660	$6,289	$7,499	$4,775	$2,327	$3,878	$21,777	$145	$60,350

(1) Includes $787 million of PPP loans designated as pass that are fully guaranteed by the SBA originating in 2021 and 2020.


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The following table presents the amortized cost basis of commercial loans and leases, by vintage date and regulatory classification rating, as of December 31, 2020:


	Term Loans by Origination Year						Revolving Loans
(in millions)	2020	2019	2018	2017	2016	Prior to 2016	Within the Revolving Period	Converted to Term	Total
Commercial and industrial
Pass(1)	$8,036	$5,730	$4,180	$2,174	$1,157	$1,980	$17,281	$340	$40,878
Special Mention	34	264	163	84	60	173	771	34	1,583
Substandard	91	195	248	100	81	127	600	22	1,464
Doubtful	65	10	34	38	3	31	63	4	248
Total commercial and industrial	8,226	6,199	4,625	2,396	1,301	2,311	18,715	400	44,173
Commercial real estate
Pass	1,848	2,836	2,810	1,106	566	919	3,271	—	13,356
Special Mention	19	130	121	92	94	48	300	—	804
Substandard	116	2	65	5	53	26	149	—	416
Doubtful	16	26	8	—	—	2	24	—	76
Total commercial real estate	1,999	2,994	3,004	1,203	713	995	3,744	—	14,652
Leases
Pass	455	246	229	139	180	673	—	—	1,922
Special Mention	3	4	2	4	2	18	—	—	33
Substandard	—	2	2	4	4	—	—	—	12
Doubtful	—	—	—	—	—	1	—	—	1
Total leases	458	252	233	147	186	692	—	—	1,968
Total commercial
Pass(1)	10,339	8,812	7,219	3,419	1,903	3,572	20,552	340	56,156
Special Mention	56	398	286	180	156	239	1,071	34	2,420
Substandard	207	199	315	109	138	153	749	22	1,892
Doubtful	81	36	42	38	3	34	87	4	325
Total commercial	$10,683	$9,445	$7,862	$3,746	$2,200	$3,998	$22,459	$400	$60,793

(1) Includes $4.2 billion of PPP loans designated as pass that are fully guaranteed by the SBA originating in 2020.

For retail loans, Citizens utilizes FICO credit scores and the loan’s payment and delinquency status to monitor credit quality. Management believes FICO scores are the strongest indicator of credit losses over the contractual life of the loan and assist management in predicting the borrower’s future payment performance. Scores are based on current and historical national industry-wide consumer level credit performance data.


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The following table presents the amortized cost basis of retail loans, by vintage date and FICO scores, as of December 31, 2021:


	Term Loans by Origination Year						Revolving Loans
(in millions)	2021	2020	2019	2018	2017	Prior to 2017	Within the Revolving Period	Converted to Term	Total
Residential mortgages
800+	$2,431	$3,017	$1,230	$342	$672	$2,139	$—	$—	$9,831
740-799	4,015	1,876	746	246	360	1,086	—	—	8,329
680-739	1,116	572	335	152	172	585	—	—	2,932
620-679	111	130	161	93	107	276	—	—	878
<620	24	66	164	162	157	257	—	—	830
No FICO available(1)	3	8	1	—	—	10	—	—	22
Total residential mortgages	7,700	5,669	2,637	995	1,468	4,353	—	—	22,822
Home equity
800+	—	2	5	5	3	134	4,394	281	4,824
740-799	—	1	4	5	7	122	3,514	278	3,931
680-739	—	1	7	14	16	134	1,738	243	2,153
620-679	—	3	11	19	17	112	363	167	692
<620	—	2	16	23	20	87	91	176	415

Total home equity	—	9	43	66	63	589	10,100	1,145	12,015
Automobile
800+	1,887	829	538	244	148	57	—	—	3,703
740-799	2,418	1,051	615	288	156	58	—	—	4,586
680-739	1,968	827	500	234	123	48	—	—	3,700
620-679	1,029	378	257	131	72	32	—	—	1,899
<620	164	142	155	103	62	32	—	—	658
No FICO available(1)	3	—	—	—	—	—	—	—	3
Total automobile	7,469	3,227	2,065	1,000	561	227	—	—	14,549
Education
800+	1,361	1,771	840	514	470	880	—	—	5,836
740-799	1,555	1,577	672	371	275	514	—	—	4,964
680-739	512	474	229	140	107	262	—	—	1,724
620-679	50	66	45	34	28	99	—	—	322
<620	5	11	12	12	10	45	—	—	95
No FICO available(1)	4	—	—	—	—	52	—	—	56
Total education	3,487	3,899	1,798	1,071	890	1,852	—	—	12,997
Other retail
800+	233	214	122	65	30	29	386	—	1,079
740-799	323	296	173	84	38	26	764	2	1,706
680-739	246	240	122	56	23	12	709	5	1,413
620-679	149	119	43	19	7	4	299	5	645
<620	32	37	17	10	3	2	100	6	207
No FICO available(1)	44	5	—	—	—	—	330	1	380
Total other retail	1,027	911	477	234	101	73	2,588	19	5,430
Retail
800+	5,912	5,833	2,735	1,170	1,323	3,239	4,780	281	25,273
740-799	8,311	4,801	2,210	994	836	1,806	4,278	280	23,516
680-739	3,842	2,114	1,193	596	441	1,041	2,447	248	11,922
620-679	1,339	696	517	296	231	523	662	172	4,436
<620	225	258	364	310	252	423	191	182	2,205
No FICO available(1)	54	13	1	—	—	62	330	1	461
Total retail	$19,683	$13,715	$7,020	$3,366	$3,083	$7,094	$12,688	$1,164	$67,813

(1) Represents loans for which an updated FICO score was unavailable (e.g., due to recent profile changes).


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The following table presents the amortized cost basis of retail loans, by vintage date and FICO scores, as of December 31, 2020:


	Term Loans by Origination Year						Revolving Loans
(in millions)	2020	2019	2018	2017	2016	Prior to 2016	Within the Revolving Period	Converted to Term	Total
Residential mortgages
800+	$2,687	$1,885	$638	$1,129	$1,615	$1,755	$—	$—	$9,709
740-799	2,931	1,133	398	527	743	904	—	—	6,636
680-739	784	351	162	172	295	458	—	—	2,222
620-679	97	94	44	56	66	223	—	—	580
<620	12	28	35	58	50	185	—	—	368
No FICO available(1)	1	2	1	5	1	14	—	—	24
Total residential mortgages	6,512	3,493	1,278	1,947	2,770	3,539	—	—	19,539
Home equity
800+	2	8	10	7	5	216	4,319	344	4,911
740-799	2	6	7	6	5	180	3,234	331	3,771
680-739	1	6	10	15	8	179	1,632	284	2,135
620-679	—	10	18	21	14	136	402	195	796
<620	1	17	30	29	18	122	105	214	536

Total home equity	6	47	75	78	50	833	9,692	1,368	12,149
Automobile
800+	1,056	812	424	312	169	62	—	—	2,835
740-799	1,514	1,022	531	344	172	59	—	—	3,642
680-739	1,347	889	461	282	138	47	—	—	3,164
620-679	669	484	259	157	84	32	—	—	1,685
<620	140	242	189	137	79	34	—	—	821
No FICO available(1)	2	—	—	—	—	4	—	—	6
Total automobile	4,728	3,449	1,864	1,232	642	238	—	—	12,153
Education
800+	1,817	1,363	849	781	578	777	—	—	6,165
740-799	1,797	1,009	541	387	251	423	—	—	4,408
680-739	450	294	173	127	90	221	—	—	1,355
620-679	26	35	33	28	25	95	—	—	242
<620	2	5	10	10	8	41	—	—	76
No FICO available(1)	2	—	—	—	—	60	—	—	62
Total education	4,094	2,706	1,606	1,333	952	1,617	—	—	12,308
Other retail
800+	461	380	163	77	15	44	341	—	1,481
740-799	620	460	184	81	19	31	638	2	2,035
680-739	495	302	111	48	10	13	561	5	1,545
620-679	248	104	37	14	3	5	174	7	592
<620	24	30	17	6	1	3	77	8	166
No FICO available(1)	54	1	—	—	—	—	272	2	329
Total other retail	1,902	1,277	512	226	48	96	2,063	24	6,148
Total retail
800+	6,023	4,448	2,084	2,306	2,382	2,854	4,660	344	25,101
740-799	6,864	3,630	1,661	1,345	1,190	1,597	3,872	333	20,492
680-739	3,077	1,842	917	644	541	918	2,193	289	10,421
620-679	1,040	727	391	276	192	491	576	202	3,895
<620	179	322	281	240	156	385	182	222	1,967
No FICO available(1)	59	3	1	5	1	78	272	2	421
Total retail	$17,242	$10,972	$5,335	$4,816	$4,462	$6,323	$11,755	$1,392	$62,297

(1) Represents loans for which an updated FICO score was unavailable (e.g., due to recent profile changes).


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Nonaccrual and Past Due Assets

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

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

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

Residential mortgages are generally placed on nonaccrual status when past due 120 days, or sooner if determined to be collateral dependent, unless repayment of the loan is fully or partially guaranteed by the FHA, VA or USDA. Credit card balances are placed on nonaccrual status when past due 90 days or more and are restored to accruing status if they subsequently become less than 90 days past due. All other retail loans are generally placed on nonaccrual status when past due 90 days or more, or earlier if management believes that the probability of collection is insufficient to warrant further accrual. Loans less than 90 days past due may be placed on nonaccrual status upon the death of the borrower, fraud or bankruptcy.


