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						7
Introduction						8
Financial Performance						9
Results of Operations						11
Net Interest Income						11
Noninterest Income						13
Noninterest Expense						14
Provision for Credit Losses						14
Income Tax Expense						14
Business Operating Segments						14
Analysis of Financial Condition						16
Securities						16
Loans and Leases						17
Allowance for Credit Losses and Nonaccrual Loans and Leases						17
Deposits						23
Borrowed Funds						23
Capital and Regulatory Matters						23
Liquidity						27
Critical Accounting Estimates						30
Accounting and Reporting Developments						32
Risk Governance						32
Market Risk						33
Non-GAAP Financial Measures and Reconciliations						37

Citizens Financial Group, Inc. | 6

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 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 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 HSBC or Investors clients and employees following the closing of the HSBC transaction and Investors acquisition; 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, receipt of required regulatory approvals and other 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 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 COVID disruption and Russia’s invasion of Ukraine, actions taken by governmental authorities in response to the COVID disruption and Russia’s invasion of Ukraine, and the direct and indirect impact of the COVID disruption 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 I, Item 1A of our 2021 Form 10-K as well as Part II, Item 1A of our Form 10-Q for the quarter ended March 31, 2022.

INTRODUCTION

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $224.7 billion in assets as of September 30, 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 the convenience of approximately 3,400 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 the 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 branches in the New York City metropolitan area, 9 branches in the Mid-Atlantic/Washington D.C. area, and 5 branches 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.

On June 8, 2022, Citizens completed the acquisition of DH Capital, a private investment banking firm serving companies in the internet infrastructure, software, IT services and communications sectors. This acquisition further strengthens our growing corporate advisory capabilities.

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.

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Non-GAAP Financial Measures

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

Key Highlights

Net income increased $106 million and decreased $369 million for the three and nine months ended September 30, 2022, with earnings per diluted common share up $0.05 to $1.23 and down $1.15 to $2.84 compared to the same periods in 2021.

Results reflect notable items of $33 million or $0.07 per diluted common share, net of tax benefit, for the three months ended September 30, 2022, compared to $16 million or $0.04 per diluted common share, net of tax benefit, for the same period in 2021. For the nine months ended September 30, 2022, notable items were $320 million or $0.68 per diluted common share, net of tax benefit, as compared to $39 million or $0.10 per diluted common share, net of tax benefit, for the same period in 2021.


Table 1: Notable Items
	Three Months Ended September 30, 2022
		Less: notable items
(in millions)	Reported results (GAAP)	Integration related costs(1)	TOP and other(2)	Provision	Underlying results (non-GAAP)
Provision (benefit) for credit losses	$123	$—	$—	$—	$123
Noninterest income	512	—	—	—	512
Noninterest expense	1,241	37	9	—	1,195
Income tax expense	177	(11)	(2)	—	190


	Three Months Ended September 30, 2021
		Less: notable items
(in millions)	Reported results (GAAP)	Integration related costs(1)	TOP and other(2)	Provision	Underlying results (non-GAAP)
Provision (benefit) for credit losses	($33)	$—	$—	$—	($33)
Noninterest income	514	—	—	—	514
Noninterest expense	1,011	4	19	—	988
Income tax expense	151	(1)	(6)	—	158

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	Nine Months Ended September 30, 2022
		Less: notable items
(in millions)	Reported results (GAAP)	Integration related costs(1)	TOP and other(2)	Provision(3)	Underlying results (non-GAAP)
Provision (benefit) for credit losses	$342	$—	$—	$169	$173
Noninterest income	1,504	(31)	—	—	1,535
Noninterest expense	3,652	178	41	—	3,433
Income tax expense	407	(49)	(7)	(43)	506


	Nine Months Ended September 30, 2021
		Less: notable items
(in millions)	Reported results (GAAP)	Integration related costs(1)	TOP and other(2)	Provision	Underlying results (non-GAAP)
Provision (benefit) for credit losses	($386)	$—	$—	$—	($386)
Noninterest income	1,541	—	—	—	1,541
Noninterest expense	3,020	6	48	—	2,966
Income tax expense	504	(2)	(13)	—	519

(1) Includes integration related costs associated with acquisitions for the three and nine months ended September 30, 2022 and 2021, and mark-to-market losses on loans acquired from Investors classified as LHFS for the nine months ended September 30, 2022.

(2) Includes our TOP transformational and revenue and efficiency initiatives for the three and nine months ended September 30, 2022 and 2021, income tax impacts related to legacy tax matters for the nine months ended September 30, 2022, and a pension settlement charge and compensation-related credit for the for the three and nine months ended September 30, 2021.

(3) Includes the initial provision for credit losses of $169 million for the nine months ended September 30, 2022 tied to the HSBC transaction and Investors acquisition. 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 increased $107 million to $611 million and decreased $369 million to $1.3 billion for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

**◦**On an Underlying basis, which excludes notable items, net income available to common stockholders of $644 million and $1.7 billion for the three and nine months ended September 30, 2022, respectively, compared with $520 million and $1.7 billion for the same periods in 2021.

**◦**On an Underlying basis, earnings per diluted common share of $1.30 and $3.52 for the three and nine months ended September 30, 2022, respectively, compared to $1.22 and $4.09 for the same periods in 2021.

Total revenue increased $518 million to $2.2 billion and increased $894 million to $5.8 billion for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven by increases of 45% and 27%, respectively, in net interest income, including the impacts of the HSBC transaction and Investors acquisition.
The efficiency ratio of 57.0% and 62.7% for the three and nine months ended September 30, 2022, respectively, compared to 60.9% and 61.3% for the same periods in 2021.

