Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


						Page
Forward-Looking Statements						6
Introduction						7
Financial Performance						8
Results of Operations						10
Net Interest Income						10
Noninterest Income						11
Noninterest Expense						12
Provision for Credit Losses						12
Income Tax Expense						12
Business Operating Segments						12
Analysis of Financial Condition						14
Securities						14
Loans and Leases						15
Allowance for Credit Losses and Nonaccrual Loans and Leases						15
Deposits						20
Borrowed Funds						20
Capital and Regulatory Matters						20
Liquidity						23
Critical Accounting Estimates						26
A cco unting and Reporting Developments						28
Risk Governance						28
Market Risk						29
Non-GAAP Financial Measures and Reconciliations						33

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FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements regarding potential future share repurchases and future dividends as well as the potential effects of the COVID-19 disruption and Russia’s invasion of Ukraine on our business, operations, financial performance and prospects, are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook,” “guidance” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.”

Forward-looking statements are based upon the current beliefs and expectations of management, and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:

Negative economic and political conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of nonaccrual assets, charge-offs and provision expense;
The rate of growth in the economy and employment levels, as well as general business and economic conditions, and changes in the competitive environment;
Our ability to implement our business strategy, including the cost savings and efficiency components, and achieve our financial performance goals, including through the integration of Investors and the HSBC branches;
The COVID-19 disruption and its effects on the economic and business environments in which we operate;
The impact of Russia’s invasion of Ukraine and the imposition of sanctions on Russia and other actions in response, including on economic and market conditions, inflationary pressures and the interest rate environment, commodity price and foreign exchange rate volatility, and heightened cybersecurity risks;
Our ability to meet heightened supervisory requirements and expectations;
Liabilities and business restrictions resulting from litigation and regulatory investigations;
Our capital and liquidity requirements under regulatory capital standards and our ability to generate capital internally or raise capital on favorable terms;
The effect of changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
Changes in interest rates and market liquidity, as well as the magnitude of such changes, which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;
The effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;
Financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses;
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber-attacks;
Greater than expected costs or other difficulties related to the integration of our business and that of Investors and the relevant HSBC branches;

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The inability to retain existing Investors or HSBC clients and employees following the closing of the Investors acquisition and HSBC transaction; and
Management’s ability to identify and manage these and other risks.

In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, risk-weighted assets, capital impacts of strategic initiatives, market conditions and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares from or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends. Further, statements about the effects of the COVID-19 disruption and Russia’s invasion of Ukraine on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic and Russia’s invasion of Ukraine, actions taken by governmental authorities in response to the pandemic and Russia’s invasion of Ukraine, and the direct and indirect impact of the pandemic and Russia’s invasion of Ukraine on our customers, third parties and us.

More information about factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section in Part II, Item 1A of this report and Part I, Item 1A of our 2021 Form 10-K.

INTRODUCTION

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions with $192.1 billion in assets as of March 31, 2022. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. We help our customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a full-service customer contact center and, including the acquisition of Investors, the convenience of approximately 3,300 ATMs and more than 1,200 branches in 14 states and the District of Columbia. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer a broad complement of financial products and solutions, including lending and leasing, deposit and treasury management services, foreign exchange, interest rate and commodity risk management solutions, as well as loan syndication, corporate finance, merger and acquisition, and debt and equity capital markets capabilities. More information is available at www.citizensbank.com.

On February 18, 2022, CBNA completed the acquisition of HSBC East Coast branches and national online deposit business. The transaction extends our physical presence and adds customers in several attractive markets, accelerating our national expansion strategy. The transaction includes 66 locations in the New York City metropolitan area, 9 locations in the Mid-Atlantic/Washington D.C. area, and 5 locations in Southeast Florida.

On April 6, 2022, Citizens completed the acquisition of all outstanding shares of Investors for a combination of stock and cash. The acquisition enhances Citizens’ banking franchise, adding an attractive middle market, small business and consumer customer base while building our physical presence in the Mid-Atlantic region with the addition of 154 branches located in the greater New York City and Philadelphia metropolitan areas and across New Jersey.

For additional information regarding these acquisitions see Note 2.

The following MD&A is intended to assist readers in their analysis of the accompanying unaudited interim Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes to the unaudited interim Consolidated Financial Statements in Part I, Item 1, as well as other information contained in this document and our 2021 Form 10-K.

Non-GAAP Financial Measures

This document contains non-GAAP financial measures denoted as “Underlying” results. Underlying results for any given reporting period exclude certain items that may occur in that period which management does not consider indicative of our on-going financial performance. We believe these non-GAAP financial measures provide

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useful information to investors because they are used by management to evaluate our operating performance and make day-to-day operating decisions. In addition, we believe our Underlying results in any given reporting period reflect our on-going financial performance, increase comparability of period-to-period results, and are useful to consider in addition to our GAAP financial results.

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

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

FINANCIAL PERFORMANCE

Quarter to Date and Period End - Key Highlights

Net income of $420 million decreased $191 million from the first quarter of 2021, with earnings per diluted common share of $0.93, down $0.44 from $1.37 per diluted common share in the first quarter of 2021. ROTCE of 11.4% decreased from 17.2% in the first quarter of 2021.

In the first quarter of 2022, results reflect $56 million of expenses, net of tax benefit, or $0.14 per diluted common share, from notable items compared to $15 million of expenses, net of tax benefit, or $0.04 per diluted common share, from notable items in the first quarter of 2021.


Table 1: Notable Items
	Three Months Ended March 31, 2022
		Less: notable items
(in millions)	Reported results (GAAP)	Integration costs(1)	TOP and other(2)	Provision(3)	Underlying results (non-GAAP)
Provision (benefit) for credit losses	$3	$—	$—	$24	($21)
Noninterest expense	1,106	37	11	—	1,058
Income tax expense	116	(10)	—	(6)	132


	Three Months Ended March 31, 2021
		Less: notable items
(in millions)	Reported results (GAAP)	Integration costs	TOP and other(2)	Provision	Underlying results (non-GAAP)
Provision (benefit) for credit losses	($140)	$—	$—	$—	($140)
Noninterest expense	1,018	—	20	—	998
Income tax expense	170	—	(5)	—	175

(1) Includes integration costs associated with acquisitions.

(2) Includes our TOP transformational and revenue and efficiency initiatives for the three months ended March 31, 2022 and 2021, and income tax impacts related to legacy tax matters for the three months ended March 31, 2022.

(3) Includes the initial provision for credit losses of $24 million tied to the HSBC transaction. As required by purchase accounting, a fair value mark for performing loans including both credit and interest rate components is recorded in addition to the provision for credit losses expense, thus the credit exposure has been “double counted”.

Net income available to common stockholders of $396 million decreased $192 million, compared to $588 million in the first quarter of 2021.

◦On an Underlying basis, which excludes notable items, net income available to common stockholders of $452 million compared with $603 million in the first quarter of 2021.

◦On an Underlying basis, earnings per diluted common share of $1.07 compared to $1.41 in the first quarter of 2021.

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Total revenue of $1.6 billion decreased $14 million, or 1%, from the first quarter of 2021, driven by a decline of 8% in noninterest income, partially offset by a 3% increase in net interest income.

◦Net interest income of $1.1 billion increased 3%, reflecting 3% growth in interest-earning assets and broadly stable net interest margin.

◦Net interest margin of 2.75% was stable compared to the first quarter of 2021.

–Net interest margin on a FTE basis of 2.75% decreased 1 basis point, compared to 2.76% in the first quarter of 2021, as the impact of lower earning-asset yields was largely offset by the deployment of cash into loan growth.

–Average loans and leases of $129.2 billion increased $6.3 billion, or 5%, from $122.8 billion in the first quarter of 2021, driven by a $6.6 billion increase in retail loans given growth in mortgage, auto and education, and the impact of the HSBC transaction, partially offset by planned run-off of personal unsecured installment loans and a $304 million decrease in commercial as growth was more than offset by a reduction in PPP loans.

*–*Average deposits of $155.1 billion increased $8.4 billion, or 6%, from $146.6 billion in the first quarter of 2021, driven by the impact of the HSBC transaction and growth in demand, checking with interest and savings, partially offset by a decrease in money market and term.

**◦**Noninterest income of $498 million decreased $44 million, or 8%, from the first quarter of 2021, primarily reflecting lower mortgage banking fees partially offset by improved capital markets fees, foreign exchange and derivative products revenue, and other income.

Noninterest expense of $1.1 billion increased by 9% from the first quarter of 2021.

**◦**On an Underlying basis, noninterest expense increased 6% from the first quarter of 2021, reflecting higher salaries and employee benefits given merit increases, and other operating expense associated with increased travel and advertising costs, partially offset by the benefit of efficiency initiatives.

The efficiency ratio of 67.2% compared to 61.4% for the first quarter of 2021, and ROTCE of 11.4% compared to 17.2%.