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The following tables present an aging analysis of accruing loans and leases, and nonaccrual loans and leases as of December 31, 2021 and 2020:


	December 31, 2021
		Days Past Due and Accruing
(in millions)	Current	30-59	60-89	90+	Nonaccrual(2)	Total	Nonaccrual with no related ACL
Commercial and industrial	$44,247	$47	$26	$9	$171	$44,500	$36
Commercial real estate	14,247	6	—	—	11	14,264	1
Leases	1,570	14	1	—	1	1,586	—
Total commercial	60,064	67	27	9	183	60,350	37
Residential mortgages(1)	21,918	102	52	549	201	22,822	137
Home equity	11,745	38	12	—	220	12,015	186
Automobile	14,324	131	39	—	55	14,549	22
Education	12,926	34	13	1	23	12,997	2
Other retail	5,331	40	23	16	20	5,430	2
Total retail	66,244	345	139	566	519	67,813	349
Total	$126,308	$412	$166	$575	$702	$128,163	$386


	December 31, 2020
		Days Past Due and Accruing
(in millions)	Current	30-59	60-89	90+	Nonaccrual(2)	Total	Nonaccrual with no related ACL
Commercial and industrial	$43,666	$198	$9	$20	$280	$44,173	$56
Commercial real estate	14,475	1	—	—	176	14,652	2
Leases	1,956	9	—	1	2	1,968	—
Total commercial	60,097	208	9	21	458	60,793	58
Residential mortgages(1)	19,272	55	15	30	167	19,539	96
Home equity	11,799	54	20	—	276	12,149	207
Automobile	11,870	157	54	—	72	12,153	17
Education	12,245	31	12	2	18	12,308	2
Other retail	6,045	39	28	8	28	6,148	—
Total retail	61,231	336	129	40	561	62,297	322
Total	$121,328	$544	$138	$61	$1,019	$123,090	$380

(1) 90+ days past due and accruing includes $544 million and $21 million of loans fully or partially guaranteed by the FHA, VA and USDA at December 31, 2021 and 2020, respectively.

(2) Beginning in 2021, nonaccrual loans and leases are no longer aged relative to their delinquency status. Prior period has been adjusted to conform with the current period presentation.

Interest income is generally not recognized for loans and leases that are on nonaccrual status. The Company reverses accrued interest receivable with a charge to interest income upon classifying the loan or lease as nonaccrual.

The Company estimates expected credit losses based on the fair value of collateral for collateralized loans that management believes will not be paid under the terms of the original loan contract. These loans are considered to be collateral dependent, and the estimated credit loss is calculated as the difference between the loan’s amortized cost basis and the fair value of the collateral as of each evaluation date.

Collateral values for residential mortgage and home equity loans are based on refreshed valuations which are updated at least every 90 days less estimated costs to sell. At December 31, 2021 and 2020, the Company had collateral-dependent residential mortgage and home equity loans totaling $542 million and $552 million, respectively.

For collateral-dependent commercial loans, the ACL is individually assessed based on the fair value of the collateral. Various types of collateral are used, including real estate, inventory, equipment, accounts receivable, securities and cash, among others. For commercial real estate loans, collateral values are generally based on appraisals which are updated based on management judgment under the specific circumstances on a case-by-case basis. At December 31, 2021 and 2020, the Company had collateral-dependent commercial loans totaling $103 million and $206 million, respectively.


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The amortized cost basis of mortgage loans collateralized by residential real estate for which formal foreclosure proceedings were in-process was $142 million and $119 million as of December 31, 2021 and 2020, respectively.

Troubled Debt Restructurings

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

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

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

In 2020, Citizens implemented various retail and commercial loan modification programs to provide borrowers relief from the economic impacts of COVID-19. The CARES Act and bank regulatory agencies provided guidance stating certain loan modifications to borrowers experiencing financial distress as a result of COVID-19 may not be accounted for as TDRs under U.S. GAAP. In accordance with the CARES Act, Citizens elected to not apply TDR classification to any COVID-19 related loan modification performed after March 1, 2020 through December 31, 2021 for borrowers who were current as of December 31, 2019 or the date of their loan modification. In addition, for loans modified in response to the COVID-19 pandemic and associated lockdowns that were not eligible for relief from TDR classification under the CARES Act, the Company elected to apply the guidance issued by the bank regulatory agencies. Under this guidance, loans with up to six months of deferred principal and interest to borrowers who were current as of March 1, 2020 or the date of their loan modification are not classified as TDRs.

For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. Interest income will continue to be recognized over the contractual life of the loan.


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The following tables summarize loans modified during the years ended December 31, 2021, 2020 and 2019. The balances represent the post-modification outstanding amortized cost basis and may include loans that became TDRs during the period and were subsequently paid off in full, charged off, or sold prior to period end. Pre-modification balances for modified loans approximate the post-modification balances shown.


		December 31, 2021
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	44	$—	$44	$123	$167

Total commercial	44	—	44	123	167
Residential mortgages	922	21	137	60	218
Home equity	412	5	11	13	29
Automobile	1,463	2	—	15	17
Education	807	—	—	26	26
Other retail	2,291	9	—	2	11
Total retail	5,895	37	148	116	301
Total	5,939	$37	$192	$239	$468


		December 31, 2020
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	70	$—	$107	$325	$432
Commercial real estate	1	—	7	—	7
Total commercial	71	—	114	325	439
Residential mortgages	473	39	34	13	86
Home equity	723	12	12	23	47
Automobile	3,236	2	1	47	50
Education	465	—	—	10	10
Other retail	2,591	10	—	2	12
Total retail	7,488	63	47	95	205
Total	7,559	$63	$161	$420	$644


		December 31, 2019
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	85	$—	$5	$210	$215
Commercial real estate	1	—	—	—	—
Total commercial	86	—	5	210	215
Residential mortgages	242	12	10	17	39
Home equity	722	20	11	26	57
Automobile	1,431	3	—	17	20
Education	272	—	—	7	7
Other retail	3,739	18	—	2	20
Total retail	6,406	53	21	69	143
Total	6,492	$53	$26	$279	$358

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

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

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

Modified TDRs resulted in charge-offs of $6 million, $51 million and $7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Unfunded commitments related to TDRs were $56 million and $49 million at December 31, 2021 and 2020, respectively.


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The following table provides a summary of TDRs that defaulted (became 90 days or more past due) within 12 months of their modification date:


	Year Ended December 31,
(dollars in millions)	2021	2020	2019
Commercial TDRs	$23	$54	$1
Retail TDRs(1)	95	46	37
Total	$118	$100	$38

(1) Includes $61 million, $16 million and $9 million of loans fully or partially government guaranteed by the FHA, VA, and USDA for the years ended December 31, 2021, 2020 and 2019, respectively.

Concentrations of Credit Risk

Most of the Company’s lending activity is with customers located in the New England, Mid-Atlantic and Midwest regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of December 31, 2021 and 2020, Citizens had a significant amount of loans collateralized by residential and commercial real estate. There were no significant concentration risks within the commercial loan or retail loan portfolios. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which may not perform according to contractual agreements. The Company’s policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.

NOTE 7 - PREMISES, EQUIPMENT AND SOFTWARE

Premises and Equipment

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

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

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


		December 31,
(dollars in millions)	Useful Lives (years)	2021	2020
Land and land improvements	10 - 75	$101	$102
Buildings and leasehold improvements	5 - 60	805	800
Furniture, fixtures and equipment	4 - 20	589	644
Construction in progress		77	50
Total premises and equipment, gross		1,572	1,596
Accumulated depreciation		(804)	(837)
Total premises and equipment, net		$768	$759

Depreciation charged to noninterest expense totaled $98 million, $110 million and $116 million for the years ended December 31, 2021, 2020 and 2019, respectively, and is presented in the Consolidated Statements of Operations in either occupancy or equipment expense, as applicable.


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Software

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

Citizens had capitalized software assets of $2.3 billion and $2.2 billion and related accumulated amortization of $1.5 billion and $1.3 billion as of December 31, 2021 and 2020, respectively. Amortization expense was $235 million, $215 million and $194 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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


Year			(in millions)
2022			$209
2023			180
2024			153
2025			112
2026			45
Thereafter			22
Total(1)			$721

(1) Excluded from this balance is $154 million of in-process software at December 31, 2021.

NOTE 8 - MORTGAGE BANKING AND OTHER

The Company sells residential mortgages into the secondary market. The Company retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. The Company may exercise its option to repurchase eligible government guaranteed residential mortgages or may be obligated to subsequently repurchase a loan if the purchaser discovers a representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud that should have been identified in a loan file review.

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

The following table summarizes activity related to residential mortgage loans sold with servicing rights retained:


	Year Ended December 31,
(in millions)	2021	2020	2019
Cash proceeds from residential mortgage loans sold with servicing retained	$37,039	$33,221	$20,430
Repurchased residential mortgages(1)	1,381	—	—
Gain on sales(2)	382	895	251
Contractually specified servicing, late and other ancillary fees(2)	247	227	208

(1) Includes government insured or guaranteed loans eligible for repurchase through the exercise of our removal of account provision option.

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

The Company recognizes the right to service residential mortgage loans for others, or MSRs, as separate assets, which are presented in other assets on the Consolidated Balance Sheets, when purchased, or when servicing is contractually separated from the underlying mortgage loans by sale with servicing rights retained. MSRs are initially recorded at fair value. Subsequent to the initial recognition, MSRs are measured using either the fair value method or the amortization method. Effective January 1, 2020, the Company elected to account for all MSRs previously accounted for under the amortization method under the fair value method. Upon election, the Company recognized a cumulative effect adjustment to retained earnings of $6 million, net of taxes, equal to the difference between the carrying value of the MSRs and the fair value. Under the fair value method, the MSRs are recorded at fair value at each reporting date with any changes in fair value during the period recorded in mortgage banking fees in the Consolidated Statements of Operations. The unpaid principal balance of residential


						Citizens Financial Group, Inc. \| 113

mortgage loans related to our MSR was $90.2 billion and $81.2 billion as of December 31, 2021 and 2020, respectively. The Company manages an active hedging strategy to manage the risk associated with changes in the value of the MSR portfolio, which includes the purchase of freestanding derivatives.

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


	As of and for the Year Ended December 31,
(in millions)	2021	2020
Fair value as of beginning of the period	$658	$642
Transfers upon election of fair value method(1)	—	190
Fair value as of beginning of the period, adjusted	658	832

Amounts capitalized	419	324
Changes in unpaid principal balance during the period(2)	(212)	(196)
Changes in fair value during the period(3)	164	(302)
Fair value at end of the period	$1,029	$658

(1) Effective January 1, 2020, the Company elected to account for all MSRs previously accounted for under the amortization method under the fair value method.

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

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

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

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

The sensitivity analysis below presents the impact to the current MSR fair value of an immediate 10% and 20% adverse change in key economic assumptions. These sensitivities are hypothetical, with the effect of a variation in a particular assumption on the fair value of the MSRs calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in interest rates, which drive changes in prepayment rates, could result in changes in the discount rates), which may amplify or counteract the sensitivities. The primary risk inherent in the Company’s MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is largely dependent upon movements in market interest rates.