**◦**On an Underlying basis, the efficiency ratio of 54.9% and 58.7% for the three and nine months ended September 30, 2022, respectively, compared to 59.5% and 60.2% for the same periods in 2021.

ROTCE of 17.0% and 12.5% for the three and nine months ended September 30, 2022, respectively, compared to 13.7% and 16.1% for the same periods in 2021.

**◦**On an Underlying basis, ROTCE of 17.9% and 15.5% for the three and nine months ended September 30, 2022, respectively, compared to 14.2% and 16.5% for the same periods in 2021.

Tangible book value per common share of $26.62 decreased 23% from December 31, 2021.

For additional information regarding our financial performance, see “—Results of Operations” included in this report.

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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 September 30,
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	$5,203	$36	2.78	%		$13,749	$6	0.16	%		($8,546)	262 bps
Taxable investment securities	38,507	243	2.50			27,466	116	1.69			11,041	81
Non-taxable investment securities	3	—	1.88			2	—	2.60			1	(72)
Total investment securities	38,510	243	2.50			27,468	116	1.69			11,042	81
Commercial and industrial	52,130	544	4.08			42,330	362	3.36			9,800	72
Commercial real estate	28,388	311	4.29			14,656	96	2.56			13,732	173
Leases	1,529	13	3.35			1,695	12	2.72			(166)	63
Total commercial loans and leases	82,047	868	4.14			58,681	470	3.14			23,366	100
Residential mortgages	29,327	240	3.27			20,834	157	3.01			8,493	26
Home equity	13,400	156	4.62			11,829	92	3.08			1,571	154
Automobile	13,540	128	3.74			13,136	126	3.83			404	(9)
Education	13,081	144	4.37			12,707	134	4.19			374	18
Other retail	5,484	121	8.71			5,454	99	7.15			30	156
Total retail loans	74,832	789	4.19			63,960	608	3.78			10,872	41
Total loans and leases	156,879	1,657	4.17			122,641	1,078	3.47			34,238	70
Loans held for sale, at fair value	1,600	18	4.37			3,299	21	2.51			(1,699)	186
Other loans held for sale	1,385	15	4.36			112	1	3.98			1,273	38
Interest-earning assets	203,577	1,969	3.82			167,269	1,222	2.89			36,308	93
Noninterest-earning assets	21,896					18,839					3,057
Total assets	$225,473					$186,108					$39,365
Liabilities and Stockholders’ Equity
Checking with interest	$38,297	$45	0.46	%		$27,965	$7	0.09	%		$10,332	37
Money market	47,374	77	0.64			49,159	18	0.14			(1,785)	50
Savings	28,741	28	0.38			20,803	5	0.09			7,938	29
Term	9,913	26	1.10			6,071	5	0.43			3,842	67
Total interest-bearing deposits	124,325	176	0.56			103,998	35	0.14			20,327	42
Short-term borrowed funds	2,043	11	2.09			23	—	2.06			2,020	3
Long-term borrowed funds	15,847	117	2.91			6,956	42	2.38			8,891	53
Total borrowed funds	17,890	128	2.81			6,979	42	2.38			10,911	43
Total interest-bearing liabilities	142,215	304	0.85			110,977	77	0.28			31,238	57
Demand deposits	53,293					47,873					5,420
Other noninterest-bearing liabilities	5,705					3,904					1,801
Total liabilities	201,213					162,754					38,459
Stockholders’ equity	24,260					23,354					906
Total liabilities and stockholders’ equity	$225,473					$186,108					$39,365
Interest rate spread			2.97	%				2.61	%			36
Net interest income and net interest margin		$1,665	3.24	%			$1,145	2.72	%			52
Net interest income and net interest margin, FTE(1)		$1,668	3.25	%			$1,147	2.72	%			53
Memo: Total deposits (interest-bearing and demand)	$177,618	$176	0.39	%		$151,871	$35	0.09	%		$25,747	30	bps

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	Nine Months Ended September 30,
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	$5,952	$53	1.19	%		$11,967	$12	0.13	%		($6,015)	106 bps
Taxable investment securities	34,584	582	2.24			27,366	368	1.79			7,218	45
Non-taxable investment securities	3	—	2.31			3	—	2.60			—	(29)
Total investment securities	34,587	582	2.24			27,369	368	1.79			7,218	45
Commercial and industrial	49,224	1,290	3.45			43,661	1,054	3.19			5,563	26
Commercial real estate	23,401	644	3.63			14,601	285	2.57			8,800	106
Leases	1,555	34	2.92			1,800	37	2.73			(245)	19
Total commercial loans and leases	74,180	1,968	3.50			60,062	1,376	3.02			14,118	48
Residential mortgages	27,113	630	3.10			20,160	459	3.03			6,953	7
Home equity	12,783	351	3.67			11,884	279	3.14			899	53
Automobile	14,078	382	3.63			12,634	376	3.98			1,444	(35)
Education	13,086	412	4.21			12,593	403	4.28			493	(7)
Other retail	5,490	332	8.08			5,659	304	7.18			(169)	90
Total retail loans	72,550	2,107	3.88			62,930	1,821	3.87			9,620	1
Total loans and leases	146,730	4,075	3.69			122,992	3,197	3.45			23,738	24
Loans held for sale, at fair value	1,965	51	3.46			3,435	63	2.45			(1,470)	101
Other loans held for sale	1,401	47	4.44			242	9	4.88			1,159	(44)
Interest-earning assets	190,635	4,808	3.35			166,005	3,649	2.92			24,630	43
Noninterest-earning assets	21,087					18,386					2,701
Total assets	$211,722					$184,391					$27,331
Liabilities and Stockholders’ Equity:
Checking with interest	$35,849	$65	0.24	%		$27,126	$18	0.09	%		$8,723	15
Money market	47,797	112	0.31			49,362	61	0.16			(1,565)	15
Savings	26,763	42	0.21			19,839	15	0.10			6,924	11
Term	7,303	36	0.67			7,195	33	0.64			108	3
Total interest-bearing deposits	117,712	255	0.29			103,522	127	0.16			14,190	13
Short-term borrowed funds	2,030	21	1.37			80	—	0.74			1,950	63
Long-term borrowed funds	10,748	215	2.65			7,570	136	2.38			3,178	27
Total borrowed funds	12,778	236	2.45			7,650	136	2.36			5,128	9
Total interest-bearing liabilities	130,490	491	0.50			111,172	263	0.32			19,318	18
Demand deposits	52,058					46,120					5,938
Other noninterest-bearing liabilities	5,285					4,166					1,119
Total liabilities	187,833					161,458					26,375
Stockholders’ equity	23,889					22,933					956
Total liabilities and stockholders’ equity	$211,722					$184,391					$27,331
Interest rate spread			2.85	%				2.61	%			24
Net interest income and net interest margin		$4,317	3.03	%			$3,386	2.73	%			30
Net interest income and net interest margin, FTE(1)		$4,324	3.03	%			$3,393	2.73	%			30
Memo: Total deposits (interest-bearing and demand)	$169,770	$255	0.20	%		$149,642	$127	0.11	%		$20,128	9	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.