◦On an Underlying basis, the efficiency ratio of 64.3% compared to 60.2% for the first quarter of 2021, and ROTCE of 13.0% compared to 17.6%.

Credit provision expense of $3 million compares with a $140 million credit provision benefit for the first quarter of 2021, reflecting strong credit performance across the retail and commercial loan portfolios. The first quarter 2022 Underlying credit provision benefit excludes the “double count” of the $24 million day-one CECL provision expense tied to the HSBC transaction.
Tangible book value per common share of $30.97 decreased 6% from the first quarter of 2021.

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RESULTS OF OPERATIONS

Net Interest Income

Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on our average interest-earning assets and the effective cost of our interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to “—Market Risk — Non-Trading Risk,” and “—Risk Governance” as described in our 2021 Form 10-K.


Table 2: Major Components of Net Interest Income
	Three Months Ended March 31,
2022					2021					Change
(dollars in millions)	Average Balances	Income/ Expense	Yields/ Rates			Average Balances	Income/ Expense	Yields/ Rates			Average Balances	Yields/ Rates (bps)
Assets:
Interest-bearing cash and due from banks and deposits in banks	$8,055	$4	0.21	%		$10,861	$3	0.11	%		($2,806)	10 bps
Taxable investment securities	29,245	138	1.88			27,031	128	1.89			2,214	(1)
Non-taxable investment securities	2	—	2.60			3	—	2.60			(1)	—
Total investment securities	29,247	138	1.88			27,034	128	1.89			2,213	(1)
Commercial and industrial	44,947	328	2.91			44,287	347	3.12			660	(21)
Commercial real estate	14,066	90	2.57			14,675	94	2.57			(609)	—
Leases	1,560	11	2.81			1,915	13	2.69			(355)	12
Total commercial loans and leases	60,573	429	2.83			60,877	454	2.98			(304)	(15)
Residential mortgages	23,461	169	2.88			19,388	148	3.05			4,073	(17)
Home equity	12,124	90	3.02			12,001	95	3.20			123	(18)
Automobile	14,534	127	3.55			12,229	125	4.14			2,305	(59)
Education	13,034	131	4.07			12,436	134	4.38			598	(31)
Other retail	5,428	102	7.63			5,916	105	7.25			(488)	38
Total retail loans	68,581	619	3.65			61,970	607	3.96			6,611	(31)
Total loans and leases	129,154	1,048	3.26			122,847	1,061	3.47			6,307	(21)
Loans held for sale, at fair value	2,366	16	2.70			3,254	18	2.27			(888)	43
Other loans held for sale	454	7	5.89			385	6	6.30			69	(41)
Interest-earning assets	169,276	1,213	2.88			164,381	1,216	2.97			4,895	(9)
Noninterest-earning assets	19,041					18,188					853
Total assets	$188,317					$182,569					$5,748
Liabilities and Stockholders’ Equity:
Checking with interest	$30,417	$5	0.07	%		$26,116	$6	0.09	%		$4,301	(2)
Money market	47,220	12	0.10			49,536	22	0.18			(2,316)	(8)
Savings	23,835	5	0.08			18,611	5	0.11			5,224	(3)
Term	4,970	3	0.29			8,572	17	0.83			(3,602)	(54)
Total interest-bearing deposits	106,442	25	0.10			102,835	50	0.20			3,607	(10)
Short-term borrowed funds	29	—	3.50			150	—	0.46			(121)	304
Long-term borrowed funds	6,066	41	2.66			8,336	49	2.35			(2,270)	31
Total borrowed funds	6,095	41	2.66			8,486	49	2.32			(2,391)	34
Total interest-bearing liabilities	112,537	66	0.23			111,321	99	0.36			1,216	(13)
Demand deposits	48,641					43,814					4,827
Other liabilities	4,144					4,858					(714)
Total liabilities	165,322					159,993					5,329
Stockholders’ equity	22,995					22,576					419
Total liabilities and stockholders’ equity	$188,317					$182,569					$5,748
Interest rate spread			2.65	%				2.62	%			3
Net interest income and net interest margin		$1,147	2.75	%			$1,117	2.75	%			—
Net interest income and net interest margin, FTE(1)		$1,149	2.75	%			$1,120	2.76	%			(1)
Memo: Total deposits (interest-bearing and demand)	$155,083	$25	0.07	%		$146,649	$50	0.14	%		$8,434	(7) bps

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

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Net interest income of $1.1 billion increased 3% from the first quarter of 2021, reflecting 3% growth in interest-earning assets and broadly stable net interest margin.

Net interest margin on a FTE basis of 2.75% decreased 1 basis point compared to 2.76% in the first quarter of 2021, as the impact of lower earning asset yields was largely offset by the deployment of cash into loan growth. Average interest-earning asset yields of 2.88% decreased 9 basis points from 2.97% in the first quarter of 2021, while average interest-bearing liability costs of 0.23% decreased 13 basis points from 0.36% in the first quarter of 2021.

Average interest-earning assets of $169.3 billion increased $4.9 billion, or 3%, from the first quarter of 2021, as a $2.2 billion, or 8% increase in investments and a $6.3 billion, or 5%, increase in loans and leases was partially offset by a $2.8 billion decrease in cash held in interest-bearing deposits reflecting partial deployment of elevated liquidity. Loan growth was driven by a $6.6 billion increase in retail loans given growth in mortgage, auto and education, partially offset by planned runoff of personal unsecured installment loans. Commercial loans decreased $304 million as growth was more than offset by a $4.2 billion reduction in PPP loans.

Average deposits of $155.1 billion increased $8.4 billion, or 6%, from the first quarter of 2021, reflecting growth in lower cost deposits and the $2.9 billion impact of the HSBC transaction, partially offset by decreases in money market and term. Average total borrowed funds of $6.1 billion decreased $2.4 billion from the first quarter of 2021, given the pay down of senior debt. Total borrowed funds costs of $41 million decreased $8 million from the first quarter of 2021. The total borrowed funds cost of 2.66% increased 34 basis points from 2.32% in the first quarter of 2021.

Noninterest Income


Table 3: Noninterest Income
	Three Months Ended March 31,
(in millions)		2022	2021	Change	Percent
Capital markets fees		$93	$81	$12	15	%
Service charges and fees		98	99	(1)	(1)
Mortgage banking fees		69	165	(96)	(58)
Card fees		60	55	5	9
Trust and investment services fees		61	58	3	5
Letter of credit and loan fees		38	38	—	—
Foreign exchange and derivative products		51	28	23	82
Securities gains, net		4	3	1	33
Other income(1)		24	15	9	60
Noninterest income		$498	$542	($44)	(8	%)

(1) Includes bank-owned life insurance income and other income for all periods presented.

Noninterest income decreased $44 million, or 8%, from the first quarter of 2021, primarily reflecting lower mortgage banking fees partially offset by improved capital markets fees, foreign exchange and derivative products revenue, and other income.

The decrease in mortgage banking fees was driven by lower gain-on-sale margins and production volumes.
Companies we acquired in the second half of 2021 contributed $21 million of capital market fees in the first quarter of 2022. Excluding these acquisitions, capital markets fees reflect lower merger and acquisition advisory and underwriting fees, partially offset by higher loan syndication fees.
Record foreign exchange and derivative products revenue increased reflecting growth in client interest rate and commodities hedging activity.
The increase in other income primarily reflects higher investment income.

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Noninterest Expense


Table 4: Noninterest Expense
	Three Months Ended March 31,
(in millions)		2022	2021	Change	Percent
Salaries and employee benefits		$594	$548	$46	8	%
Equipment and software		150	152	(2)	(1)
Outside services		169	139	30	22
Occupancy		83	88	(5)	(6)
Other operating expense		110	91	19	21
Noninterest expense		$1,106	$1,018	$88	9	%

Noninterest expense increased $88 million, or 9%, compared to the first quarter of 2021. On an Underlying basis, noninterest expense of $1.1 billion increased $60 million, or 6%, reflecting higher salaries and employee benefits given merit increases, and other operating expense associated with increased travel and advertising costs, partially offset by the benefit of efficiency initiatives.

Provision for Credit Losses

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

Credit provision expense was $3 million for the first quarter of 2022, compared to a credit provision benefit of $140 million in the first quarter of 2021, reflecting strong economic growth that began in the fourth quarter of 2020 and continued solid credit performance. Underlying credit provision benefit of $21 million in the first quarter of 2022 excludes the “double count” of the $24 million day-one CECL provision expense tied to the HSBC transaction.

Income Tax Expense

Income tax expense of $116 million for the first quarter of 2022 decreased $54 million from $170 million in the first quarter of 2021 due to decreased taxable income. The effective income tax rate decreased to 21.7% in the first quarter of 2022 from 21.8% in the first quarter of 2021, primarily driven by the increased benefit of tax-advantaged investments on lower pre-tax income.