(dollars in millions)	December 31, 2021	December 31, 2020
Fair value	$1,029	$658
Weighted average life (years)	6.4	4.2
Weighted average constant prepayment rate	10.7%	17.3%
Decline in fair value from 10% adverse change	$45	$43
Decline in fair value from 20% adverse change	$87	$92
Weighted average option adjusted spread	596 bps	595 bps
Decline in fair value from 10% adverse change	$25	$14
Decline in fair value from 20% adverse change	$50	$29

The Company’s mortgage banking derivatives include commitments to originate mortgages held for sale, certain loan sale agreements, and other financial instruments that meet the definition of a derivative. Refer to Note 14 for additional information.

Other Serviced Loans

From time to time, Citizens engages in other servicing relationships. The following table presents the unpaid principal balance of other serviced loans:


(in millions)	December 31, 2021	December 31, 2020
Education	$761	$974
Commercial and industrial(1)	80	51

(1) Represents the government guaranteed portion of SBA loans sold to outside investors.


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NOTE 9 - LEASES

Citizens as Lessee

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

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

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

The components of operating lease cost are presented below.


	Year Ended December 31,
(in millions)	2021	2020	2019
Operating lease cost	$161	$165	$165
Short-term lease cost	1	4	10
Variable lease cost	8	8	7
Sublease income	(4)	(4)	(3)
Total	$166	$173	$179

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

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


(in millions)	December 31, 2021	December 31, 2020	Affected Line Item in Consolidated Balance Sheets
Operating lease right-of-use assets	$766	$800	Other assets
Operating lease liabilities	800	835	Other liabilities

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


	Year Ended December 31,
(in millions)	2021	2020	2019
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases	$163	$167	$164
Right-of-use assets in exchange for new operating lease liabilities	79	268	117

The weighted average remaining lease term and weighted average discount rate for operating leases as of December 31, 2021 is seven years and 2.34%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases as of December 31, 2020 is eight years and 2.48%, respectively.


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At December 31, 2021, lease liabilities maturing under non-cancelable operating leases are presented below for the years ended December 31.


(in millions)			Operating Leases
2022			$157
2023			151
2024			129
2025			106
2026			78
Thereafter			258
Total lease payments			879
Less: Interest			79
Present value of lease liabilities			$800

Citizens as Lessor

Operating lease assets where Citizens was the lessor totaled $244 million and $153 million as of December 31, 2021 and 2020, respectively. Operating lease rental income for leased assets where Citizens is the lessor is recognized in other income on a straight-line basis over the lease term.

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

For discussion of direct finance and sales-type leases where Citizens is lessor, refer to Note 5.

NOTE 10 - GOODWILL AND INTANGIBLE ASSETS

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

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

Citizens may elect to bypass the qualitative assessment and perform a quantitative assessment. 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, applicable goodwill is deemed to be not impaired. If the carrying value of the reporting unit inclusive of goodwill exceeds fair value, an impairment charge is recorded for the excess. The impairment loss recognized cannot exceed the amount of goodwill assigned to the reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.

Under the quantitative impairment assessment, the fair values of the Company’s reporting units are determined using a combination of income and market-based approaches. Citizens relies on the income approach (discounted cash flow method) for determining fair value. Market and transaction approaches are used as benchmarks to corroborate the value determined by the discounted cash flow method. Citizens relies on several


						Citizens Financial Group, Inc. \| 116

assumptions when estimating the fair value of its reporting units using the discounted cash flow method. These assumptions include the discount rate, as well as projected loan loss, income tax and capital retention rates.

For the year ended December 31, 2021, Citizens performed a quantitative analysis to determine whether the fair value of either of its reporting units was less than the respective reporting unit’s carrying value. Multi-year financial forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, customer retention standards, market share changes, anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. The long-term growth rate used in determining the terminal value of each reporting unit is based on management’s assessment of the minimum expected terminal growth rate of each reporting unit, as well as broader economic considerations such as GDP and inflation. As a result of this quantitative assessment, the Company determined that there was no impairment to the carrying value of the Company's goodwill as of December 31, 2021.

Changes in the carrying value of goodwill for the years ended December 31, 2021 and 2020 are presented below.


(in millions)	Consumer Banking	Commercial Banking	Total
Balance at December 31, 2019	$2,258	$4,786	$7,044
Business acquisition	—	6	6

Balance at December 31, 2020	$2,258	$4,792	$7,050
Business acquisitions	—	66	66

Balance at December 31, 2021	$2,258	$4,858	$7,116

Accumulated impairment losses related to the Consumer Banking reporting unit totaled $5.9 billion at December 31, 2021 and 2020. The accumulated impairment losses related to the Commercial Banking reporting unit totaled $50 million at December 31, 2021 and 2020. No impairment was recorded for the years ended December 31, 2021, 2020 or 2019.

Other Intangibles

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

A summary of the carrying value of intangible assets is presented below.


		December 31, 2021			December 31, 2020
(in millions)	Amortizable Lives (years)	Gross	Accumulated Amortization	Net	Gross	Accumulated Amortization	Net
Acquired technology	5 - 7	$21	$11	$10	$21	$7	$14
Acquired relationships	2 - 15	53	14	39	38	10	28
Naming Rights	10	10	3	7	11	2	9
Other	2 - 7	13	5	8	13	6	7
Total		$97	$33	$64	$83	$25	$58

As of December 31, 2021, all of the Company’s intangible assets were being amortized. Amortization expense recognized on intangible assets was $11 million for the years ended December 31, 2021, 2020 and 2019. The Company’s projection of amortization expense is based on balances as of December 31, 2021. Future amortization expense may vary from these projections.

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


(in millions)			Total
2022			$20
2023			12
2024			7
2025			7
2026			6


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NOTE 11 - VARIABLE INTEREST ENTITIES

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

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

A summary of these investments is presented below:


	December 31,
(in millions)	2021	2020
Lending to special purpose entities included in loans and leases	$2,646	$1,295
LIHTC investment included in other assets	1,978	1,687
LIHTC unfunded commitments included in other liabilities	927	875
Investment in asset-backed securities included in HTM securities	737	893
Renewable energy investments included in other assets	429	403

Lending to Special Purpose Entities

Citizens provides lending facilities to third-party sponsored special purpose entities. Because the sponsor for each respective entity has the power to direct how proceeds from the Company are utilized, as well as maintains responsibility for any associated servicing commitments, Citizens is not the primary beneficiary of these entities. Accordingly, Citizens does not consolidate these VIEs on the Consolidated Balance Sheets. As of December 31, 2021 and 2020, the lending facilities had aggregate unpaid principal balances of $2.6 billion and $1.3 billion, respectively, and undrawn commitments to extend credit of $1.9 billion and $1.5 billion, respectively.

Low Income Housing Tax Credit Partnerships

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

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


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


	Year Ended December 31,
(in millions)	2021	2020	2019
Tax credits included in income tax expense	$202	$159	$128
Other tax benefits included in income tax expense	48	38	32
Total tax benefits included in income tax expense	250	197	160
Less: Amortization included in income tax expense	208	168	137
Net benefit from affordable housing tax credit investments included in income tax expense	$42	$29	$23

No LIHTC investment impairment losses were recognized during the years ended December 31, 2021, 2020 and 2019.

Asset-backed securities

The Company’s investment in asset-backed securities are collateralized by education loans sold to a third-party sponsored VIE during the year ended December 31, 2020. Citizens acts as primary servicer for the sold educational loans and receives a servicing fee. A third-party special servicer is responsible for all loans that become significantly delinquent.

As of December 31, 2021, the Company concluded that both their investment in asset-backed securities, as well as the primary servicing fee, are considered variable interests in the VIE as there is a possibility, even if remote, that would result in either the Company’s interest in the asset-backed securities or the primary servicing fee absorbing some of the losses of the VIE. However, Citizens did not control the determination of the assets purchased by the VIE and does not control the servicing activities on significantly delinquent loans. Since these activities significantly impact the economic performance of the VIE, the Company has concluded that Citizens is not the primary beneficiary. Accordingly, Citizens does not consolidate the VIE and accounts for its investment in the asset-backed securities as HTM securities on the Consolidated Balance Sheets.

Renewable Energy Entities

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

NOTE 12 - DEPOSITS

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

The following table presents the major components of deposits:


	December 31,
(in millions)	2021	2020
Demand	$49,443	$43,831
Money market accounts	47,216	48,569
Checking with interest	30,409	27,204
Regular savings	22,030	18,044
Term deposits	5,263	9,516
Total deposits	$154,361	$147,164


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The following table presents the maturity distribution by year of term deposits as of December 31, 2021:


(in millions)
2022			$4,420
2023			484
2024			215
2025			116
2026			25
2027 and thereafter			3
Total			$5,263

The following table presents the remaining maturities of term deposits with a denomination of $250,000 or more at December 31, 2021:


(in millions)
Three months or less			$1,298
After three months through six months			140
After six months through twelve months			154
After twelve months			101
Total term deposits			$1,693

NOTE 13 - BORROWED FUNDS

Short-term borrowed funds

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


	December 31,
(in millions)	2021	2020
Securities sold under agreements to repurchase	$1	$231

Other short-term borrowed funds	73	12
Total short-term borrowed funds	$74	$243


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Long-term borrowed funds

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


	December 31,
(in millions)	2021	2020
Parent Company:
2.375% fixed-rate senior unsecured debt, due July 2021(1)	$—	$350
4.150% fixed-rate subordinated debt, due September 2022(2)(3)	168	182
3.750% fixed-rate subordinated debt, due July 2024(2)(3)	90	159
4.023% fixed-rate subordinated debt, due October 2024(2)(3)	17	25
4.350% fixed-rate subordinated debt, due August 2025(2)(3)	133	193
4.300% fixed-rate subordinated debt, due December 2025(2)(3)	336	450
2.850% fixed-rate senior unsecured notes, due July 2026	498	497
2.500% fixed-rate senior unsecured notes, due February 2030	298	297
3.250% fixed-rate senior unsecured notes, due April 2030	745	745
3.750% fixed-rate reset subordinated debt, due February 2031(2)	69	—
4.300% fixed-rate reset subordinated debt, due February 2031(2)	135	—
4.350% fixed-rate reset subordinated debt, due February 2031(2)	60	—
2.638% fixed-rate subordinated debt, due September 2032(3)	550	543
CBNA’s Global Note Program:
2.550% senior unsecured notes, due May 2021	—	1,003
3.250% senior unsecured notes, due February 2022	700	716
0.845% floating-rate senior unsecured notes, due February 2022(4)	300	299
0.932% floating-rate senior unsecured notes, due May 2022(4)	250	250
2.650% senior unsecured notes, due May 2022	503	510
3.700% senior unsecured notes, due March 2023	512	527
1.170% floating-rate senior unsecured notes, due March 2023(4)	250	249
2.250% senior unsecured notes, due April 2025	746	746
3.750% senior unsecured notes, due February 2026	524	551
Additional Borrowings by CBNA and Other Subsidiaries:
Federal Home Loan Bank advances, 0.852% weighted average rate, due through 2041	19	19
Other	29	35
Total long-term borrowed funds	$6,932	$8,346

(1) Notes were redeemed on June 28, 2021.