Net interest income increased $520 million, or 45%, and increased $931 million, or 27%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, reflecting growth of 22% and 15%, respectively, in interest-earning assets, driven by the impacts of the HSBC transaction and Investors acquisition, and a higher net interest margin.

Net interest margin on a FTE basis increased 53 basis points to 3.25%, and increased 30 basis points to 3.03%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, reflecting higher earning-asset yields given higher market interest rates, partially offset by increased funding costs. Average interest-earning asset yields increased 93 basis points to 3.82%, and increased 43 basis points to 3.35%, while average interest-bearing liability costs increased 57 basis points to 0.85%, and increased 18 basis points to 0.50%, respectively, compared to the same periods.

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Average interest-earning assets increased $36.3 billion, or 22%, and increased $24.6 billion, or 15%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. An increase in loans, reflecting the impacts of the HSBC transaction and Investors acquisition as well as growth in commercial and industrial, residential mortgage and home equity, and investments was partially offset by a decrease in cash held in interest-bearing deposits reflecting the deployment of elevated liquidity.

Average deposits increased $25.7 billion, or 17%, and increased $20.1 billion, or 13%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily attributable to the HSBC transaction and Investors acquisition. Average total borrowed funds increased $10.9 billion and increased $5.1 billion, respectively, compared to the same periods in 2021, given an increase in long-term and short-term FHLB borrowings driven by advances acquired from Investors and the funding of loan and security growth, partially offset by a decrease in senior debt.

Noninterest Income


Table 3: Noninterest Income
	Three Months Ended September 30,					Nine Months Ended September 30,
(dollars in millions)	2022	2021	Change	Percent		2022	2021	Change	Percent
Capital markets fees	$89	$72	$17	24	%	$270	$244	$26	11	%
Service charges and fees	109	110	(1)	(1)		315	309	6	2
Mortgage banking fees	66	108	(42)	(39)		207	358	(151)	(42)
Card fees	71	66	5	8		202	185	17	9
Trust and investment services fees	61	61	—	—		188	179	9	5
Letter of credit and loan fees	40	39	1	3		118	115	3	3
Foreign exchange and derivative products	42	29	13	45		153	85	68	80
Securities gains, net	—	3	(3)	(100)		5	9	(4)	(44)
Other income(1)	34	26	8	31		46	57	(11)	(19)
Noninterest income	$512	$514	($2)	—	%	$1,504	$1,541	($37)	(2	%)

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

Noninterest income remained stable and decreased $37 million, or 2%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, highlighted by the following significant changes.

The increase in capital markets fees reflects lower bond underwriting fees and higher merger and acquisition advisory and loan syndication fees.
Mortgage banking fees declined given lower gain-on-sale margins and production volumes, partially offset by higher servicing revenue.
Card fees increased driven by higher debit and credit card volumes.
Trust and investment services fees were flat in the three-month period and increased in the nine-month period driven by higher annuity and assets under management fees.
Foreign exchange and derivative products revenue increased reflecting growth in client hedging activity across foreign exchange, interest rate and commodity products.
Other income reflects higher bank-owned life insurance and leasing income in the three and nine-month periods. The overall decrease in other income in the nine-month period is driven by $31 million of mark-to-market losses on loans acquired from Investors classified as LHFS, partially offset by the aforementioned increases in income.

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Noninterest Expense


Table 4: Noninterest Expense
	Three Months Ended September 30,					Nine Months Ended September 30,
(dollars in millions)	2022	2021	Change	Percent		2022	2021	Change	Percent
Salaries and employee benefits	$639	$509	$130	26	%	$1,916	$1,581	$335	21	%
Equipment and software	159	157	2	1		478	464	14	3
Outside services	172	144	28	19		530	420	110	26
Occupancy	106	77	29	38		300	247	53	21
Other operating expense	165	124	41	33		428	308	120	39
Noninterest expense	$1,241	$1,011	$230	23	%	$3,652	$3,020	$632	21	%

Noninterest expense increased $230 million, or 23%, and increased $632 million, or 21%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases in three and nine month expense were driven primarily by acquisition and integration-related costs, higher salaries and employee benefits and other operating expense associated with FDIC insurance, 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 of $123 million and $342 million for the three and nine months ended September 30, 2022, respectively, compared to a credit provision benefit of $33 million and $386 million for the same periods in 2021. The credit provision for the nine months ended September 30, 2022 includes the “double count” for the non-PCD loan CECL provision expense of $169 million tied to the HSBC transaction and Investors acquisition. The provision expense for the three and nine months ended September 30, 2022, reflects loan growth, the Investors acquisition and a deterioration in the macroeconomic environment, including an increased risk of recession, partly offset by an improvement in portfolio mix. The credit provision benefit in the three and nine months ended September 30, 2021 reflected the strong economic recovery driven by highly accommodative fiscal and monetary policies in place during that time.