Business Operating Segments

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

Non-segment operations are classified as Other and include 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, for impairment testing purposes, we allocate all goodwill to our Consumer Banking and Commercial Banking reporting units.

There have been no significant changes in our methodologies used to allocate items to our business operating segments as described in “—Results of Operations — Business Operating Segments” in our 2021 Form 10-K other than the change relative to our FTP methodology. See Note 17 for additional information.

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The following table presents certain financial data of our business operating segments. Total business operating segment financial results differ from total consolidated financial results. These differences are reflected in Other non-segment operations. See Note 17 for additional information.


Table 5: Selected Financial Data for Business Operating Segments
	Consumer Banking		Commercial Banking
	Three Months Ended March 31,		Three Months Ended March 31,
(dollars in millions)	2022	2021	2022	2021
Net interest income	$857	$863	$416	$421
Noninterest income	257	351	213	170
Total revenue	1,114	1,214	629	591
Noninterest expense	784	750	272	227
Profit before credit losses	330	464	357	364
Net charge-offs	49	59	12	101
Income before income tax expense	281	405	345	263
Income tax expense	72	103	74	52
Net income	$209	$302	$271	$211
Average Balances:
Total assets	$77,551	$75,283	$61,118	$57,738
Total loans and leases(1)	73,233	70,188	58,007	54,813
Deposits	104,663	97,180	44,520	43,974
Interest-earning assets	74,052	71,135	58,312	55,175

(1) Includes LHFS.

Consumer Banking

Net interest income of $857 million decreased $6 million, or 1%, from the first quarter of 2021, driven by a reduced benefit from PPP loan forgiveness, partially offset by loan growth, including the impacts from the HSBC transaction. Average loans increased $3.0 billion driven by higher residential mortgages, including approximately $480 million from the HSBC transaction, automobile and education, partially offset by the impact of the reduction in PPP loans and planned runoff of personal unsecured installment loans. Deposits increased $7.5 billion, or 8%, including the $2.9 billion impact of the HSBC transaction. Growth in demand, checking with interest and savings were partially offset by decreases in money market and term.

Noninterest income decreased $94 million, or 27%, from the first quarter of 2021, driven by lower mortgage banking fees reflecting lower gain-on-sale margins and production volumes. This decrease was partially offset by higher trust and investment services fees driven by an increase in assets under management from strong net inflows and higher equity market levels, and higher card fees driven by higher debit and credit card volumes.

Noninterest expense increased $34 million, or 5%, from the first quarter of 2021, reflecting higher salaries and employee benefits given merit increases, as well as higher other operating expense associated with increased travel and advertising costs, partially offset by the benefit of efficiency initiatives.

Net charge-offs of $49 million decreased $10 million, or 17%, as consumers continue to benefit from the the fiscal support provided during the pandemic, the rapid growth in jobs, and elevated residential mortgage and auto loan collateral values.

Commercial Banking

Net interest income of $416 million decreased $5 million, or 1%, from $421 million in the first quarter of 2021, driven by lower earning asset yields, partially offset by improved funding mix and deposit pricing.

Noninterest income of $213 million increased $43 million, or 25%, from $170 million in the first quarter of 2021, driven by record foreign exchange and derivative products revenue reflecting increased client interest-rate and commodities hedging activity and capital markets fees driven by higher loan syndication fees, partially offset by lower mergers and acquisitions advisory and underwriting fees.

Noninterest expense of $272 million increased $45 million, or 20%, from $227 million in the first quarter of 2021, reflecting higher salaries and employee benefits given merit increases, as well as higher other operating expense associated with increased travel and advertising costs, partially offset by the benefit of efficiency initiatives.

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Net charge-offs of $12 million decreased $89 million, or 88%, from the first quarter of 2021 given the strong economic growth that began in the fourth quarter of 2020 and continued solid credit performance.

ANALYSIS OF FINANCIAL CONDITION

Securities


Table 6: Amortized Cost and Fair Value of AFS and HTM Securities
	March 31, 2022		December 31, 2021
(in millions)	Amortized Cost	Fair Value	Amortized Cost	Fair Value
U.S. Treasury and other	$158	$154	$11	$11
State and political subdivisions	2	2	2	2
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	25,074	23,498	24,607	24,442
Other/non-agency	412	401	397	405
Total mortgage-backed securities	25,486	23,899	25,004	24,847

Collateralized loan obligations	1,276	1,264	1,208	1,207
Total debt securities available for sale, at fair value	$26,922	$25,319	$26,225	$26,067
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	$1,370	$1,355	$1,505	$1,557

Total mortgage-backed securities	1,370	1,355	1,505	1,557
Asset-backed securities	686	656	737	732
Total debt securities held to maturity	$2,056	$2,011	$2,242	$2,289
Total debt securities available for sale and held to maturity	$28,978	$27,330	$28,467	$28,356
Equity securities, at cost	$611	$611	$624	$624
Equity securities, at fair value	130	130	109	109

Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality, and market risk while achieving returns that align with our overall portfolio management strategy. The portfolio primarily includes high quality, highly liquid investments reflecting our ongoing commitment to maintain strong contingent liquidity levels and pledging capacity. U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 92% of the fair value of our debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge those securities to the FHLB for collateral purposes. For further discussion of the liquidity coverage ratios, see “Regulation and Supervision — Liquidity Requirements” in our 2021 Form 10-K.

The fair value of the AFS debt securities portfolio of $25.3 billion at March 31, 2022 decreased $748 million from $26.1 billion at December 31, 2021, reflecting $697 million in portfolio growth offset by a $1.4 billion increase in unrealized losses driven by higher rates. The decline in fair value of the HTM debt securities portfolio of $278 million reflects $191 million from portfolio runoff and $87 million due to higher rates.

As of March 31, 2022, the portfolio’s average effective duration was 5.3 years compared with 4.3 years as of December 31, 2021, as higher long-term rates drove a decrease in both actual and projected securities prepayment speeds. We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetite in the context of the broader interest rate risk framework and limits.

Citizens Financial Group, Inc. | 14

Loans and Leases


Table 7: Composition of Loans and Leases, Excluding LHFS
(in millions)	March 31, 2022	December 31, 2021	Change	Percent
Commercial and industrial(1)	$45,724	$44,500	$1,224	3	%
Commercial real estate	14,268	14,264	4	—
Leases	1,529	1,586	(57)	(4)
Total commercial	61,521	60,350	1,171	2
Residential mortgages	24,211	22,822	1,389	6
Home equity	12,264	12,015	249	2
Automobile	14,439	14,549	(110)	(1)
Education	13,306	12,997	309	2
Other retail	5,564	5,430	134	2
Total retail	69,784	67,813	1,971	3
Total loans and leases	$131,305	$128,163	$3,142	2	%

Total loans and leases increased $3.1 billion from $128.2 billion as of December 31, 2021, driven by 3% growth in retail, including the impact of the HSBC transaction, as well as growth in mortgage, education and home equity, and 2% growth in commercial.

Allowance for Credit Losses and Nonaccrual Loans and Leases

The ACL is a reserve to absorb estimated future credit losses in accordance with GAAP. For additional information regarding the ACL, see Note 5 of this report, and “—Critical Accounting Estimates — Allowance for Credit Losses” and Note 6 in our 2021 Form 10-K.

The ACL of $1.9 billion at March 31, 2022 remained stable compared to December 31, 2021. For further information, see Note 5.


Table 8: ACL and Related Coverage Ratios by Portfolio
	March 31, 2022				December 31, 2021
(in millions)	Loans and Leases	Allowance	Coverage		Loans and Leases	Allowance	Coverage
Allowance for Loan and Lease Losses
Commercial and industrial	$45,724	$525	1.15	%	$44,500	$555	1.25	%
Commercial real estate	14,268	214	1.50		14,264	220	1.54
Leases	1,529	39	2.54		1,586	46	2.92
Total commercial	61,521	778	1.26		60,350	821	1.36
Residential mortgages	24,211	144	0.60		22,822	144	0.63
Home equity	12,264	78	0.64		12,015	82	0.69
Automobile	14,439	149	1.03		14,549	154	1.05
Education	13,306	321	2.41		12,997	308	2.37
Other retail	5,564	250	4.49		5,430	249	4.59
Total retail	69,784	942	1.35		67,813	937	1.38
Total loans and leases	$131,305	$1,720	1.31	%	$128,163	$1,758	1.37	%
Allowance for Unfunded Lending Commitments
Commercial(1)		$147	1.50	%		$153	1.61	%
Retail(2)		11	1.37			23	1.42
Total allowance for unfunded lending commitments		158				176
Allowance for credit losses	$131,305	$1,878	1.43	%	$128,163	$1,934	1.51	%

(1) Coverage ratio includes total commercial allowance for unfunded lending commitments and total commercial allowance for loan and lease losses in the numerator and total commercial loans and leases in the denominator.

(2) Coverage ratio includes total retail allowance for unfunded lending commitments and total retail allowance for loan losses in the numerator and total retail loans in the denominator.