(2) December 31, 2021 balances reflect the February 2021 completion of $265 million in private exchange offers for five series of outstanding subordinated notes whereby participants received newly issued 3.750%, 4.300%, and 4.350% fixed-rate reset subordinated notes due 2031 which are redeemable by the Company five years prior to their maturity.

(3) December 31, 2020 balances reflect 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 Company’s 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 Citizens and subsequently cancelled.

(4) Rate disclosed reflects the floating rate as of December 31, 2021, or final floating rate as applicable.

The Parent Company’s long-term borrowed funds as of December 31, 2021 and 2020 included principal balances of $3.2 billion and $3.5 billion, respectively, and unamortized deferred issuance costs and/or discounts of $80 million and $90 million, respectively. CBNA and other subsidiaries’ long-term borrowed funds as of December 31, 2021 and 2020 included principal balances of $3.8 billion and $4.8 billion, respectively, with unamortized deferred issuance costs and/or discounts of $7 million and $11 million, respectively, and hedging basis adjustments of $42 million and $112 million, respectively. See Note 14 for further information about the Company’s hedging of certain long-term borrowed funds.

Advances, lines of credit and letters of credit from the FHLB are collateralized primarily by residential mortgages and home equity products 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 $2.3 billion and $3.2 billion at December 31, 2021 and 2020, respectively. The Company’s available FHLB borrowing capacity was $15.9 billion and $13.9 billion at December 31, 2021 and 2020, respectively. Citizens can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At December 31, 2021, the Company’s unused secured borrowing capacity was approximately $63.0 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity.


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The following table presents a summary of maturities for the Company’s long-term borrowed funds at December 31, 2021:


(in millions)	Parent Company	CBNA and Other Subsidiaries	Consolidated
Year
2022	$168	$1,763	$1,931
2023	—	765	765
2024	107	1	108
2025	469	760	1,229
2026	498	524	1,022
2027 and thereafter	1,857	20	1,877
Total	$3,099	$3,833	$6,932

NOTE 14 - DERIVATIVES

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

The Company’s derivative instruments are recognized on the Consolidated Balance Sheets in derivative assets and derivative liabilities at fair value. Certain derivatives are cleared through a central clearing house. Cleared derivatives represent contracts executed bilaterally with counterparties in the OTC market that are novated to a central clearing house who then becomes our counterparty. OTC-cleared derivative instruments are typically settled in cash each day based on the prior day value. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 20.

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


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


	December 31, 2021			December 31, 2020
(in millions)	Notional Amount(1)	Derivative Assets	Derivative Liabilities	Notional Amount(1)	Derivative Assets	Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate contracts	$23,450	$12	$2	$22,300	$1	$3
Derivatives not designated as hedging instruments:
Interest rate contracts	142,987	680	174	149,021	1,565	214
Foreign exchange contracts	21,336	263	231	16,789	320	291
Commodities contracts	514	508	505	246	62	61
TBA contracts	7,776	8	8	11,149	8	65
Other contracts	3,555	38	2	8,051	197	—
Total derivatives not designated as hedging instruments		1,497	920		2,152	631
Gross derivative fair values		1,509	922		2,153	634
Less: Gross amounts offset in the Consolidated Balance Sheets(2)		(235)	(235)		(182)	(182)
Less: Cash collateral applied(2)		(58)	(490)		(56)	(324)
Total net derivative fair values presented in the Consolidated Balance Sheets		$1,216	$197		$1,915	$128

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

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

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

Derivatives Designated As Hedging Instruments

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

Fair Value Hedges

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

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


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


	Year Ended December 31,
(in millions)		2021	2020	2019	Affected Line Item in the Consolidated Statements of Operations
Interest rate swaps hedging borrowed funds		($72)	$65	$107	Interest expense - long-term borrowed funds
Hedged long-term debt attributable to the risk being hedged		71	(63)	(107)	Interest expense - long-term borrowed funds
Interest rate swaps hedging fixed rate loans		—	17	(17)	Interest and fees on loans and leases
Hedged fixed rate loans attributable to the risk being hedged		—	(17)	17	Interest and fees on loans and leases
Interest rate swaps hedging debt securities available for sale		68	(104)	8	Interest income - investment securities
Hedged debt securities available for sale attributable to risk being hedged		(68)	104	(8)	Interest income - investment securities

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


	December 31, 2021		December 31, 2020
(in millions)	Debt securities available for sale(1)	Long-term borrowed funds	Debt securities available for sale(1)	Long-term borrowed funds
Carrying amount of hedged assets	$6,042	$—	$10,869	$—
Carrying amount of hedged liabilities	—	2,239	—	3,307
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items	29	42	96	112

(1) The Company designated $2.0 billion as the hedged amount (from a closed portfolio of prepayable financial assets with an amortized cost basis of $6.0 billion and $10.9 billion as of December 31, 2021 and 2020, respectively) in a last-of-layer hedging relationship, which commenced in the third quarter of 2019.

Cash Flow Hedges

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

Citizens has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating-rate assets and liabilities. All of these swaps have been deemed highly effective cash flow hedges. During the next 12 months, there are $36 million in pre-tax net gains on derivative instruments included in OCI expected to be reclassified to net interest income in the Consolidated Statements of Operations. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to December 31, 2021.

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


	Amounts Recognized for the Year Ended December 31,
(in millions)	2021	2020	2019
Amount of pre-tax net gains (losses) recognized in OCI	($66)	$130	$138
Amount of pre-tax net gains (losses) reclassified from OCI into interest income	183	184	(68)
Amount of pre-tax net gains (losses) reclassified from OCI into interest expense	(48)	(35)	11

Derivatives not designated as hedging instruments

Economic Hedges

The Company’s economic hedges include those related to offsetting customer derivatives, residential mortgage loan derivatives (including interest rate lock commitments and forward sales commitments) and


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

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


	Amounts Recognized in Noninterest Income for the Year Ended December 31,			Affected Line Item in the Consolidated Statements of Operations
(in millions)	2021	2020	2019
Economic hedge type:
Customer interest rate contracts	($374)	$1,234	$687	Foreign exchange and interest rate products
Derivatives hedging interest rate risk	401	(1,188)	(620)	Foreign exchange and interest rate products
Customer foreign exchange contracts	(207)	216	(166)	Foreign exchange and interest rate products
Derivatives hedging foreign exchange risk	305	(263)	200	Foreign exchange and interest rate products
Customer commodity contracts	779	(9)	—	Foreign exchange and interest rate products
Derivatives hedging commodity price risk	(770)	13	—	Foreign exchange and interest rate products
Residential loan commitments	(208)	179	8	Mortgage banking fees
Derivatives hedging residential loan commitments and mortgage loans held for sale, at fair value	152	(50)	20	Mortgage banking fees
Derivative contracts used to hedge residential MSRs(1)	(150)	311	134	Mortgage banking fees
Total	($72)	$443	$263

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

NOTE 15 - EMPLOYEE BENEFITS

Pension Plans

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


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


	Year Ended December 31,
	Qualified Plan		Non-Qualified Plan
(in millions)	2021	2020	2021	2020
Fair value of plan assets as of January 1	$1,343	$1,246	$—	$—
Actual return on plan assets	125	165	—	—
Employer contributions	—	—	8	8


Benefits and administrative expenses paid	(78)	(68)	(8)	(8)
Fair value of plan assets as of December 31	1,390	1,343	—	—
Projected benefit obligation	1,083	1,157	99	105
Pension asset (obligation)	$307	$186	($99)	($105)
Accumulated benefit obligation	$1,083	$1,157	$99	$105

The Company’s projected benefit obligation decreased for the year ending December 31, 2021 due to an actuarial gain and benefits paid exceeded the interest cost on remaining obligations. Citizens recognized actuarial gains and losses on the Pension Plans in AOCI resulting in an ending balance of $465 million and $571 million at December 31, 2021 and 2020, respectively.

Citizens does not plan to contribute to the Qualified Plan in 2022. No contributions were made to the Qualified Plan in 2021 or 2020. Citizens expects to contribute $8 million to the Non-Qualified Plan in 2022 and contributed $8 million to the Non-Qualified Plan in 2021 and 2020.

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


	Year Ended December 31,
(in millions)	2021	2020	2019
Net periodic pension cost (income)	($31)	($22)	($5)
Net actuarial loss (gain)	(74)	37	(49)
Amortization of prior service credit	—	—	—
Amortization of net actuarial loss	(17)	(17)	(19)
Settlement	(15)	—	—

Total gain (loss) recognized in other comprehensive income (loss)	(106)	20	(68)
Total (loss) gain recognized in net periodic pension cost (income) and other comprehensive income (loss)	($137)	($2)	($73)

Costs under the Company’s Pension Plans are actuarially computed and include current service costs and amortization of prior service costs over the participants’ average future working lifetime. The actuarial cost method used in determining the net periodic pension cost is the projected unit method. During 2021, lump sum payments made under the Qualified Plan triggered settlement accounting. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the Qualified Plan and recognized a settlement loss.

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


	Year Ended December 31,
	Qualified Plan			Non-Qualified Plan			Total
(in millions)	2021	2020	2019	2021	2020	2019	2021	2020	2019
Service cost	$3	$3	$3	$—	$—	$—	$3	$3	$3
Interest cost	31	37	41	3	3	4	34	40	45
Expected return on plan assets	(85)	(82)	(72)	—	—	—	(85)	(82)	(72)
Amortization of actuarial loss	14	14	17	3	3	2	17	17	19

Settlement	15	—	—	—	—	—	15	—	—
Net periodic pension (income) cost(1)	($22)	($28)	($11)	$6	$6	$6	($16)	($22)	($5)

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


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


			(in millions)
Expected benefit payments by fiscal year ending:
December 31, 2022			$70
December 31, 2023			68
December 31, 2024			68
December 31, 2025			69
December 31, 2026			69
December 31, 2027 - 2031			339

401(k) Plan

Citizens sponsors a 401(k) Plan under which employee tax-deferred/Roth after-tax contributions to the 401(k) Plan are matched by the Company after completion of one year of service. Contributions for substantially all employees are matched at 100% up to an overall limitation of 4% on a pay period basis. In addition, substantially all employees will receive an additional 1% of earnings after completion of one year of service, subject to limits set by the Internal Revenue Service. Amounts expensed by the Company were $63 million in 2021 compared to $78 million in 2020 and $72 million in 2019.

NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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


(in millions)	Net Unrealized Gains (Losses) on Derivatives	Net Unrealized Gains (Losses) on Debt Securities	Employee Benefit Plans	Total AOCI
Balance at January 1, 2019	($143)	($490)	($463)	($1,096)
Other comprehensive income (loss) before reclassifications	103	501	—	604

Amounts reclassified to the Consolidated Statements of Operations	43	(15)	48	76
Net other comprehensive income (loss)	146	486	48	680
Cumulative effect of change in accounting principle	—	5	—	5
Balance at December 31, 2019	$3	$1	($415)	($411)
Other comprehensive income (loss) before reclassifications	97	382	—	479

Amounts reclassified to the Consolidated Statements of Operations	(111)	(3)	(14)	(128)
Net other comprehensive income (loss)	(14)	379	(14)	351

Balance at December 31, 2020	($11)	$380	($429)	($60)
Other comprehensive income (loss) before reclassifications	(49)	(528)	—	(577)

Amounts reclassified to the Consolidated Statements of Operations	(101)	(8)	81	(28)
Net other comprehensive income (loss)	(150)	(536)	81	(605)

Balance at December 31, 2021	($161)	($156)	($348)	($665)
Primary location in the Consolidated Statement of Operations of amounts reclassified from AOCI	Net interest income	Securities gains, net	Other operating expense


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NOTE 17 - STOCKHOLDERS’ EQUITY

Preferred Stock

The following table summarizes the Company’s preferred stock:


			December 31,
			2021			2020
(in millions, except per share and share data)	Liquidation value per share		Preferred Shares		Carrying Amount	Preferred Shares	Carrying Amount
Authorized ($25 par value per share)			100,000,000			100,000,000
Issued and outstanding:
Series A	$1,000		—		$—	250,000	$247
Series B	1,000		300,000		296	300,000	296
Series C	1,000		300,000		297	300,000	297
Series D	1,000	(1)	300,000	(2)	293	300,000	293
Series E	1,000	(1)	450,000	(3)	437	450,000	437
Series F	1,000		400,000		395	400,000	395
Series G	1,000		300,000		296	—	—
Total			2,050,000		$2,014	2,000,000	$1,965

(1) Equivalent to $25 per depositary share.

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

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

On June 11, 2021, the Company issued $300 million, or 300,000 shares, of 4.000% fixed-rate reset non-cumulative perpetual Series G Preferred Stock, par value of $25.00 per share with a liquidation preference of $1,000 per share (the “Series G Preferred Stock”). As a result of this issuance, the Company received net proceeds of $296 million after the underwriting discount and other expenses. The Series G Preferred Stock has no stated maturity and will not be subject to any sinking fund or other obligation of the Company. The Series G Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after October 6, 2026 or, in whole but not in part, at any time within the 90 days following a regulatory capital treatment event at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends. The Company may not redeem shares of the Series G Preferred Stock without obtaining the prior approval of the FRB if then required under applicable capital guidelines. Except in limited circumstances, the Series G Preferred Stock does not have any voting rights.

On July 6, 2021, the Company redeemed all outstanding shares of the 5.500% fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock.


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The following table provides information related to the Company’s preferred stock outstanding as of December 31, 2021:


(in millions, except per share and share data)
Preferred Stock(1)	Issue Date	Number of Shares Issued	Dividend Dates(2)	Annual Per Share Dividend Rate	Optional Redemption Date(3)
Series B	May 24, 2018	300,000	Semi-annually beginning January 6, 2019 until July 6, 2023	6.000% until July 6, 2023	July 6, 2023
			Quarterly beginning October 6, 2023	3 Mo. LIBOR plus 3.003% beginning July 6, 2023
Series C	October 25, 2018	300,000	Quarterly beginning January 6, 2019 until April 6, 2024	6.375% until April 6, 2024	April 6, 2024
			Quarterly beginning July 6, 2024	3 Mo. LIBOR plus 3.157% beginning April 6, 2024
Series D	January 29, 2019	300,000(4)	Quarterly beginning April 6, 2019 until April 6, 2024	6.350% until April 6, 2024	April 6, 2024
			Quarterly beginning July 6, 2024	3 Mo. LIBOR plus 3.642% beginning April 6, 2024
Series E	October 28, 2019	450,000(5)	Quarterly beginning January 6, 2020	5.000%	January 6, 2025
Series F	June 4, 2020	400,000	Quarterly beginning October 6, 2020 until October 6, 2025	5.650% until October 6, 2025	October 6, 2025
			Quarterly beginning January 6, 2026	5 Yr. US Treasury rate plus 5.313% beginning October 6, 2025
Series G	June 11, 2021	300,000	Quarterly beginning October 6, 2021 until October 6, 2026	4.000% until October 6, 2026	October 6, 2026
			Quarterly beginning January 6, 2027	5 Yr. US Treasury rate plus 3.215% beginning October 6, 2026

(1) Series B through D are non-cumulative fixed-to-floating rate perpetual preferred stock, Series E is non-cumulative fixed-rate perpetual preferred stock, and Series F and G are non-cumulative fixed-rate reset perpetual preferred stock. Except in limited circumstances, each series of preferred stock does not have voting rights.

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

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

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

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

Dividends


	Year Ended December 31,
	2021			2020			2019
(in millions, except per share data)	Dividends Declared per Share	Dividends Declared	Dividends Paid	Dividends Declared per Share	Dividends Declared	Dividends Paid	Dividends Declared per Share	Dividends Declared	Dividends Paid
Common stock	$1.56	$670	$670	$1.56	$672	$672	$1.36	$617	$617
Preferred stock
Series A	$20.99	$5	$8	$62.59	$15	$13	$55.00	$14	$14
Series B	60.00	18	18	60.00	18	18	60.00	18	20
Series C	63.75	19	19	63.75	19	19	63.75	19	18
Series D	63.50	18	18	63.50	19	19	59.45	18	13
Series E	50.00	23	23	50.00	23	21	9.44	4	—
Series F	56.50	23	23	33.27	13	8	—	—	—
Series G	22.78	7	4	—	—	—	—	—	—
Total preferred stock		$113	$113		$107	$98		$73	$65

Treasury Stock

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

During the years ended December 31, 2021 and 2020, the Company paid $295 million to repurchase 6,455,636 common shares and paid $270 million to repurchase 7,548,655 common shares, respectively.


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NOTE 18 - SHARE-BASED COMPENSATION

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

Employees of the Company hold time-based restricted stock units and performance-based restricted stock units. A restricted stock unit is the right to receive shares of stock on a future date, which may be subject to time-based vesting conditions and/or performance-based vesting conditions.

Citizens Financial Group, Inc. 2014 Omnibus Incentive Plan. Certain employees of the Company hold time-based restricted stock units and performance-based restricted stock units granted under this plan. Time-based restricted stock units granted generally become vested ratably over a 3-year period and performance-based restricted stock units granted generally become vested in a single installment at the end of a 3-year performance period, depending on the level of performance achieved during such period relative to established targets. If a dividend is paid on shares underlying the awards prior to the date such shares are distributed, those dividends will be distributed following vesting in the same form as the dividend that has been paid to common stockholders generally.

Citizens Financial Group, Inc. 2014 Non-Employee Directors Compensation Plan. Non-employee directors receive grants of time-based restricted stock units under this plan as compensation for their services. Restricted stock units granted to directors are fully vested on the grant date, with settlement of the awards deferred until a director’s cessation of service. If a dividend is paid on the shares underlying awards prior to the date such shares are distributed, they are reinvested into additional restricted stock units.

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

Stock Option Activity

Under the terms of the merger agreement with JMP, Citizens granted stock option awards to replace awards previously granted by JMP that were outstanding as of November 15, 2021. A share conversion ratio of 6:1 was applied to convert JMP’s outstanding equity awards into CFG awards and the strike prices of replacement stock options were also adjusted to reflect this exchange ratio, in accordance with the merger agreement. Converted awards retain the same terms and conditions they had prior to the merger, except that Citizens shares will be issued upon the settlement or exercise.

The fair value of the awards being replaced and replacement awards were measured using a simple lattice model as of the date of the merger. The portion of the fair value of the awards being replaced which was attributable to pre-combination service was included as a component of the consideration paid in the merger. The portion attributable to post-combination service, in addition to any increased value of replacement awards over the awards being replaced, was recognized as stock-based compensation expense over each award’s remaining service period.

There were no stock options granted during the years ended December 31, 2021, 2020 and 2019, except for stock option awards that were converted into Citizens awards in conjunction with the JMP acquisition on November 15, 2021.


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The following table presents a summary of the Company’s outstanding and exercisable stock option activity:


	Number of Options	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)














Outstanding at January 1. 2021	—	$—	—	$—
Assumed	249,861	19.45	—	—
Granted	—	—	—	—
Exercised	(4,000)	19.45	—	—
Forfeited or expired	—	—	—	—
Outstanding at December 31, 2021	245,861	19.45	3.1	7
Exercisable at December 31, 2021	34,856	$19.45	3.1	$1

As of December 31, 2021, the aggregate intrinsic value of both outstanding and exercisable stock options was $7 million and $1 million, respectively.

Summary of Share-Based Plans Activity

The following table presents the activity related to the Company’s share-based plans (excluding the ESPP):


	Year Ended December 31,
	2021		2020		2019
	Units	Weighted-Average Grant Price	Units	Weighted-Average Grant Price	Units	Weighted-Average Grant Price
Outstanding, January 1	3,496,231	$34.37	3,000,224	$36.71	2,893,281	$34.04
Assumed	82,013	49.95	—	—	—	—
Granted	1,417,370	44.97	1,947,902	32.64	1,677,167	36.21
Vested & Distributed	(1,400,722)	38.88	(1,384,091)	38.59	(1,518,836)	32.21
Forfeited	(91,936)	35.00	(67,804)	35.89	(51,388)	38.29
Outstanding, December 31	3,502,956	$38.23	3,496,231	$34.37	3,000,224	$36.71

There are 44,911,455 shares of Company common stock available for awards to be granted under the Omnibus Plan and Directors Plan. In addition, there are 4,547,955 shares available for awards under the ESPP. Upon settlement of share-based awards, the Company generally issues new shares, but may also issue shares from treasury stock.