Income Tax Expense

Income tax expense of $177 million and $407 million increased $26 million and decreased $97 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven by fluctuations in taxable income. The effective income tax rate of 21.8% and 22.3% for the same periods decreased from 22.4% and increased from 22.0%, respectively, compared to the same periods in 2021, primarily driven by discrete tax impacts from the HSBC transaction and Investors acquisition. Provision for income taxes is calculated by applying the estimated annual effective tax rate to year-to-date pre-tax income, adjusting for discrete items that occurred during the period.

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 to each business operating segment. 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 to our FTP methodology. See Note 18 for additional information.

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The following tables present 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 18 for additional information.


Table 5: Selected Financial Data for Business Operating Segments
	Consumer Banking		Commercial Banking
	Three Months Ended September 30,		Three Months Ended September 30,
(in millions)	2022	2021	2022	2021
Net interest income	$1,085	$919	$559	$428
Noninterest income	270	315	213	168
Total revenue	1,355	1,234	772	596
Noninterest expense	863	749	325	226
Profit before credit losses	492	485	447	370
Net charge-offs	62	35	12	15
Income before income tax expense	430	450	435	355
Income tax expense	111	114	101	81
Net income	$319	$336	$334	$274
Average Balances:
Total assets	$89,560	$75,070	$80,067	$56,702
Total loans and leases(1)	83,373	70,984	75,767	53,815
Deposits	117,448	100,968	51,095	45,465
Interest-earning assets	84,122	71,879	76,025	54,177


	Consumer Banking		Commercial Banking
	Nine Months Ended September 30,		Nine Months Ended September 30,
(in millions)	2022	2021	2022	2021
Net interest income	$2,937	$2,679	$1,509	$1,268
Noninterest income	807	949	647	516
Total revenue	3,744	3,628	2,156	1,784
Noninterest expense	2,528	2,250	905	679
Profit before credit losses	1,216	1,378	1,251	1,105
Net charge-offs	150	139	34	150
Income before income tax expense	1,066	1,239	1,217	955
Income tax expense	273	315	271	205
Net income	$793	$924	$946	$750
Average Balances:
Total assets	$85,375	$75,317	$73,344	$57,318
Total loans and leases(1)	79,988	70,857	69,381	54,459
Deposits	113,578	99,708	49,087	44,501
Interest-earning assets	80,770	71,777	69,651	54,828

(1) Includes LHFS.

Consumer Banking

Net interest income increased $166 million, or 18%, and increased $258 million, or 10%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven by higher net interest margin and growth in interest-earning assets, including the impacts of the HSBC transaction and Investors acquisition. This increase was partially offset by a reduction in PPP loans. Average loans increased $12.4 billion and increased $9.1 billion for the same periods, reflecting the impacts of the HSBC transaction and Investors acquisition, as well as strength in mortgage and home equity. This increase was partially offset by a decline in PPP loans and planned runoff in auto and personal unsecured installment loans. Average deposits increased $16.5 billion, or 16%, and increased $13.9 billion, or 14%, for the same periods, reflecting the impacts of the HSBC transaction and Investors acquisition.

Noninterest income decreased $45 million, or 14%, and decreased $142 million, or 15%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven by lower mortgage banking fees reflecting lower gain-on-sale margins and production volumes, partially offset by higher servicing revenue. This decrease was partially offset by higher card fees given higher transaction volumes.

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Noninterest expense increased $114 million, or 15%, and increased $278 million, or 12%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven primarily by acquisition and integration-related costs, higher salaries and employee benefits and other operating expenses associated with FDIC insurance, travel and advertising costs, partially offset by the benefit of efficiency initiatives.

Net charge-offs increased $27 million, or 77%, and increased $11 million, or 8%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, reflecting the normalization of the credit cycle.

Commercial Banking

Net interest income increased $131 million, or 31%, and increased $241 million, or 19%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven by higher net interest margin and growth in interest-earning assets, including the impact of the Investors acquisition.

Noninterest income increased $45 million, or 27%, and increased $131 million, or 25%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven by higher capital markets fees, reflecting the impact of acquisitions, partially offset by lower underwriting. Foreign exchange and derivative products revenue also increased, reflecting increased client interest rate, foreign exchange and commodity hedging activity.

Noninterest expense increased $99 million, or 44%, and increased $226 million, or 33%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven primarily by acquisition and integration-related costs, higher salaries and employee benefits and other operating expenses associated with FDIC insurance, travel and advertising costs, partially offset by the benefit of efficiency initiatives.

Net charge-offs decreased $3 million, or 20%, and decreased $116 million, or 77%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, as credit performance remained strong.