Citizens Financial Group, Inc. | 15


Table 9: Nonaccrual Loans and Leases
(dollars in millions)	March 31, 2022		December 31, 2021		Change		Percent
Commercial and industrial	$200		$171		$29		17	%
Commercial real estate	11		11		—		—
Leases	1		1		—		—
Total commercial	212		183		29		16
Residential mortgages(1)	243		201		42		21
Home equity	239		220		19		9
Automobile	52		55		(3)		(5)
Education	23		23		—		—
Other retail	20		20		—		—
Total retail	577		519		58		11
Nonaccrual loans and leases	$789		$702		$87		12	%
Nonaccrual loans and leases to total loans and leases	0.60	%	0.55	%	5	bps
Allowance for loan and lease losses to nonaccrual loans and leases	218		251		(3,264)
Allowance for credit losses to nonaccrual loans and leases	238		276		(3,769)

(1) Loans fully or partially guaranteed by the FHA, VA and USDA are classified as accruing.

Nonaccrual loans and leases of $789 million as of March 31, 2022 increased $87 million, or 12%, from December 31, 2021, primarily due to residential real estate secured loans exiting forbearance. Total commercial nonaccrual loans and leases were 0.3% of the commercial portfolio as of March 31, 2022 and December 31, 2021.


Table 10: Ratio of Net Charge-Offs to Average Loans and Leases
	Three Months Ended March 31,
	2022				2021
(dollars in millions)	Net Charge-Offs	Average Balance	Ratio		Net Charge-Offs	Average Balance	Ratio
Commercial and industrial	$11	$44,947	0.10	%	$77	$44,287	0.70	%
Commercial real estate	—	14,066	—		26	14,675	0.73
Leases	—	1,560	0.10		1	1,915	0.26
Total commercial	11	60,573	0.08		104	60,877	0.69
Residential mortgages	—	23,461	—		(1)	19,388	(0.01)
Home equity	(9)	12,124	(0.32)		(7)	12,001	(0.25)
Automobile	6	14,534	0.18		11	12,229	0.35
Education	16	13,034	0.49		7	12,436	0.24
Other retail	35	5,428	2.61		44	5,916	3.00
Total retail	48	68,581	0.28		54	61,970	0.35
Total loans and leases	$59	$129,154	0.19	%	$158	$122,847	0.52	%

First quarter 2022 NCOs of $59 million decreased $99 million, or 63%, from $158 million in the first quarter of 2021, driven by decreases in commercial and retail of $93 million and $6 million, respectively. First quarter 2022 annualized net charge-offs of 0.19% of average loans and leases were down 33 basis points from first quarter of 2021.

Retail NCOs declined as consumers continue to benefit from the fiscal support provided during the pandemic, the rapid growth in jobs, and elevated residential mortgage and auto loan collateral values. Commercial NCOs decreased given the strong economic growth that began in the fourth quarter of 2020 and continued solid credit performance. However, we continue to assess risks to the macroeconomic environment. While the outlook is positive, uncertainty exists given changing monetary and fiscal policies, the recent surge in inflation and higher inflation expectations, labor shortages, continuing supply-chain challenges, and possible consequences from Russia’s invasion of Ukraine.

Citizens Financial Group, Inc. | 16

Commercial Loan Asset Quality

Our commercial portfolio consists of traditional commercial and industrial loans, commercial leases and commercial real estate loans. The portfolio is predominantly focused on customers in our footprint and adjacent states in which we have a physical presence where our local delivery model provides for strong client connectivity. Additionally, we also do business in certain specialized industry sectors on a national basis. As discussed in our 2021 Form 10-K, we utilize regulatory classification ratings to monitor credit quality for commercial loans and leases.


Table 11: Commercial Loans and Leases by Regulatory Classification
	March 31, 2022
		Criticized
(in millions)	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial	$43,594	$845	$1,109	$176	$45,724
Commercial real estate	13,273	512	472	11	14,268
Leases	1,509	8	11	1	1,529
Total commercial	$58,376	$1,365	$1,592	$188	$61,521


	December 31, 2021
		Criticized
(in millions)	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial	$42,254	$809	$1,294	$143	$44,500
Commercial real estate	13,319	406	528	11	14,264
Leases	1,512	49	24	1	1,586
Total commercial	$57,085	$1,264	$1,846	$155	$60,350

Total commercial criticized balances of $3.1 billion as of March 31, 2022 decreased $120 million compared with December 31, 2021. Commercial criticized as a percent of total commercial of 5.1% at March 31, 2022 decreased from 5.4% at December 31, 2021.

Commercial and industrial criticized balances of $2.1 billion, or 4.7% of the total commercial and industrial loan portfolio as of March 31, 2022, decreased from $2.2 billion, or 5.0%, as of December 31, 2021. The percentage decrease was driven by an increase in total commercial and industrial net book balances, with a modest decrease in the criticized net book balances primarily attributable to loan payoffs. Commercial and industrial criticized loans represented 68% of total criticized loans as of March 31, 2022 compared to 69% as of December 31, 2021.

Commercial real estate criticized balances of $995 million, or 7.0% of the commercial real estate portfolio, increased from $945 million, or 6.6% as of December 31, 2021. The increase was primarily driven by downgrades from lowest pass for a limited number of higher net book balance loans. Loss content, however, remained stable. Commercial real estate accounted for 32% of total criticized loans as of March 31, 2022 compared to 29% as of December 31, 2021.

Citizens Financial Group, Inc. | 17


Table 12: Commercial Loans and Leases by Industry Sector
	March 31, 2022			December 31, 2021
(dollars in millions)	Balance	% of Total Loans and Leases		Balance	% of Total Loans and Leases
Finance and insurance	$9,610	7	%	$9,301	7	%
Health, pharma, and social assistance	2,862	2		2,912	2
Accommodation and food services	3,442	3		3,438	3
Professional, scientific, and technical services	2,836	2		2,665	2
Other manufacturing	4,162	3		4,087	3
Technology	4,183	3		4,220	3
Retail trade	2,400	2		2,237	2
Energy and related	2,044	2		2,017	2
Wholesale trade	2,678	2		2,358	2
Arts, entertainment, and recreation	1,107	1		1,189	1
Other services	1,911	2		2,051	2
Administrative and waste management services	1,424	1		1,396	1
Transportation and warehousing	1,302	1		1,147	1
Consumer products manufacturing	1,303	1		1,192	1
Automotive	1,208	1		1,172	1
Educational services	553	—		573	—
Chemicals	939	1		896	1
Real estate and rental and leasing	968	1		739	—
All other(1)	375	—		123	—
Total commercial and industrial	45,307	35		43,713	34
Real estate and rental and leasing	12,807	10		12,773	10
Accommodation and food services	615	—		605	—
Finance and insurance	624	1		624	1
All other(1)	222	—		262	—
Total commercial real estate	14,268	11		14,264	11
Total leases	1,529	1		1,586	1
Total commercial(2)	$61,104	47	%	$59,563	46	%

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

(2) Excludes PPP loans of $417 million and $787 million as of March 31, 2022 and December 31, 2021, respectively.

Retail Loan Asset Quality

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

Citizens Financial Group, Inc. | 18


Table 13: Retail Loan Portfolio Analysis
	March 31, 2022										December 31, 2021
			Days Past Due and Accruing										Days Past Due and Accruing
(dollars in millions)	Current		30-59		60-89		90+		Nonaccrual		Current		30-59		60-89		90+		Nonaccrual
Residential mortgages(1)	95.32	%	0.24	%	0.17	%	3.27	%	1.00	%	96.03	%	0.45	%	0.23	%	2.41	%	0.88	%
Home equity	97.60		0.34		0.11		—		1.95		97.75		0.32		0.10		—		1.83
Automobile	98.60		0.83		0.21		—		0.36		98.45		0.90		0.27		—		0.38
Education	99.53		0.20		0.08		0.02		0.17		99.45		0.26		0.10		0.01		0.18
Other retail	97.89		1.10		0.40		0.25		0.36		98.18		0.74		0.42		0.29		0.37
Total retail	97.40	%	0.44	%	0.17	%	1.16	%	0.83	%	97.69	%	0.51	%	0.20	%	0.83	%	0.77	%

(1) 90+ days past due and accruing includes $792 million and $544 million of loans fully or partially guaranteed by the FHA, VA, and USDA at March 31, 2022 and December 31, 2021, respectively.

For more information on the aging of accruing and nonaccrual retail loans, see Note 5.