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

Share-based compensation expense (including ESPP) was $59 million, $48 million, and $55 million for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, the total unrecognized compensation expense for nonvested equity awards granted was $53 million. This expense is expected to be recognized over a weighted-average period of approximately two years. No share-based compensation costs were capitalized during the years ended December 31, 2021, 2020 and 2019.

Citizens recognized income tax benefits related to share-based compensation arrangements of $12 million, $8 million and $1 million for the years ended December 31, 2021, 2020 and 2019, respectively.


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NOTE 19 - COMMITMENTS AND CONTINGENCIES

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


	December 31,
(in millions)	2021	2020
Commitments to extend credit	$84,206	$74,160
Letters of credit	1,998	2,239
Risk participation agreements	39	98
Loans sold with recourse	82	54
Marketing rights	26	29
Total	$86,351	$76,580

Commitments to Extend Credit

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

Letters of Credit

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

Other Commitments

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

Marketing Rights - During 2003, Citizens entered into a 25-year agreement to acquire the naming and marketing rights of a baseball stadium in Pennsylvania.
Loans sold with recourse - Citizens is an originator and servicer of residential mortgages and routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales, the Company makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of those representations and warranties. The Company also sells the government guaranteed portion of certain SBA loans to outside investors, for which it retains the servicing rights.
Risk Participation Agreements - RPAs are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. The current amount of credit exposure is spread out over multiple counterparties. At December 31, 2021, the remaining terms on these RPAs ranged from less than one year to eight years.


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Contingencies

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

In these disputes and proceedings, the Company contests liability and the amount of damages as appropriate. Given their complex nature, and based on the Company's experience, it may be years before some of these matters are finally resolved. Moreover, before liability can be reasonably estimated for a claim, numerous legal and factual issues may need to be examined, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal issues relevant to the proceedings in question. The Company cannot predict with certainty if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages. The Company recognizes a provision for a claim when, in the opinion of management after seeking legal advice, it is probable that a liability exists and the amount of loss can be reasonably estimated. In many proceedings, however, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.

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

NOTE 20 - FAIR VALUE MEASUREMENTS

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

Fair Value Option

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


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


	December 31, 2021			December 31, 2020
(in millions)	Aggregate Fair Value	Aggregate Unpaid Principal	Aggregate Fair Value Greater (Less) Than Aggregate Unpaid Principal	Aggregate Fair Value	Aggregate Unpaid Principal	Aggregate Fair Value Greater (Less) Than Aggregate Unpaid Principal
Residential mortgage loans held for sale, at fair value	$2,657	$2,591	$66	$3,416	$3,260	$156
Commercial and industrial, and commercial real estate loans held for sale, at fair value	76	79	(3)	148	153	(5)

Residential Mortgage Loans Held for Sale

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

Residential mortgage loans accounted for under the fair value option are initially measured at fair value when the financial asset is originated or purchased. Subsequent changes in fair value are recognized in mortgage banking fees on the Consolidated Statements of Operations.

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

Commercial and Industrial, and Commercial Real Estate Loans Held for Sale

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

The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in capital markets fees on the Consolidated Statements of Operations. Since all loans in the Company’s commercial trading portfolio consist of floating rate obligations, all changes in fair value are due to changes in credit risk. Such credit-related fair value changes may include observed changes in overall credit spreads and/or changes to the creditworthiness of an individual borrower.

Interest income on commercial and industrial, and commercial real estate loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income.

Recurring Fair Value Measurements

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


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

Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by market data for substantially the full term of the asset or liability.
Level 3. Unobservable inputs that are supported by little or no market information and that are significant to the fair value measurement.

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

Citizens reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in fair value measurements may result in a reclassification between the fair value hierarchy levels and are recognized based on period-end balances.

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

Debt securities available for sale

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

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

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

Mortgage Servicing Rights

MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. The fair value is calculated using a discounted cash flow model which uses assumptions, including weighted-average life, prepayment assumptions and weighted-average option adjusted spread. The underlying assumptions and estimated values are corroborated by values received from independent third parties based on their review of the servicing portfolio, and comparisons


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to market transactions. In addition, the MSR Policy is approved by the Asset Liability Committee. Refer to Note 8 for more information.

Derivatives

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

The fair value of commodity derivatives uses the mid-point of market observable quoted prices as an input into the fair value model. The model uses the observed market prices combined with other market observed inputs to derive the fair value of the instrument, which generally classifies it as Level 2 instrument.

The fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy.

The fair value of TBA contracts is estimated using observable prices of similar loan pools that transact in the marketplace, as well as sector curves and benchmarking techniques. Therefore, the Company classifies TBA contracts in Level 2 of the fair value hierarchy given the observable market inputs.

Other contracts primarily consist of interest rate lock commitments and forward sales commitments of residential MBS used to economically hedge existing mortgage commitments that are pending closure. Forward sales commitments are valued based on the value of similarly situated pools of mortgages trading in the market, adjusted for the unique characteristics of the pool. Since these inputs are observable in the market, these derivatives are classified as Level 2 in the fair value hierarchy. Interest rate lock commitments are valued utilizing internally generated loan closing rate assumptions, which are a significant unobservable input, and therefore are classified as Level 3 in the fair value hierarchy.


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Equity Securities, at fair value

The fair value of money market mutual fund investments is determined based upon unadjusted quoted market prices and is considered a Level 1 fair value measurement.

The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities, on a recurring basis at December 31, 2021:


(in millions)	Total	Level 1	Level 2	Level 3
Debt securities available for sale:
Mortgage-backed securities	$24,847	$—	$24,847	$—
Collateralized loan obligations	1,207	—	1,207	—
State and political subdivisions	2	—	2	—
U.S. Treasury and other	11	11	—	—
Total debt securities available for sale	26,067	11	26,056	—
Loans held for sale, at fair value:
Residential loans held for sale	2,657	—	2,657	—
Commercial loans held for sale	76	—	76	—
Total loans held for sale, at fair value	2,733	—	2,733	—
Mortgage servicing rights	1,029	—	—	1,029
Derivative assets:
Interest rate contracts	692	—	692	—
Foreign exchange contracts	263	—	263	—
Commodities contracts	508	—	508	—
TBA contracts	8	—	8	—
Other contracts	38	—	—	38
Total derivative assets	1,509	—	1,471	38
Equity securities, at fair value(1)	102	95	7	—
Total assets	$31,440	$106	$30,267	$1,067
Derivative liabilities:
Interest rate contracts	$176	$—	$176	$—
Foreign exchange contracts	231	—	231	—
Commodities contracts	505	—	505	—
TBA contracts	8	—	8	—
Other contracts	2	—	2	—
Total derivative liabilities	922	—	922	—
Total liabilities	$922	$—	$922	$—

(1) Excludes investments of $7 million that are measured at fair value using the net asset value per share (or its equivalent) practical expedient.


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The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities, on a recurring basis at December 31, 2020:


(in millions)	Total	Level 1	Level 2	Level 3
Debt securities available for sale:
Mortgage-backed securities	$22,928	$—	$22,928	$—
State and political subdivisions	3	—	3	—
U.S. Treasury and other	11	11	—	—
Total debt securities available for sale	22,942	11	22,931	—
Loans held for sale, at fair value:
Residential loans held for sale	3,416	—	3,416	—
Commercial loans held for sale	148	—	148	—
Total loans held for sale, at fair value	3,564	—	3,564	—
Mortgage servicing rights	658	—	—	658
Derivative assets:
Interest rate contracts	1,566	—	1,566	—
Foreign exchange contracts	320	—	320	—
Commodities contracts	62	—	62	—
TBA contracts	8	—	8	—
Other contracts	197	—	—	197
Total derivative assets	2,153	—	1,956	197
Equity securities, at fair value	66	66	—	—
Total assets	$29,383	$77	$28,451	$855
Derivative liabilities:
Interest rate contracts	$217	$—	$217	$—
Foreign exchange contracts	291	—	291	—
Commodities contracts	61	—	61	—
TBA contracts	65	—	65	—

Total derivative liabilities	634	—	634	—
Total liabilities	$634	$—	$634	$—

The following table presents a roll forward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as Level 3:


	For the Year Ended December 31,
	2021	2020
(in millions)	Mortgage Servicing Rights	Other Derivative Contracts	Mortgage Servicing Rights	Asset-Backed Securities	Other Derivative Contracts
Beginning balance	$658	$197	$642	$—	$19
Transfers upon election of fair value method(1)	—	—	190	—	—
Beginning balance, adjusted	658	197	832	—	19
Purchases	—	—	—	813	—
Issuances	419	377	324	—	900
Settlements(2)	(212)	(328)	(196)	—	(1,133)
Changes in fair value during the period recognized in earnings(3)	164	(208)	(302)	—	411

Transfer from AFS to HTM(4)	—	—	—	(813)	—
Ending balance	$1,029	$38	$658	$—	$197

(1) Effective January 1, 2020, the Company elected to account for all MSRs previously accounted for under the amortization method under the fair value method.

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

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

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

(4) In October 2020, Citizens concluded that it has the ability and intent to hold these assets to maturity and transferred them to HTM. Refer to Note 11 for additional information.


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The following table presents quantitative information about the Company’s Level 3 assets, including the range and weighted-average of the significant unobservable inputs used to fair value these assets, as well as valuation techniques used.


		As of December 31, 2021
		Valuation Technique	Unobservable Input	Range (Weighted Average)
Mortgage servicing rights		Discounted Cash Flow	Constant prepayment rate	9.40-26.32% CPR (10.70% CPR)
	Option adjusted spread	370-1,228 bps (596 bps)
Other derivative contracts		Internal Model	Pull through rate	9.39-100.00% (77.51%)
	MSR value	(17.00)-168.75 bps (96.13 bps)

Nonrecurring Fair Value Measurements

Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. An example of a nonrecurring use of fair value includes loan impairments for certain loans and leases.