ANALYSIS OF FINANCIAL CONDITION

Securities


Table 6: Amortized Cost and Fair Value of AFS and HTM Securities
	September 30, 2022		December 31, 2021
(in millions)	Amortized Cost	Fair Value	Amortized Cost	Fair Value
U.S. Treasury and other	$3,557	$3,350	$11	$11
State and political subdivisions	3	3	2	2
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	21,019	18,684	24,607	24,442
Other/non-agency	281	249	397	405
Total mortgage-backed securities	21,300	18,933	25,004	24,847

Collateralized loan obligations	1,248	1,192	1,208	1,207
Total debt securities available for sale, at fair value	$26,108	$23,478	$26,225	$26,067
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	$9,457	$8,804	$1,505	$1,557

Total mortgage-backed securities	9,457	8,804	1,505	1,557
Asset-backed securities	614	569	737	732
Total debt securities held to maturity	$10,071	$9,373	$2,242	$2,289
Total debt securities available for sale and held to maturity	$36,179	$32,851	$28,467	$28,356
Equity securities, at cost	$1,113	$1,113	$624	$624
Equity securities, at fair value	151	151	109	109

Citizens Financial Group, Inc. | 16

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. As of September 30, 2022, U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 94% 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 debt securities portfolio increased $4.5 billion from December 31, 2021, driven in large part by $3.8 billion from the Investors acquisition as well as net securities purchases. This increase was partially offset by the impact of higher interest rates driving a $3.2 billion increase in unrealized losses.

The amortized cost basis of the HTM portfolio increased $7.8 billion due to the transfer of $8.5 billion from the AFS portfolio during 2022, offset in part by paydowns. The ratio of HTM securities to total securities increased to approximately 30% as of September 30, 2022.

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. As of September 30, 2022, the portfolio’s average effective duration was 5.9 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.

Loans and Leases


Table 7: Composition of Loans and Leases, Excluding LHFS
(dollars in millions)	September 30, 2022	December 31, 2021	Change	Percent
Commercial and industrial	$50,989	$44,500	$6,489	15	%
Commercial real estate	28,681	14,264	14,417	101
Leases	1,444	1,586	(142)	(9)
Total commercial	81,114	60,350	20,764	34
Residential mortgages	29,548	22,822	6,726	29
Home equity	13,684	12,015	1,669	14
Automobile	13,155	14,549	(1,394)	(10)
Education	13,094	12,997	97	1
Other retail	5,545	5,430	115	2
Total retail	75,026	67,813	7,213	11
Total loans and leases	$156,140	$128,163	$27,977	22	%

Total loans and leases increased $28.0 billion from $128.2 billion as of December 31, 2021, primarily driven by the HSBC transaction and Investors acquisition, resulting in growth in commercial and retail of 34% and 11%, respectively.

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 “—Critical Accounting Estimates — Allowance for Credit Losses” and 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 $2.2 billion at September 30, 2022 compared with the ACL of $1.9 billion as of December 31, 2021, reflecting a reserve increase of $262 million. For further information, see Note 5.

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Table 8: ACL and Related Coverage Ratios by Portfolio
	September 30, 2022				December 31, 2021
(dollars in millions)	Loans and Leases	Allowance	Coverage		Loans and Leases	Allowance	Coverage
Allowance for Loan and Lease Losses
Commercial and industrial	$50,989	$582	1.14	%	$44,500	$555	1.25	%
Commercial real estate	28,681	421	1.47		14,264	220	1.54
Leases	1,444	27	1.86		1,586	46	2.92
Total commercial	81,114	1,030	1.27		60,350	821	1.36
Residential mortgages	29,548	197	0.67		22,822	144	0.63
Home equity	13,684	68	0.50		12,015	82	0.69
Automobile	13,155	137	1.04		14,549	154	1.05
Education	13,094	307	2.35		12,997	308	2.37
Other retail	5,545	241	4.33		5,430	249	4.59
Total retail	75,026	950	1.27		67,813	937	1.38
Total loans and leases	$156,140	$1,980	1.27	%	$128,163	$1,758	1.37	%
Allowance for Unfunded Lending Commitments
Commercial(1)		$172	1.48	%		$153	1.61	%
Retail(2)		44	1.33			23	1.42
Total allowance for unfunded lending commitments		216				176
Allowance for credit losses	$156,140	$2,196	1.41	%	$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.


Table 9: Nonaccrual Loans and Leases
(dollars in millions)	September 30, 2022		December 31, 2021		Change		Percent
Commercial and industrial	$234		$171		$63		37	%
Commercial real estate	37		11		26		236
Leases	—		1		(1)		(100)
Total commercial	271		183		88		48
Residential mortgages(1)	236		201		35		17
Home equity	235		220		15		7
Automobile	52		55		(3)		(5)
Education	33		23		10		43
Other retail	25		20		5		25
Total retail	581		519		62		12
Nonaccrual loans and leases	$852		$702		$150		21	%
Nonaccrual loans and leases to total loans and leases	0.55	%	0.55	%	—	bp
Allowance for loan and lease losses to nonaccrual loans and leases	232		251		(19	%)
Allowance for credit losses to nonaccrual loans and leases	258		276		(18	%)

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

Citizens Financial Group, Inc. | 18


Table 10: Ratio of Net Charge-Offs to Average Loans and Leases
	Three Months Ended September 30,
	2022				2021
(dollars in millions)	Net Charge-Offs	Average Balance	Ratio		Net Charge-Offs	Average Balance	Ratio
Commercial and industrial	$14	$52,130	0.11	%	$10	$42,330	0.09	%
Commercial real estate	1	28,388	0.01		5	14,656	0.12
Leases	—	1,529	(0.11)		(1)	1,695	(0.22)
Total commercial	15	82,047	0.07		14	58,681	0.09
Residential mortgages	—	29,327	0.01		—	20,834	—
Home equity	(6)	13,400	(0.17)		(12)	11,829	(0.42)
Automobile	11	13,540	0.31		2	13,136	0.06
Education	13	13,081	0.38		13	12,707	0.41
Other retail	41	5,484	3.02		27	5,454	1.99
Total retail	59	74,832	0.32		30	63,960	0.19
Total loans and leases	$74	$156,879	0.19	%	$44	$122,641	0.14	%

Third quarter 2022 NCO ratio increased compared to the third quarter of 2021, driven by an increase in retail, but remained low relative to historical levels.