Table 14: Retail Asset Quality Metrics
	March 31, 2022		December 31, 2021
Average refreshed FICO for total portfolio	768		768
CLTV ratio for secured real estate(1)	54	%	56	%
Nonaccrual retail loans as a percentage of total retail	0.83	%	0.77	%

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

Troubled Debt Restructurings

In the first quarter of 2020, we adopted the CARES Act and interagency guidance issued by the bank regulatory agencies which provide that COVID-19-related modifications to retail and commercial loans that met certain eligibility criteria are exempt from classification as a TDR. We generally do not consider payment deferrals and forbearance plans established due to the COVID-19 pandemic and under the CARES Act to be TDRs. Relief provisions granted under the CARES Act, including the TDR classification exemption for certain eligible loans, expired on December 31, 2021.

For additional information regarding TDRs, see Note 6 in our 2021 Form 10-K.


Table 15: Accruing and Nonaccrual Troubled Debt Restructurings
	March 31, 2022
		As a % of Accruing TDRs
(dollars in millions)	Accruing	30-89 Days Past Due		90+ Days Past Due		Nonaccrual	Total
Commercial and industrial	$189	0.2	%	—	%	$80	$269
Commercial real estate	1	—		—		9	10
Total commercial	190	0.2		—		89	279
Residential mortgages(1)	479	2.5		27.5		78	557
Home equity	169	0.3		—		91	260
Automobile	8	0.2		—		17	25
Education	110	0.4		0.1		11	121
Other retail	18	0.2		—		2	20
Total retail	784	3.6		27.6		199	983
Total	$974	3.8	%	27.6	%	$288	$1,262

Citizens Financial Group, Inc. | 19


	December 31, 2021
		As a % of Accruing TDRs
(dollars in millions)	Accruing	30-89 Days Past Due		90+ Days Past Due		Nonaccrual	Total
Commercial and industrial	$196	—	%	—	%	$74	$270
Commercial real estate	1	—		—		9	10
Total commercial	197	—		—		83	280
Residential mortgages(1)	295	2.9		12.0		42	337
Home equity	183	0.6		—		74	257
Automobile	8	0.2		—		22	30
Education	112	0.5		0.1		11	123
Other retail	20	0.2		—		2	22
Total retail	618	4.5		12.1		151	769
Total	$815	4.5	%	12.1	%	$234	$1,049

(1) Includes $265 million and $98 million in 90+ days past due and accruing that are fully or partially guaranteed by the FHA, VA, and USDA at March 31, 2022 and December 31, 2021, respectively.

Deposits


Table 16: Composition of Deposits
(in millions)	March 31, 2022	December 31, 2021	Change	Percent
Demand	$50,113	$49,443	$670	1	%
Money market	45,342	47,216	(1,874)	(4)
Checking with interest	32,417	30,409	2,008	7
Savings	26,104	22,030	4,074	18
Term	4,800	5,263	(463)	(9)
Total deposits	$158,776	$154,361	$4,415	3	%

Total deposits as of March 31, 2022 increased $4.4 billion, or 3%, to $158.8 billion, from $154.4 billion as of December 31, 2021, driven by the $6.3 billion impact of the HSBC transaction, partially offset by seasonal impacts as well as continued normalization from elevated liquidity levels. Citizens Access®, our national digital platform, had $4.2 billion in deposits as of March 31, 2022, down from $4.4 billion as of December 31, 2021.

Borrowed Funds

Long-term borrowed funds of $5.9 billion as of March 31, 2022 decreased $1.0 billion from December 31, 2021 driven by the redemption of CBNA senior notes during the quarter. For more information regarding our borrowed funds, see “—Liquidity” and Note 8.

CAPITAL AND REGULATORY MATTERS

As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association primarily regulated by the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. For more information, see “Regulation and Supervision” in our 2021 Form 10-K.

Capital Adequacy Process

Our assessment of capital adequacy begins with our board-approved risk appetite and risk management framework. This framework provides for the identification, measurement and management of material risks. There have been no significant changes to our capital adequacy risk appetite and risk management framework as described in “—Capital and Regulatory Matters” in our 2021 Form 10-K.

Under the FRB’s Tailoring Rules, Category IV firms, such as us, are subject to biennial supervisory stress testing and are exempt from company-run stress testing and related disclosure requirements. The FRB supervises Category IV firms on an ongoing basis, including evaluation of the capital adequacy and capital planning processes during off-cycle years. Annually, the FRB requires us to submit a capital plan approved by our board of directors or one of its committees. Our annual capital plan is due each year in April. We submitted our 2022 Capital Plan to the FRB on April 4, 2022. For more information, see the “Tailoring of Prudential Requirements” section in Item 1 of our 2021 Form 10-K.

Citizens Financial Group, Inc. | 20

Under the stress capital buffer (“SCB”) framework, the FRB will not object to capital plans on quantitative grounds and each firm is required to maintain capital ratios above the sum of its minimum and SCB requirements to avoid restrictions on capital distributions and discretionary bonus payments.

For Category IV firms, like us, the SCB will be re-calibrated with each biennial supervisory stress test and updated annually to reflect our planned common stock dividends. In addition, Category IV firms may elect to participate in the supervisory stress test and receive an updated SCB requirement in a year in which they are not subject to the supervisory stress test. Our SCB requirement effective October 1, 2021, through September 30, 2022, is 3.4%. We are subject to the 2022 supervisory stress test conducted by the FRB and expect to receive an updated SCB from the FRB later this year. On March 22, 2022, the FRB approved our application to acquire Investors and indicated that it will use the 2023 stress test to recalculate our SCB to incorporate the effects of the Investors acquisition into our capital requirements.

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

For more information, see the “Regulation and Supervision” and “—Capital and Regulatory Matters” sections in our 2021 Form 10-K.

Regulatory Capital Ratios and Capital Composition

Under the current U.S. Basel III capital framework, we and our banking subsidiary, 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%. As a bank holding company, our SCB of 3.4% is imposed on top of the three minimum risk-based capital ratios listed above and a CCB of 2.5% is imposed on top of the three minimum risk-based capital ratios listed above for our banking subsidiary.

Under the U.S. Basel III rules, the CET1 deduction threshold for MSRs, certain deferred tax assets and investments in the capital of unconsolidated financial institutions is 25%. As of March 31, 2022, we did not meet the threshold for these additional capital deductions. MSRs or certain deferred tax assets not deducted from CET1 capital are assigned a 250% risk weight and investments in the capital of unconsolidated financial institutions not deducted from CET1 capital are assigned an exposure category risk weight.

In reaction to the COVID-19 pandemic, the FRB and the other federal banking regulators adopted a final rule relative to regulatory capital treatment of ACL under CECL. This rule allows electing banking organizations to delay the estimated impact of CECL on regulatory capital for a two-year period ending December 31, 2021, followed by a three-year transition period ending December 31, 2024. The three-year transition period will phase-in the aggregate amount of capital benefit provided during the initial two-year delay. On December 31, 2021, the aggregate amount of capital benefit was $384 million. The reduction in the capital benefit in 2022 is $96 million, or 6 basis points.

For additional discussion of the U.S. Basel III capital framework and its related application, see “Regulation and Supervision” in our 2021 Form 10-K. The table below presents our actual regulatory capital ratios under the U.S. Basel III Standardized rules:


Table 17: Regulatory Capital Ratios Under the U.S. Basel III Standardized Rules
	March 31, 2022			December 31, 2021			Required Minimum Capital Ratios(1)
(in millions, except ratio data)	Amount	Ratio		Amount	Ratio
CET1 capital	$15,643	9.7	%	$15,656	9.9	%	7.9	%
Tier 1 capital	17,657	10.9		17,670	11.1		9.4
Total capital	20,301	12.5		20,244	12.7		11.4
Tier 1 leverage	17,657	9.6		17,670	9.7		4.0
Risk-weighted assets	161,859			158,831
Quarterly adjusted average assets	183,089			181,800

(1) Required “Minimum Capital Ratios” are: CET1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%. “Minimum Capital Ratios” also include a SCB of 3.4%; N/A to Tier 1 leverage.

Citizens Financial Group, Inc. | 21

At March 31, 2022, our CET1 capital, tier 1 capital and total capital ratios were 9.7%, 10.9% and 12.5%, respectively, as compared with 9.9%, 11.1% and 12.7%, respectively, as of December 31, 2021. The CET1 and tier 1 capital ratios decreased driven by $3.0 billion of RWA growth, dividends as described in “—Capital Transactions” below, higher estimated goodwill and intangibles related to the HSBC transaction and a decrease in the modified CECL transition amount as a result of entering the CECL three-year transition period, partially offset by net income for the three months ended March 31, 2022. The total capital ratio decreased due to the changes in the CET1 capital ratio described above and lower AACL partially offset by a reduction in the modified AACL transition amount as a result of entering the CECL three-year transition period. At March 31, 2022, our CET1 capital, tier 1 capital and total capital ratios were approximately 180 basis points, 150 basis points and 110 basis points, respectively, above their regulatory minimums plus our SCB. All ratios remained well above the U.S. Basel III minimums.