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

Impaired Loans

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

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


	Year Ended December 31,
(in millions)	2021	2020	2019
Collateral-dependent loans	($27)	($82)	($34)

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


	December 31, 2021				December 31, 2020
(in millions)	Total	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3
Collateral-dependent loans	$645	$—	$645	$—	$758	$—	$758	$—

Disclosures about Fair Value of Financial Instruments

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


	December 31, 2021
	Total		Level 1		Level 2		Level 3
(in millions)	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value
Financial assets:
Debt securities held to maturity	$2,242	$2,289	$—	$—	$1,505	$1,557	$737	$732
Other loans held for sale	735	735	—	—	—	—	735	735
Loans and leases	128,163	128,156	—	—	645	645	127,518	127,511
Other assets	624	624	—	—	609	609	15	15
Financial liabilities:
Deposits	154,361	154,366	—	—	154,361	154,366	—	—
Short-term borrowed funds	74	74	—	—	74	74	—	—
Long-term borrowed funds	6,932	7,188	—	—	6,932	7,188	—	—


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	December 31, 2020
	Total		Level 1		Level 2		Level 3
(in millions)	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value
Financial assets:
Debt securities held to maturity	$3,235	$3,357	$—	$—	$2,342	$2,464	$893	$893
Other loans held for sale	439	439	—	—	—	—	439	439
Loans and leases	123,090	123,678	—	—	758	758	122,332	122,920
Other assets	604	604	—	—	596	596	8	8
Financial liabilities:
Deposits	147,164	147,223	—	—	147,164	147,223	—	—
Short-term borrowed funds	243	243	—	—	243	243	—	—
Long-term borrowed funds	8,346	8,850	—	—	8,346	8,850	—	—

NOTE 21 - NONINTEREST INCOME

Revenues from Contracts with Customers

Citizens recognizes revenue from contracts with customers in the amount of consideration it expects to receive upon the transfer of control of a good or service. The timing of recognition is dependent on whether the Company satisfies a performance obligation by transferring control of the product or service to a customer over time or at a point in time. Judgments are made in the recognition of income including the timing of satisfaction of performance obligations and determination of the transaction price.

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


	Year Ended December 31, 2021
(in millions)	Consumer Banking	Commercial Banking	Other	Consolidated
Service charges and fees	$302	$105	$—	$407
Card fees	216	32	—	248
Capital markets fees	—	419	—	419
Trust and investment services fees	239	—	—	239
Other banking fees	—	12	—	12
Total revenue from contracts with customers	$757	$568	$—	$1,325
Total revenue from other sources	466	241	103	810
Total noninterest income	$1,223	$809	$103	$2,135


	Year Ended December 31, 2020
(in millions)	Consumer Banking	Commercial Banking	Other	Consolidated
Service charges and fees	$301	$100	$—	$401
Card fees	185	31	—	216
Capital markets fees	—	249	—	249
Trust and investment services fees	203	—	—	203
Other banking fees	1	10	—	11
Total revenue from contracts with customers	$690	$390	$—	$1,080
Total revenue from other sources	965	205	69	1,239
Total noninterest income	$1,655	$595	$69	$2,319


						Citizens Financial Group, Inc. \| 140


	Year Ended December 31, 2019
(in millions)	Consumer Banking	Commercial Banking	Other	Consolidated
Service charges and fees	$400	$103	$—	$503
Card fees	215	39	—	254
Capital markets fees	—	202	—	202
Trust and investment services fees	202	—	—	202
Other banking fees	1	10	—	11
Total revenue from contracts with customers	$818	$354	$—	$1,172
Total revenue from other sources	338	253	114	705
Total noninterest income	$1,156	$607	$114	$1,877

Citizens does not have any material contract assets, liabilities, or other receivables recorded on its Consolidated Balance Sheets related to revenues from contracts with customers as of December 31, 2021. Citizens has elected to exclude disclosure of unsatisfied performance obligations for contracts with an original expected length of one year or less and contracts for which the Company recognized revenue at the amount to which the Company has the right to invoice for services performed.

A description of the above components of revenue from contracts with customers is presented below:

Service Charges and Fees

Service charges and fees include fees earned from deposit products in lieu of compensating balances, service charges for transactions performed upon depositors’ request, as well as fees earned from performing cash management activities. Service charges on deposit products are recognized over the period in which the related service is provided, typically monthly. Service fees are recognized at a point in time upon completion of the requested service transaction. Fees on cash management products and servicing fees on loans sold without recognition of a servicing right are recognized over time (typically monthly) as services are provided.

Card Fees

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

Capital Markets Fees

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

Trust and Investment Services Fees

Trust and investment services fees include fees from investment management services and brokerage services. Fees from investment management services are based on asset market values and are recognized over the period in which the related service is provided. Brokerage services include custody fees, commission income, trailing commissions and other investment securities. Custody fees are recognized on a monthly basis for customers that are assessed custody fees. Commission income is recognized at a point in time on trade date. Trailing commissions such as 12b-1 fees, insurance renewal income, and income based on asset or investment levels in future periods are recognized at a point in time when the asset balance is known, or the renewal occurs and the income is no longer constrained. For the years ended December 31, 2021, 2020 and 2019, the Company recognized trailing commissions of $16 million, $14 million and $15 million, respectively, related to services provided in previous reporting periods. Fees from other investment services are recognized at a point in time upon completion of the service.


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O**ther Banking Fees

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

Revenue from Other Sources

Letter of Credit and Loan Fees

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

Foreign Exchange and Interest Rate Products

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

Mortgage Banking Fees

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

Other Income

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

NOTE 22 - OTHER OPERATING EXPENSE

The following table presents the details of other operating expense:


	Year Ended December 31,
(in millions)	2021	2020	2019
Marketing	$111	$100	$112
Other	300	319	364
Other operating expense	$411	$419	$476

NOTE 23 - INCOME TAXES

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

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


						Citizens Financial Group, Inc. \| 142

The following table presents total income tax expense:


	Year Ended December 31,
(in millions)	2021	2020	2019
Income tax expense	$658	$241	$460
Tax effect of changes in OCI	(199)	112	225
Total comprehensive income tax expense	$459	$353	$685

The following table presents the components of income tax expense:


(in millions)	Current	Deferred	Total
Year Ended December 31, 2021
U.S. federal	$871	($345)	$526
State and local	216	(84)	132
Total	$1,087	($429)	$658
Year Ended December 31, 2020
U.S. federal	$377	($181)	$196
State and local	102	(57)	45
Total	$479	($238)	$241
Year Ended December 31, 2019
U.S. federal	$323	$64	$387
State and local	73	—	73
Total	$396	$64	$460

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


	Year Ended December 31,
	2021			2020			2019
(in millions, except ratio data)	Amount	Rate		Amount	Rate		Amount	Rate
U.S. federal income tax expense and tax rate	$625	21.0	%	$273	21.0	%	$473	21.0	%
Increase (decrease) resulting from:
State and local income taxes (net of federal benefit)	126	4.2		54	4.2		73	3.2
Bank-owned life insurance	(14)	(0.5)		(12)	(0.9)		(12)	(0.5)
Tax-exempt interest	(7)	(0.2)		(10)	(0.7)		(15)	(0.7)
Tax advantaged investments (including related credits)	(95)	(3.2)		(68)	(5.3)		(50)	(2.3)
Other tax credits	(7)	(0.2)		(6)	(0.5)		(10)	(0.4)
Adjustments for uncertain tax positions	3	0.1		(1)	(0.1)		—	—
Non-deductible FDIC premiums	14	0.5		14	1.1		13	0.6
Legacy tax matters	—	—		(4)	(0.3)		(19)	(0.8)
Other	13	0.4		1	—		7	0.3
Total income tax expense and tax rate	$658	22.1	%	$241	18.5	%	$460	20.4	%


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


	December 31,
(in millions)	2021	2020
Deferred tax assets:
Other comprehensive income	$227	$29
Allowance for credit losses	448	622
State net operating loss carryforwards	50	71
Accrued expenses not currently deductible	676	77
Investment and other tax credit carryforwards	110	99

Total deferred tax assets	1,511	898
Valuation allowance	(103)	(98)
Deferred tax assets, net of valuation allowance	1,408	800
Deferred tax liabilities:
Leasing transactions	331	459
Amortization of intangibles	379	376
Depreciation	256	262
Pension and other employee compensation plans	132	107
Partnerships	95	76
Deferred Income	85	62
MSRs	130	87
Total deferred tax liabilities	1,408	1,429
Net deferred tax liability	$—	$629

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

At December 31, 2021, the Company had state tax net operating loss carryforwards of $812 million. Limitations on the ability to realize these carryforwards are reflected in the associated valuation allowance. At December 31, 2021, the Company had a valuation allowance of $103 million against various deferred tax assets related to state net operating losses and state tax credits, as it is management’s current assessment that it is more likely than not that the Company will not recognize a portion of the deferred tax assets related to these items. The valuation allowance increased $5 million during the year ended December 31, 2021.

Effective with the fiscal year ended September 30, 1997, the reserve method for bad debts was no longer permitted for tax purposes. The repeal of the reserve method required the recapture of the reserve balance in excess of certain base year reserve amounts attributable to years ended prior to 1988. At December 31, 2021, the Company’s base year loan loss reserves attributable to years ended prior to 1988, for which no deferred income taxes have been provided, was $557 million. This base year reserve may become taxable if certain distributions are made with respect to the stock of the Company or if the Company ceases to qualify as a bank for tax purposes. No actions are planned that would cause this reserve to become wholly or partially taxable.

Citizens files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state and local income tax examinations by major tax authorities for years before 2018.


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


	December 31,
(in millions)	2021	2020	2019
Balance at the beginning of the year	$4	$5	$8
Gross increase for tax positions related to current year	1	—	—
Gross increase for tax positions related to prior years	3	—	—
Gross decrease for tax positions related to prior years	—	—	(2)
Decrease for tax positions as a result of the lapse of the statutes of limitations	(1)	(1)	(1)
Decrease for tax positions related to settlements with taxing authorities	—	—	—
Balance at end of year	$7	$4	$5

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

Included in the total amount of unrecognized tax benefits at December 31, 2021, are potential benefits of $7 million that, if recognized, would impact the effective tax rate.

Citizens classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company released $1 million of accrued interest through income tax expense during the year ended December 31, 2020. Citizens had no amounts accrued for the payment of interest at December 31, 2021 and 2020, respectively, and approximately $1 million at December 31, 2019. There were no amounts accrued for penalties as of December 31, 2021, 2020 and 2019, and there were no penalties recognized during the years ended December 31, 2021, 2020 and 2019.