Table 11: Ratio of Net Charge-Offs to Average Loans and Leases
	Nine Months Ended September 30,
	2022				2021
(dollars in millions)	Net Charge-Offs	Average Balance	Ratio		Net Charge-Offs	Average Balance	Ratio
Commercial and industrial	$35	$49,224	0.10	%	$115	$43,661	0.35	%
Commercial real estate	1	23,401	—		31	14,601	0.28
Leases	—	1,555	(0.02)		13	1,800	1.01
Total commercial	36	74,180	0.07		159	60,062	0.35
Residential mortgages	(1)	27,113	—		(2)	20,160	(0.01)
Home equity	(24)	12,783	(0.25)		(29)	11,884	(0.33)
Automobile	23	14,078	0.22		11	12,634	0.12
Education	40	13,086	0.40		33	12,593	0.35
Other retail	108	5,490	2.63		108	5,659	2.55
Total retail	146	72,550	0.27		121	62,930	0.26
Total loans and leases	$182	$146,730	0.17	%	$280	$122,992	0.30	%

First nine months 2022 NCO ratio was down 13 basis points from first nine months of 2021.

Retail NCO ratio increased for the three months ended September 30, 2022 compared to the same period in 2021, reflecting the normalization of the credit cycle; however, the NCO ratio remains below pre-pandemic levels. Retail NCO ratio for the nine months ended September 30, 2022 remained relatively flat compared to the same period in 2021. Commercial NCO ratio remained stable for the three months ended September 30, 2022 and decreased for the nine months ended September 30, 2022 compared to the same periods in 2021, as credit performance remained strong.

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.

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Table 12: Commercial Loans and Leases by Regulatory Classification
	September 30, 2022
		Criticized
(in millions)	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial	$48,265	$1,049	$1,487	$188	$50,989
Commercial real estate	26,861	714	1,094	12	28,681
Leases	1,416	22	6	—	1,444
Total commercial	$76,542	$1,785	$2,587	$200	$81,114


	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 $4.6 billion as of September 30, 2022 increased $1.3 billion compared with December 31, 2021. Commercial criticized as a percent of total commercial of 5.6% at September 30, 2022 increased from 5.4% at December 31, 2021.

Commercial and industrial criticized balances of $2.7 billion as of September 30, 2022, increased from $2.2 billion as of December 31, 2021, primarily driven by the Investors acquisition. Commercial and industrial criticized as a percent of total commercial and industrial was 5.3% at September 30, 2022 and 5.0% at December 31, 2021, reflecting the impacts of wage inflation on select non-profit sectors. Commercial and industrial criticized loans represented 60% of total criticized loans as of September 30, 2022, compared to 69% as of December 31, 2021.

Commercial real estate criticized balances of $1.8 billion increased from $945 million as of December 31, 2021, primarily driven by the Investors acquisition. It also reflected the effect of inflationary and interest rate pressure on commercial real estate generally, and return to office dynamics on commercial real estate office. Commercial real estate criticized as a percent of total commercial real estate declined to 6.3% at September 30, 2022 from 6.6% at December 31, 2021. Commercial real estate accounted for 40% of total criticized loans as of September 30, 2022, compared to 29% as of December 31, 2021.

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Table 13: Commercial Loans and Leases
	September 30, 2022			December 31, 2021
(dollars in millions)	Balance	% of Total Loans and Leases		Balance	% of Total Loans and Leases
Finance and insurance	$11,477	7	%	$9,301	7	%
Other manufacturing	4,680	3		4,087	3
Technology	4,610	3		4,220	3
Accommodation and food services	3,550	2		3,438	3
Health, pharma, and social assistance	3,132	2		2,912	2
Professional, scientific, and technical services	3,013	2		2,665	2
Wholesale trade	2,961	2		2,358	2
Retail trade	2,661	2		2,237	2
Other services	2,360	2		2,051	2
Energy and related	2,258	1		2,017	2
Real estate and rental and leasing	1,584	1		739	—
Consumer products manufacturing	1,557	1		1,192	1
Administrative and waste management services	1,535	1		1,396	1
Arts, entertainment, and recreation	1,462	1		1,189	1
Automotive	1,430	1		1,172	1
All other(1)	2,554	2		2,739	2
Total commercial and industrial	50,824	33		43,713	34
Multi-family	8,722	6		2,253	2
Office	6,356	4		5,234	4
Retail	3,364	2		1,433	1
Industrial	3,309	2		1,753	1
Co-op	1,833	1		—	—
All other(1)	5,097	3		3,591	3
Total commercial real estate	28,681	18		14,264	11
Total leases	1,444	1		1,586	1
Total commercial(2)	$80,949	52	%	$59,563	46	%

(1) Includes deferred fees and costs.

(2) Excludes PPP loans of $165 million and $787 million as of September 30, 2022 and December 31, 2021, respectively.

Retail Loan Asset Quality

For retail loans, we utilize credit scores provided by FICO and the loan’s payment and delinquency status to monitor credit quality. Management believes FICO credit scores are the strongest indicator of potential credit losses over the contractual life of the loan. These scores represent current and historical national industry-wide consumer level credit performance data, which management considers to predict a 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. However, we do lend selectively in areas outside the footprint, primarily in automobile finance and education lending.