Both the Company and CBNA are subject to the standardized approach for determining RWA. At March 31, 2022 RWA totaled $161.9 billion, up $3.0 billion from December 31, 2021, driven by higher commercial and consumer loans including higher home lending loans resulting from the HSBC transaction, MSRs, derivative valuations and market risk, partially offset by lower loans held for sale and commercial commitments.

As of March 31, 2022, the tier 1 leverage ratio was 9.6%, down from 9.7% at December 31, 2021, driven by an increase in quarterly adjusted average assets of $1.3 billion and slightly lower tier 1 capital.


Table 18: Capital Composition Under the U.S. Basel III Capital Framework
(in millions)	March 31, 2022	December 31, 2021
Total common stockholders' equity	$20,060	$21,406
Exclusions:
Modified CECL transitional amount	288	384
Net unrealized (gains)/losses recorded in accumulated other comprehensive income (loss), net of tax:
Debt and equity securities	1,236	156
Derivatives	675	160
Unamortized net periodic benefit costs	347	349
Deductions:
Goodwill	(7,232)	(7,116)
Deferred tax liability associated with goodwill	387	383
Other intangible assets	(117)	(66)
Deferred tax assets that arise from tax loss and credit carryforwards	(1)	—
Total common equity tier 1	15,643	15,656
Qualifying preferred stock	2,014	2,014
Total tier 1 capital	17,657	17,670
Qualifying subordinated debt(1)	1,140	1,138
Allowance for credit losses	1,878	1,934
Exclusions from tier 2 capital:
Modified AACL transitional amount	(374)	(498)
Adjusted allowance for credit losses	1,504	1,436
Total capital	$20,301	$20,244

(1) As of March 31, 2022, and December 31, 2021, the amount of non-qualifying subordinated debt excluded from regulatory capital was $420 million.

See Note 8 for more details on our outstanding subordinated debt.

Capital Transactions

We completed the following capital actions during the three months ended March 31, 2022:

Declared and paid a quarterly common stock dividend of $0.39 per share in the first quarter of 2022, aggregating to $165 million;
Declared a quarterly dividend of $15.94 per share on the 6.375% fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock, aggregating to $5 million;
Declared a quarterly dividend of $15.88 per share on the 6.350% fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock, aggregating to $5 million;

Citizens Financial Group, Inc. | 22

Declared a quarterly dividend of $12.50 per share on the 5.000% fixed-rate non-cumulative perpetual Series E Preferred Stock, aggregating to $5 million;
Declared a quarterly dividend of $14.13 per share on the 5.650% fixed-rate non-cumulative perpetual Series F Preferred Stock, aggregating to $6 million; and
Declared a quarterly dividend of $10.00 per share on the 4.000% fixed-rate reset non-cumulative perpetual Series G Preferred Stock, aggregating to $3 million.

In January 2021, our board of directors authorized us to repurchase up to $750 million of our common stock, of which $455 million is available as of March 31, 2022. All future capital distributions are subject to consideration and approval by our board of directors prior to execution. The timing and amount of future dividends and share repurchases will depend on various factors, including our capital position, financial performance, risk-weighted assets, capital impacts of strategic initiatives, market conditions and regulatory considerations.

Banking Subsidiary’s Capital


Table 19: CBNA's Capital Ratios Under the U.S. Basel III Standardized Rules
	March 31, 2022			December 31, 2021
(dollars in millions, except ratio data)	Amount	Ratio		Amount	Ratio
CET1 capital	$17,226	10.7	%	$17,039	10.7	%
Tier 1 capital	17,226	10.7		17,039	10.7
Total capital	19,855	12.3		19,600	12.4
Tier 1 leverage	17,226	9.4		17,039	9.4
Risk-weighted assets	161,443			158,550
Quarterly adjusted average assets	182,509			181,268

CBNA’s CET1 and tier 1 capital totaled $17.2 billion at March 31, 2022, up $187 million from $17.0 billion at December 31, 2021. This increase was primarily driven by net income for the three months ended March 31, 2022, partially offset by higher estimated goodwill and intangibles related to the HSBC transaction and a decrease in the modified CECL transition amount as a result of entering the CECL three-year transition period. Total capital was $19.9 billion at March 31, 2022, an increase of $255 million from $19.6 billion at December 31, 2021, driven by the changes in CET1 capital and a reduction in the modified AACL transition amount as a result of entering the CECL three-year transition period, partially offset by lower AACL.

CBNA’s RWA totaled $161.4 billion at March 31, 2022, up $2.9 billion from December 31, 2021, driven by higher commercial and consumer loans including higher home lending loans resulting from the HSBC transaction, MSRs, derivative valuations and market risk, partially offset by lower loans held for sale and commercial commitments.

As of March 31, 2022, CBNA’s tier 1 leverage ratio of 9.4% remained stable as higher tier 1 capital was mostly offset by an increase in quarterly adjusted average assets of $1.2 billion.

LIQUIDITY

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

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Parent Company Liquidity

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

During the three months ended March 31, 2022 and 2021, the Parent Company declared dividends on common stock of $165 million and $167 million, respectively, and declared dividends on preferred stock of $24 million and $23 million, respectively.

Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $2.1 billion and $2.3 billion as of March 31, 2022 and December 31, 2021, respectively. The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At March 31, 2022, the Parent Company’s double-leverage ratio was 99.1%.

CBNA Liquidity

As CBNA’s primary business involves taking deposits and making loans, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and for loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary. In the ordinary course of business, the liquidity of CBNA is managed by matching sources and uses of cash. The primary sources of bank liquidity include deposits from our consumer and commercial customers; payments of principal and interest on loans and debt securities; and wholesale borrowings, as needed, and as described under “—Liquidity Risk Management and Governance.” The primary uses of bank liquidity include withdrawals and maturities of deposits; payment of interest on deposits; funding of loans and related commitments; and funding of securities purchases. To the extent that CBNA has relied on wholesale borrowings, uses also include payments of related principal and interest. For further information on CBNA’s outstanding debt, see Note 8.

On April 26, 2022, CBNA redeemed $750 million of senior notes.

Liquidity Risk

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

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

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

Factors Affecting Liquidity

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

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

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participant), or a combination of both. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our contingent liquidity risk and our funding liquidity risk to be relatively modest.

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


Table 20: Credit Ratings
	March 31, 2022
	Moody’s	Standard and Poor’s	Fitch

Citizens Financial Group, Inc.:
Long-term issuer	NR	BBB+	BBB+
Short-term issuer	NR	A-2	F1
Subordinated debt	NR	BBB	BBB
Preferred Stock	NR	BB+	BB
Citizens Bank, National Association:
Long-term issuer	Baa1	A-	BBB+
Short-term issuer	NR	A-2	F1
Long-term deposits	A1	NR	A-
Short-term deposits	P-1	NR	F1
NR = Not rated

Changes in our public credit ratings could affect both the cost and availability of our wholesale funding. As a result, and in order to maintain a conservative funding profile, CBNA continues to minimize reliance on unsecured wholesale funding. At March 31, 2022, our wholesale funding consisted primarily of term debt issued by the Parent Company and CBNA.

Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB, OCC, and FDIC regularly evaluate our liquidity as part of the overall supervisory process. In addition, we are subject to existing and evolving regulatory liquidity requirements, some of which are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. For further discussion, see “Regulation and Supervision — Tailoring of Prudential Requirements” and “—Liquidity Requirements” in our 2021 Form 10-K.

Liquidity Risk Management and Governance

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

Our Funding and Liquidity unit’s primary goals are to deliver and maintain prudent levels of operating liquidity to support expected and projected funding requirements, contingent liquidity to support unexpected funding requirements resulting from idiosyncratic, systemic, and combination stress events, and regulatory liquidity requirements in a timely manner from stable and cost-efficient funding sources. We seek to accomplish these goals by funding loans with stable deposits; by prudently controlling dependence on wholesale funding, particularly short-term unsecured funding; and by maintaining ample available liquidity, including a contingent liquidity buffer of unencumbered high-quality loans and securities. As of March 31, 2022:

Organically generated deposits continue to be our primary source of funding, resulting in a consolidated period end loan-to-deposits ratio, excluding LHFS, of 82.7%;
Our total available liquidity, comprised of contingent liquidity and available discount window capacity, was approximately $71.9 billion;
Contingent liquidity was $45.7 billion, consisting of unencumbered high-quality liquid securities of $20.6 billion, unused FHLB capacity of $16.4 billion, and our cash balances at the FRB of $8.7 billion;

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Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured primarily by non-mortgage commercial and retail loans and totaled $26.2 billion. Use of this borrowing capacity would be considered only during exigent circumstances; and
For a summary of our sources and uses of cash by type of activity for the three months ended March 31, 2022 and 2021, see the Consolidated Statements of Cash Flows.

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

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

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

Off-Balance Sheet Arrangements

We engage in a variety of activities that are not reflected in our Consolidated Balance Sheets that are generally referred to as “off-balance sheet arrangements.” For more information on these types of activities, see Note 12 in Item 1.