NOTE 24 - EARNINGS PER SHARE

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


	Year Ended December 31,
(in millions, except share and per share data)	2021	2020	2019
Numerator (basic and diluted):
Net income	$2,319	$1,057	$1,791
Less: Preferred stock dividends	113	107	73
Net income available to common stockholders	$2,206	$950	$1,718
Denominator:
Weighted-average common shares outstanding - basic	425,669,451	427,062,537	449,731,453
Dilutive common shares: share-based awards	1,766,367	1,095,243	1,482,248
Weighted-average common shares outstanding - diluted	427,435,818	428,157,780	451,213,701
Earnings per common share:
Basic	$5.18	$2.22	$3.82
Diluted(1)	5.16	2.22	3.81

(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted average antidilutive shares totaling 2,929, 1,338,130 and 783 for the years ended December 31, 2021, 2020 and 2019.

NOTE 25 - REGULATORY MATTERS

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


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Under the U.S. Basel III capital framework, the Company and CBNA must meet the following specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and tier 1 leverage ratio of 4.0%. The Company is imposed a SCB of 3.4% on top of each of the three minimum risk-weighted capital ratios listed above and the Company’s SCB is re-calibrated with each biennial supervisory stress test and updated annually to reflect the Company’s planned common stock dividends and common share buybacks. CBNA is imposed a static CCB of 2.5% on top of each of the three minimum risk-weighted capital ratios listed above. In addition, the Company must not be subject to a written agreement, order or capital directive with any of its regulators. Failure to meet minimum capital requirements can result in the initiation of certain actions that, if undertaken, could have a material effect on the Company’s Consolidated Financial Statements.

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


	Actual			Minimum Capital Adequacy
(in millions, except ratio data)	Amount	Ratio		Amount	Ratio(1)
As of December 31, 2021
CET1 capital	$15,656	9.9	%	$12,548	7.9	%
Tier 1 capital	17,670	11.1		14,930	9.4
Total capital	20,244	12.7		18,107	11.4
Tier 1 leverage	17,670	9.7		7,272	4.0
As of December 31, 2020
CET1 capital	$14,607	10.0	%	$11,596	7.9	%
Tier 1 capital	16,572	11.3		13,797	9.4
Total capital	19,602	13.4		16,733	11.4
Tier 1 leverage	16,572	9.4		7,015	4.0

(1) “Minimum Capital ratio” includes stress capital buffer of 3.4% for 2021 and 2020; N/A to Tier 1 leverage.

The Company’s capital distributions are restricted primarily by the FRB’s SCB framework. Failure to maintain risk-based capital ratios above respective minimum requirements including the SCB would result in graduated restrictions on the Company’s ability to make capital distributions, including common stock dividends, share repurchases, and certain discretionary bonus payments. The timing and exact amount of future dividends and share repurchases will depend on various factors, including the Company’s 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. See Note 17 for more information regarding the Company’s preferred stock issuances, common stock repurchases, and dividends.

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

NOTE 26 - BUSINESS OPERATING SEGMENTS

Citizens is managed by its Chief Executive Officer on a segment basis. The Company’s two business operating segments are Consumer Banking and Commercial Banking. The business segments are determined based on the products and services provided, or the type of customer served. Each segment has a segment head who reports directly to the Chief Executive Officer. The Chief Executive Officer has final authority over resource


						Citizens Financial Group, Inc. \| 146

allocation decisions and performance assessment. The business segments reflect this management structure and the manner in which financial information is currently evaluated by the Chief Executive Officer.

Reportable Segments

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

Consumer Banking

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

Commercial Banking

The Commercial Banking segment primarily targets companies with annual revenues from $25 million to $3.0 billion and provides a full complement of financial products and solutions, including loans, leases, trade financing, deposits, cash management, commercial cards, foreign exchange, interest rate risk management, corporate finance and capital markets advisory capabilities. It focuses on middle-market companies, large corporations and institutions and has dedicated teams with industry expertise in government banking, not-for-profit, healthcare, technology, professionals, oil and gas, asset finance, franchise finance, asset-based lending, commercial real estate, private equity and sponsor finance. While the segment’s business development efforts are predominantly focused in the Company’s footprint, some of its specialized industry businesses also operate selectively on a national basis (such as healthcare, asset finance and franchise finance). A key component of Commercial Banking’s growth strategy is to bring ideas to clients that help their businesses thrive, and in doing so, expand the loan portfolio and ancillary product sales.

Non-segment Operations

Other

Non-segment operations includes assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense not attributed to our Consumer or Commercial Banking segments as well as treasury and community development. In addition to non-segment operations, Other includes goodwill and any associated goodwill impairment charges. For impairment testing purposes, the Company assigns goodwill to its Consumer Banking and Commercial Banking reporting units.

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

FTP adjustments

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


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Provision for credit losses allocation

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

Income tax allocation

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

Expense allocation

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

Goodwill

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

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


	As of and for the Year Ended December 31, 2021
(in millions)	Consumer Banking	Commercial Banking	Other	Consolidated
Net interest income	$3,562	$1,706	($756)	$4,512
Noninterest income	1,223	809	103	2,135
Total revenue	4,785	2,515	(653)	6,647
Noninterest expense	2,987	973	121	4,081
Profit (loss) before provision for credit losses	1,798	1,542	(774)	2,566
Provision for credit losses	185	156	(752)	(411)
Income (loss) before income tax expense (benefit)	1,613	1,386	(22)	2,977
Income tax expense (benefit)	410	300	(52)	658
Net income (loss)	$1,203	$1,086	$30	$2,319
Total average assets	$75,509	$57,617	$51,980	$185,106


	As of and for the Year Ended December 31, 2020
(in millions)	Consumer Banking	Commercial Banking	Other	Consolidated
Net interest income	$3,311	$1,643	($368)	$4,586
Noninterest income	1,655	595	69	2,319
Total revenue	4,966	2,238	(299)	6,905
Noninterest expense	2,964	860	167	3,991
Profit (loss) before provision for credit losses	2,002	1,378	(466)	2,914
Provision for credit losses	288	398	930	1,616
Income (loss) before income tax expense (benefit)	1,714	980	(1,396)	1,298
Income tax expense (benefit)	429	206	(394)	241
Net income (loss)	$1,285	$774	($1,002)	$1,057
Total average assets	$72,022	$60,839	$43,581	$176,442


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

NOTE 27 - PARENT COMPANY FINANCIALS

Condensed Statements of Operations


	Year Ended December 31,
(in millions)	2021	2020	2019
OPERATING INCOME:
Income from consolidated subsidiaries and excluding equity in undistributed earnings:
Dividends from banking subsidiaries	$1,120	$900	$1,130
Interest	35	42	48
Management and service fees	64	54	42
Income from nonbank subsidiaries and excluding equity in undistributed earnings:
Dividends from nonbank subsidiaries	57	40	8
Interest	2	4	4
All other operating income	1	1	1
Total operating income	1,279	1,041	1,233
OPERATING EXPENSE:
Salaries and employee benefits	36	27	35
Interest expense	119	120	87
All other expenses	28	30	27
Total operating expense	183	177	149
Income before taxes and undistributed income	1,096	864	1,084
Income taxes	(16)	(16)	(10)
Income before undistributed earnings of subsidiaries	1,112	880	1,094
Equity in undistributed earnings of subsidiaries:
Bank	1,188	170	682
Nonbank	19	7	15
Net income	$2,319	$1,057	$1,791
Other comprehensive income (loss), net of income taxes:
Net pension plan activity arising during the period	$4	($3)	($5)
Net unrealized derivative instrument gains (losses) arising during the period	1	2	2
Other comprehensive income (loss) activity of the Parent Company, net of income taxes	5	(1)	(3)
Other comprehensive income activity of Bank subsidiaries, net of income taxes	(610)	352	683
Total other comprehensive income (loss), net of income taxes	(605)	351	680
Total comprehensive income	$1,714	$1,408	$2,471

In accordance with federal and state banking regulations, dividends paid by CBNA to the Company are subject to certain limitations, see Note 25 for more information. Additionally, see Note 17 for more information regarding the Company’s common and preferred stock dividends.


						Citizens Financial Group, Inc. \| 149

Condensed Balance Sheets


(in millions)	December 31, 2021	December 31, 2020
ASSETS:
Cash and due from banks	$2,266	$2,680
Loans and advances to:
Bank subsidiary	1,148	1,148
Nonbank subsidiaries	150	105
Investments in subsidiaries:
Bank subsidiary	22,742	22,164
Nonbank subsidiaries	325	106
Other assets	140	152
TOTAL ASSETS	$26,771	$26,355
LIABILITIES:
Long-term borrowed funds due to unaffiliated companies	$3,099	$3,441
Other liabilities	252	241
TOTAL LIABILITIES	3,351	3,682
TOTAL STOCKHOLDERS’ EQUITY	23,420	22,673
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$26,771	$26,355

Condensed Cash Flow Statements


	Year Ended December 31,
(in millions)	2021	2020	2019
OPERATING ACTIVITIES
Net income	$2,319	$1,057	$1,791
Adjustments to reconcile net income to net change in cash due to operating activities:
Deferred income taxes	—	17	(8)
Equity in undistributed earnings of subsidiaries	(1,207)	(177)	(697)
Increase (decrease) in other liabilities	34	43	50
(Increase) decrease in other assets	12	(41)	7
Other operating, net	67	48	58
Net change due to operating activities	1,225	947	1,201
INVESTING ACTIVITIES
Investments in and advances to subsidiaries	(196)	(190)	(105)
Repayment of investments in and advances to subsidiaries	125	205	55
Acquisitions, net of cash acquired	(165)	—	—
Other investing, net	(1)	(1)	(1)
Net change due to investing activities	(237)	14	(51)
FINANCING ACTIVITIES
Proceeds from issuance of long-term borrowed funds	—	1,053	500
Repayments of long-term borrowed funds	(350)	(12)	—
Treasury stock purchased	(295)	(270)	(1,220)
Net proceeds from issuance of preferred stock	296	395	730
Redemption of preferred stock	(250)	—	—
Dividends declared and paid to common stockholders	(670)	(672)	(617)
Dividends declared and paid to preferred stockholders	(113)	(98)	(65)
Other financing, net	(20)	(95)	(21)
Net change due to financing activities	(1,402)	301	(693)
Net change in cash and due from banks	(414)	1,262	457
Cash and due from banks at beginning of year	2,680	1,418	961
Cash and due from banks at end of year	$2,266	$2,680	$1,418


						Citizens Financial Group, Inc. \| 150

NOTE 28 - SUBSEQUENT EVENTS

On February 18, 2022, Citizens completed the acquisition of 80 East Coast branches and the national online deposit business from HSBC.

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