Citizens Financial Group, Inc. | 21


Table 14: Retail Loan Portfolio Analysis
	September 30, 2022										December 31, 2021
			Days Past Due and Accruing										Days Past Due and Accruing
	Current		30-59		60-89		90+		Nonaccrual		Current		30-59		60-89		90+		Nonaccrual
Residential mortgages(1)	97.40	%	0.22	%	0.14	%	1.44	%	0.80	%	96.03	%	0.45	%	0.23	%	2.41	%	0.88	%
Home equity	97.87		0.30		0.11		—		1.72		97.75		0.32		0.10		—		1.83
Automobile	98.31		1.00		0.29		—		0.40		98.45		0.90		0.27		—		0.38
Education	99.33		0.24		0.15		0.03		0.25		99.45		0.26		0.10		0.01		0.18
Other retail	98.04		0.70		0.49		0.32		0.45		98.18		0.74		0.42		0.29		0.37
Total retail	98.03	%	0.41	%	0.19	%	0.60	%	0.77	%	97.69	%	0.51	%	0.20	%	0.83	%	0.77	%

(1) 90+ days past due and accruing includes $425 million and $544 million of loans fully or partially guaranteed by the FHA, VA, and USDA at September 30, 2022 and December 31, 2021, respectively.

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


Table 15: Retail Asset Quality Metrics
	September 30, 2022		December 31, 2021
Average refreshed FICO for total portfolio	769		768
CLTV ratio for secured real estate(1)	51	%	56	%
Nonaccrual retail loans as a percentage of total retail	0.77	%	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, the CARES Act and interagency guidance exempted from TDR classification COVID-related modified retail and commercial loans that met certain eligibility criteria. While relief provisions under the CARES Act expired on December 31, 2021, we generally do not consider loans that were modified before January 1, 2022, that met eligibility criteria under the CARES Act to be TDRs.

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


Table 16: Accruing and Nonaccrual Troubled Debt Restructurings
	September 30, 2022
		As a % of Accruing TDRs
(dollars in millions)	Accruing	30-89 Days Past Due		90+ Days Past Due		Nonaccrual	Total
Commercial and industrial	$157	—	%	—	%	$119	$276
Commercial real estate	1	—		—		9	10
Total commercial	158	—		—		128	286
Residential mortgages(1)	538	3.0		18.0		87	625
Home equity	156	0.2		—		83	239
Automobile	7	0.2		—		11	18
Education	100	0.5		0.3		21	121
Other retail	18	0.2		—		2	20
Total retail	819	4.0		18.3		204	1,023
Total	$977	4.0	%	18.3	%	$332	$1,309

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	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 $176 million and $98 million in 90+ days past due and accruing that are fully or partially guaranteed by the FHA, VA, and USDA at September 30, 2022 and December 31, 2021, respectively.

Deposits


Table 17: Composition of Deposits
(dollars in millions)	September 30, 2022	December 31, 2021	Change	Percent
Demand	$51,888	$49,443	$2,445	5	%
Money market	49,081	47,216	1,865	4
Checking with interest	38,040	30,409	7,631	25
Savings	29,882	22,030	7,852	36
Term	9,675	5,263	4,412	84
Total deposits	$178,566	$154,361	$24,205	16	%

The increase in total deposits as of September 30, 2022 compared to December 31, 2021 is driven by $25.6 billion of period-end balances from the HSBC transaction and Investors acquisition.

Borrowed Funds

Total borrowed funds of $16.5 billion as of September 30, 2022 increased $9.5 billion from December 31, 2021, driven by an increase in FHLB borrowings from the advances acquired from Investors and the funding of loan and security growth. For more information regarding our borrowed funds, see “—Liquidity” and Note 9.

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.

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Under the 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. Our SCB requirement through September 30, 2022 was 3.4%. On August 4, 2022, the FRB announced, based on the results of the 2022 CCAR supervisory stress tests, that our SCB effective October 1, 2022 through September 30, 2023, will remain at 3.4%. To incorporate the effects of the Investors acquisition on our capital requirements, the FRB will require that we participate in the 2023 CCAR supervisory stress test.

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 September 30, 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 disruption, the federal banking regulators adopted a final rule relative to the regulatory capital treatment of the 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 5 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 18: Regulatory Capital Ratios Under the U.S. Basel III Standardized Rules
	September 30, 2022			December 31, 2021			Required Minimum Capital Ratios(1)
(in millions, except ratio data)	Amount	Ratio		Amount	Ratio
CET1 capital	$18,304	9.8	%	$15,656	9.9	%	7.9	%
Tier 1 capital	20,318	10.9		17,670	11.1		9.4
Total capital	23,516	12.6		20,244	12.7		11.4
Tier 1 leverage	20,318	9.2		17,670	9.7		4.0
Risk-weighted assets	187,201			158,831
Quarterly adjusted average assets	220,076			181,800

(1) Represents minimum requirement under the current capital framework plus the SCB of 3.4%. The SCB is not applicable to the Tier 1 leverage ratio.

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At September 30, 2022, our CET1 capital, tier 1 capital and total capital ratios were 9.8%, 10.9% and 12.6%, 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 largely driven by $28.4 billion of RWA growth, higher estimated goodwill and intangibles related to the HSBC transaction and Investors acquisition, dividends as described in “—Capital Transactions” below and a decrease in the modified CECL transition amount as a result of entering the CECL three-year transition period, partially offset by the common stock issued in connection with the Investors acquisition and net income for the nine months ended September 30, 2022. The total capital ratio decreased due to the changes in the CET1 capital ratio described above, partially offset by the net increase in subordinated debt largely due to transactions described in “—Capital Transactions” below, reduced by maturing subordinated debt and higher AACL related to the Investors acquisition and a reduction in the modified AACL transition amount as a result of entering the CECL three-year transition period. At September 30, 2022, our CET1 capital, tier 1 capital and total capital ratios were approximately 190 basis points, 150 basis points and 120 basis points, respectively, above their required minimums.