CRITICAL ACCOUNTING ESTIMATES

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

An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on our unaudited interim Consolidated Financial Statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. Our most significant accounting policies and estimates and their related application are discussed below. For additional information regarding fair value measurements, see “—Critical Accounting Estimates” in our 2021 Form 10-K.

Allowance for Credit Losses

The ACL of $1.9 billion at March 31, 2022 remained stable compared to December 31, 2021.

To determine the ACL as of March 31, 2022, we utilized an economic forecast that generally reflects real GDP growth on an annual average basis of 2.5% and an average unemployment rate of 5.2% in 2022. This forecast reflects a positive overall macroeconomic outlook, generally in-line with December 31, 2021, which reflected real GDP growth on an annual average basis of 2.8% and an average unemployment rate of 6% in 2022. While the U.S. economy has remained strong, 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.

Our March 2022 qualitative consideration for macroeconomic risk reflects the strength of the overall economy weighed against the headwinds of tightening monetary and fiscal policies, impacts of elevated inflation, including the gap between wage gains and inflation rate, labor shortages, continuing supply-chain challenges, and possible consequences from Russia’s invasion of Ukraine. We expect the combination of these items to likely create volatility in key macroeconomic variables. While COVID has reemerged in certain areas of the world, the impact to the US economy has been limited to date given vaccination rates and material reductions in hospitalizations and deaths, reductions in consumer concerns about the pandemic, and a strong labor market with over 11 million open jobs as of February 2022.

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Our determination of the ACL is sensitive to changes in forecasted macroeconomic conditions during the reasonable and supportable period. To illustrate the sensitivity, we applied a more pessimistic scenario than that described above which assumes that challenges in tempering inflation combined with a rise in infections from new COVID strains lead to lower consumer spending and a slowing of business hiring. This pessimistic scenario reflects similar real GDP growth to our base case forecast but an unemployment rate in the range of 6.6% to 7.4% over 2022. Excluding consideration of qualitative adjustments, this scenario would result in a quantitative lifetime loss estimate of approximately 1.16x our modeled period-end ACL, or an increase of approximately $160 million. This analysis relates only to the modeled credit loss estimate and not to the overall period-end ACL, which includes qualitative adjustments.

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

It remains difficult to estimate how changes in economic forecasts might affect our ACL because such forecasts consider a wide variety of variables and inputs, and changes in the variables and inputs may not occur at the same time or in the same direction, and such changes may have differing impacts by product types. The variables and inputs may be idiosyncratically affected by risks to the economy, including changing monetary and fiscal policies and their impact on inflationary trends, as well as continuing supply-chain challenges. Changes in one or multiple of the key variables may have a material impact to our estimation of expected credit losses.

For additional information regarding the ACL, see Note 5 of this report, and “—Critical Accounting Estimates - Allowance for Credit Losses” and Note 6 in our 2021 Form 10-K.

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ACCOUNTING AND REPORTING DEVELOPMENTS

Accounting standards issued but not adopted as of March 31, 2022


Pronouncement	Summary of Guidance	Effects on Financial Statements
Troubled Debt Restructurings and Vintage Disclosures Issued March 2022	•Eliminates the separate recognition and measurement guidance for TDRs •Requires evaluation of all modifications to borrowers experiencing financial difficulty to determine whether the modification results in a new loan or continuation of an existing loan •Requires expected credit losses measured under a discounted cash flow method to be determined using an effective interest rate based on the modified (not original) contractual terms of the loan •Enhances disclosures by creditors for modifications of receivables from borrowers experiencing financial difficulty in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay or a term extension •Requires disclosure of current period gross charge-offs by vintage year for loans and net investments in leases •Transition is prospective, with an option to adopt the recognition and measurement guidance for TDRs on a modified retrospective basis, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption	•Required effective date: January 1, 2023, with early adoption permitted. Management is currently evaluating adoption prior to the effective date. •Adoption is not expected to have a material financial impact on our Consolidated Financial Statements, but a meaningful impact on our required disclosures in the Notes to our Consolidated Financial Statements.
Derivatives and Hedging - Fair Value Hedging - Portfolio Layer Method Issued March 2022	•Replaces the ‘last-of-layer’ method. •Allows the designation of multiple layers in a closed portfolio of financial assets. •Permits hedging of non-prepayable as well as prepayable assets. •Prohibits the consideration of basis adjustments when measuring expected credit losses of assets in the closed portfolio or determining whether an AFS security is impaired. •The guidance on hedging multiple layers in a closed portfolio is applied prospectively. The guidance on the accounting for fair value basis adjustments is applied on a modified retrospective basis.	•Required effective date: January 1, 2023. Early adoption is permitted. •Adoption is not expected to have a material impact on our Consolidated Financial Statements.

RISK GOVERNANCE

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

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

There have been no significant changes in our risk governance practices, risk framework, risk appetite, or credit risk as described in “—Risk Governance” in our 2021 Form 10-K.

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MARKET RISK

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

Non-Trading Risk

We are exposed to market risk as a result of non-trading banking activities. This market risk is substantially composed of interest rate risk, as we have no commodity risk and de minimis direct currency and equity risk. We also have market risk related to capital markets loan originations, as well as the valuation of our MSRs. There have been no significant changes in our sources of interest rate risk, interest rate risk practices, risk framework, metrics or assumptions as described in “—Market Risk — Non-Trading Risk” in our 2021 Form 10-K.

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

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


Table 21: Sensitivity of Net Interest Income
	Estimated % Change in Net Interest Income over 12 Months
Basis points	March 31, 2022		December 31, 2021
Instantaneous Change in Interest Rates
200	13.8	%	19.4	%
100	7.1		10.2
-25	(2.0)		(3.0)
Gradual Change in Interest Rates
200	7.2	%	10.1	%
100	3.7		5.2
-25	(1.0)		(1.5)

We continue to manage asset sensitivity within the scope of our policy, changing market conditions and changes in our balance sheet. Asset sensitivity against a 200 basis point gradual increase in rates was 7.2% at March 31, 2022, compared to 10.1% at December 31, 2021. The change reflects the evolving balance sheet and the rising base net interest income, which reduces the asset sensitivity to further rate increases. We continue to adjust our hedge positions to capture higher forward rates and manage evolving downside risks through dollar-cost averaging our entry points for monetizing the asset sensitivity. Current levels of asset sensitivity continue to provide meaningful upside benefit to net interest income as we enter a period of expected higher short-term policy rates from the FRB. Changes in interest rates can also affect the risk positions, which impacts the repricing sensitivity or beta of the deposit base as well as the cash flows on assets that allow for early payoff without a penalty. The risk position is managed within our risk limits, and long-term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding.

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

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


Table 22: Interest Rate Swap Contracts Used to Manage Non-Trading Interest Rate Exposure
	March 31, 2022						December 31, 2021
		Weighted Average							Weighted Average
(dollars in millions)	Notional Amount	Maturity (Years)	Receive Rate		Pay Rate			Notional Amount		Maturity (Years)	Receive Rate		Pay Rate
Cash flow - receive-fixed/pay-variable - conventional ALM(1)(2)	$15,750	4.1	1.3	%	0.6	%		$16,250		3.7	1.0	%	0.1	%
Fair value - receive-fixed/pay-variable - conventional debt	1,500	1.8	2.4		0.6			2,200		1.3	2.5		0.2
Cash flow - pay-fixed/receive-variable - conventional ALM(1)	—	—	—		—			3,000		2.5	0.1		1.7
Fair value - pay-fixed/receive-variable - conventional ALM(1)	—	—	—		—			2,000		2.7	0.1		1.5
Total portfolio swaps	$17,250	3.9	1.4	%	0.6	%		$23,450		3.3	1.0	%	0.4	%

(1) Asset Liability Management (“ALM”) strategies used to manage interest rate exposures include interest rate swap contracts used to manage exposure to the variability in the interest cash flows on our floating-rate commercial loans and floating-rate wholesale funding, as well as the variability in the fair value of AFS securities.

(2) March 31, 2022 includes $2.0 billion of forward-starting swaps that will become effective in the third quarter of 2022.


Table 23: Pre-Tax Gains (Losses) Recorded in the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income on Cash Flow Hedges
	Three Months Ended March 31,
(in millions)		2022	2021
Amount of pre-tax net gains (losses) recognized in OCI		($661)	($28)
Amount of pre-tax net gains (losses) reclassified from OCI into interest income		37	46
Amount of pre-tax net gains (losses) reclassified from OCI into interest expense		(5)	(12)

(1) Using the interest rate curve at March 31, 2022 with respect to cash flow hedge strategies, we estimate that approximately ($141) million will be reclassified from AOCI to net interest income over the next 12 months.

LIBOR Transition

For details regarding our LIBOR Transition Program and associated efforts to plan for the discontinuation of LIBOR, see “—Market Risk — LIBOR Transition” in our 2021 Form 10-K. There were no significant changes relative to the program during the three months ended March 31, 2022.

Capital Markets

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

Mortgage Servicing Rights

We have market risk associated with the value of residential MSRs, which are impacted by various types of inherent risks, including duration, basis, convexity, volatility and yield curve.

As part of our overall risk management strategy relative to the fair market value of the MSRs, we enter into various free-standing derivatives, such as interest rate swaps, interest rate swaptions, interest rate futures, and forward contracts to purchase mortgage-backed securities to economically hedge the changes in fair value. As of March 31, 2022 and December 31, 2021, the fair value of our MSRs was $1.2 billion and $1.0 billion, respectively, and the total notional amount of related derivative contracts was $13.4 billion and $11.8 billion, respectively. Gains and losses on MSRs and the related derivatives used for hedging are included in mortgage banking fees in the Consolidated Statements of Operations.

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

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Trading Risk

We are exposed to market risk primarily through client facilitation activities including derivatives and foreign exchange products as well as underwriting and market making activities. Exposure is created as a result of changes in interest rates and related basis spreads and volatility, foreign exchange rates, equity prices, and credit spreads on a select range of interest rates, foreign exchange, commodities, equity securities, corporate bonds and secondary loan instruments. These securities underwriting and trading activities are conducted through CBNA, CCMI and JMP. There have been no significant changes in our market risk governance, market risk measurement, or market risk practices including VaR, stressed VaR, sensitivity analysis, stress testing, or VaR model review and validation as described in “—Market Risk — Trading Risk” in our 2021 Form 10-K.

Market Risk Regulatory Capital

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


Table 24: Results of Modeled and Non-Modeled Measures for Regulatory Capital Calculations
(in millions)	For the Three Months Ended March 31, 2022				For the Three Months Ended March 31, 2021
Market Risk Category	Period End	Average	High	Low	Period End	Average	High	Low
Interest Rate	$1	$2	$6	$—	$2	$3	$6	$1
Foreign Exchange Currency Rate	—	—	3	—	—	—	—	—
Credit Spread	3	9	14	3	15	13	18	6
Commodity	—	—	—	—	—	—	—	—
General VaR	3	10	17	3	14	12	16	7
Specific Risk VaR	—	—	—	—	—	—	—	—
Total VaR	$3	$10	$17	$3	$14	$12	$16	$7
Stressed General VaR	$15	$13	$19	$4	$18	$15	$19	$9
Stressed Specific Risk VaR	—	—	—	—	—	—	—	—
Total Stressed VaR	$15	$13	$19	$4	$18	$15	$19	$9
Market Risk Regulatory Capital	$67				$82
Specific Risk Not Modeled Add-on	25				15

Total Market Risk Regulatory Capital	$92				$97
Market Risk-Weighted Assets	$1,154				$1,216

VaR Backtesting

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

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The following graph shows our daily net trading revenue and total internal, modeled VaR for the twelve months ended March 31, 2022.

Daily VaR Backtesting

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NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS

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


Table 25: Reconciliations of Non-GAAP Measures
		As of and for the Three Months Ended March 31,
(in millions, except share, per share and ratio data)	Ref.		2022		2021









Total revenue, Underlying:
Total revenue (GAAP)	A		$1,645		$1,659
Less: Notable items			—		—
Total revenue, Underlying (non-GAAP)	B		$1,645		$1,659
Noninterest expense, Underlying:
Noninterest expense (GAAP)	C		$1,106		$1,018
Less: Notable items			48		20
Noninterest expense, Underlying (non-GAAP)	D		$1,058		$998
Pre-provision profit:
Total revenue (GAAP)	A		$1,645		$1,659
Less: Noninterest expense (GAAP)	C		1,106		1,018
Pre-provision profit (GAAP)			$539		$641
Pre-provision profit, Underlying
Total revenue, Underlying (non-GAAP)	B		$1,645		$1,659
Less: Noninterest expense, Underlying (non-GAAP)	D		1,058		998
Pre-provision profit, Underlying (non-GAAP)			$587		$661
Provision (benefit) for credit losses, Underlying:
Provision (benefit) for credit losses (GAAP)			$3		($140)
Less: Notable items			24		—
Provision (benefit) for credit losses, Underlying (non-GAAP)			($21)		($140)
Income before income tax expense, Underlying:
Income before income tax expense (GAAP)	E		$536		$781
Less: Income (loss) before income tax expense (benefit) related to notable items			(72)		(20)
Income before income tax expense, Underlying (non-GAAP)	F		$608		$801
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP)	G		$116		$170
Less: Income tax expense (benefit) related to notable items			(16)		(5)
Income tax expense, Underlying (non-GAAP)	H		$132		$175
Effective income tax rate (GAAP)	G/E		21.70	%	21.76	%
Effective income tax rate, Underlying (non-GAAP)	H/F		21.70		21.85
Net income, Underlying:
Net income (GAAP)	I		$420		$611
Add: Notable items, net of income tax benefit			56		15
Net income, Underlying (non-GAAP)	J		$476		$626
Net income available to common stockholders, Underlying:
Net income available to common stockholders (GAAP)	K		$396		$588
Add: Notable items, net of income tax benefit			56		15
Net income available to common stockholders, Underlying (non-GAAP)	L		$452		$603
Return on average common equity and return on average common equity, Underlying:
Average common equity (GAAP)	M		$20,981		$20,611
Return on average common equity	K/M		7.65	%	11.57	%
Return on average common equity, Underlying (non-GAAP)	L/M		8.75		11.85

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		As of and for the Three Months Ended March 31,
(in millions, except share, per share and ratio data)	Ref.		2022		2021
Return on average tangible common equity and return on average tangible common equity, Underlying:
Average common equity (GAAP)	M		$20,981		$20,611
Less: Average goodwill (GAAP)			7,156		7,050
Less: Average other intangibles (GAAP)			80		57
Add: Average deferred tax liabilities related to goodwill (GAAP)			383		379
Average tangible common equity	N		$14,128		$13,883
Return on average tangible common equity	K/N		11.36	%	17.17	%
Return on average tangible common equity, Underlying (non-GAAP)	L/N		12.99		17.59
Return on average total assets and return on average total assets, Underlying:
Average total assets (GAAP)	O		$188,317		$182,569
Return on average total assets	I/O		0.90	%	1.36	%
Return on average total assets, Underlying (non-GAAP)	J/O		1.03		1.39
Return on average total tangible assets and return on average total tangible assets, Underlying:
Average total assets (GAAP)	O		$188,317		$182,569
Less: Average goodwill (GAAP)			7,156		7,050
Less: Average other intangibles (GAAP)			80		57
Add: Average deferred tax liabilities related to goodwill (GAAP)			383		379
Average tangible assets	P		$181,464		$175,841
Return on average total tangible assets	I/P		0.94	%	1.41	%
Return on average total tangible assets, Underlying (non-GAAP)	J/P		1.06		1.44
Efficiency ratio and efficiency ratio, Underlying:
Efficiency ratio	C/A		67.23	%	61.35	%
Efficiency ratio, Underlying (non-GAAP)	D/B		64.28		60.19
Operating leverage and operating leverage, Underlying:
(Decrease) increase in total revenue			(0.85)	%	0.07	%
Increase in noninterest expense			8.65		0.48
Operating leverage			(9.50	%)	(0.41)	%
(Decrease) increase in total revenue, Underlying (non-GAAP)			(0.85)	%	0.07	%
Increase in noninterest expense, Underlying (non-GAAP)			5.89		1.94
Operating leverage, Underlying (non-GAAP)			(6.74	%)	(1.87)	%
Tangible book value per common share:
Common shares - at period end (GAAP)	Q		423,031,985		425,930,159
Common stockholders' equity (GAAP)			$20,060		$20,688
Less: Goodwill (GAAP)			7,232		7,050
Less: Other intangible assets (GAAP)			115		54
Add: Deferred tax liabilities related to goodwill (GAAP)			387		380
Tangible common equity	R		$13,100		$13,964
Tangible book value per common share	R/Q		$30.97		$32.79
Net income per average common share - basic and diluted and net income per average common share - basic and diluted, Underlying:
Average common shares outstanding - basic (GAAP)	S		422,401,747		425,953,716
Average common shares outstanding - diluted (GAAP)	T		424,670,871		427,880,530
Net income per average common share - basic (GAAP)	K/S		$0.94		$1.38
Net income per average common share - diluted (GAAP)	K/T		0.93		1.37
Net income per average common share - basic, Underlying (non-GAAP)	L/S		1.07		1.41
Net income per average common share - diluted, Underlying (non-GAAP)	L/T		1.07		1.41
Dividend payout ratio and dividend payout ratio, Underlying:
Cash dividends declared and paid per common share	U		$0.39		$0.39
Dividend payout ratio	U/(K/S)		41	%	28	%
Dividend payout ratio, Underlying (non-GAAP)	U/(L/S)		36		28

Citizens Financial Group, Inc. | 34

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