Both the Company and CBNA are subject to the standardized approach for determining RWA. At September 30, 2022, RWA totaled $187.2 billion, up $28.4 billion from December 31, 2021, largely driven by the Investors acquisition and includes higher CRE, commercial and residential mortgage loans, home equity lines, CRE commitments, commercial commitments and MSRs, partially offset by lower automobile loans and loans held for sale.

As of September 30, 2022, the tier 1 leverage ratio was 9.2%, down from 9.7% at December 31, 2021, driven by an increase in quarterly adjusted average assets of $38.3 billion, partially offset by higher tier 1 capital.

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Table 19: Capital Composition Under the U.S. Basel III Capital Framework
(in millions)	September 30, 2022	December 31, 2021
Total common stockholders' equity	$21,132	$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	2,919	156
Derivatives	1,566	160
Unamortized net periodic benefit costs	338	349
Deductions:
Goodwill, net of deferred tax liability	(7,766)	(6,733)
Other intangible assets, net of deferred tax liability	(171)	(66)
Deferred tax assets that arise from tax loss and credit carryforwards	(2)	—
Total common equity tier 1	18,304	15,656
Qualifying preferred stock	2,014	2,014
Total tier 1 capital	20,318	17,670
Qualifying subordinated debt(1)	1,496	1,138
Allowance for credit losses	2,196	1,934
Exclusions from tier 2 capital:
Modified AACL transitional amount	(374)	(498)
Allowance on PCD assets	(120)	—
Adjusted allowance for credit losses	1,702	1,436
Total capital	$23,516	$20,244

(1) As of September 30, 2022 and December 31, 2021, the amount of non-qualifying subordinated debt excluded from regulatory capital was $297 million and $420 million, respectively. See Note 9 for more details on our outstanding subordinated debt.

Capital Transactions

We completed the following capital actions during the nine months ended September 30, 2022:

Issued $400 million of 5.641% fixed-rate reset subordinated notes in the second quarter;
Declared and paid quarterly common stock dividends of $0.39 per share in the first and second quarter and $0.42 in the third quarter, aggregating to $569 million; and
Declared and paid preferred stock dividends aggregating to $81 million and $90 million, respectively.

For additional detail regarding our common and preferred stock dividends see Note 12.

On June 27, 2022, we announced that our Board of Directors increased the authorization of common share repurchases to $1.0 billion, which was an increase of $545 million above the $455 million of capacity remaining under the prior $750 million January 2021 authorization. On July 19, 2022, we announced that our Board of Directors declared a three-cent increase in our quarterly common stock dividend to $0.42 per share for the third quarter of 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, receipt of required regulatory approvals and other regulatory and accounting considerations.

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Banking Subsidiary’s Capital


Table 20: CBNA's Capital Ratios Under the U.S. Basel III Standardized Rules
	September 30, 2022			December 31, 2021
(in millions, except ratio data)	Amount	Ratio		Amount	Ratio
CET1 capital	$20,458	11.0	%	$17,039	10.7	%
Tier 1 capital	20,458	11.0		17,039	10.7
Total capital	23,285	12.5		19,600	12.4
Tier 1 leverage	20,458	9.3		17,039	9.4
Risk-weighted assets	186,706			158,550
Quarterly adjusted average assets	219,454			181,268

CBNA’s CET1 and tier 1 capital totaled $20.5 billion at September 30, 2022, up $3.4 billion from $17.0 billion at December 31, 2021. This increase was related to the common stock issued in connection with the Investors acquisition and net income for the nine months ended September 30, 2022, partially offset by higher estimated goodwill and intangibles related to the HSBC transaction and Investors acquisition and a decrease in the modified CECL transition amount as a result of entering the CECL three-year transition period. Total capital was $23.3 billion at September 30, 2022, an increase of $3.7 billion from $19.6 billion at December 31, 2021, driven by the changes in CET1 capital, higher AACL related to the Investors acquisition and a reduction in the modified AACL transition amount as a result of entering the CECL three-year transition period.

CBNA’s RWA totaled $186.7 billion at September 30, 2022, up $28.2 billion from December 31, 2021, largely driven by the Investors acquisition and includes higher CRE, commercial and residential mortgage loans, home equity lines, CRE commitments, commercial commitments and MSRs, partially offset by lower automobile loans and loans held for sale.

As of September 30, 2022, CBNA’s tier 1 leverage ratio was 9.3%, down from 9.4% at December 31, 2021, driven by an increase in quarterly adjusted average assets of $38.2 billion, partially offset by higher tier 1 capital.

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.

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 debt 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 nine months ended September 30, 2022, the Parent Company completed the following transaction:

Issued $400 million of 5.641% fixed-rate reset subordinated notes.

During the three months ended September 30, 2022 and 2021, the Parent Company declared dividends on common stock of $209 million and $167 million, respectively, and declared dividends on preferred stock of $25 million and $26 million, respectively.

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During the nine months ended September 30, 2022 and 2021, the Parent Company declared dividends on common stock of $569 million and $502 million, respectively, and declared dividends on preferred stock of $81 million.

During the nine months ended September 30, 2022 and 2021, the Parent Company repurchased $2 million and $95 million, respectively, of its outstanding common stock.

Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $1.6 billion and $2.3 billion as of September 30, 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. The Parent Company’s double-leverage ratio was 101.5% and 98.5% as of September 30, 2022 and December 31, 2021, respectively.

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 9.

During the nine months ended September 30, 2022, CBNA completed the following transactions:

Issued $650 million of 4.119% fixed-to-floating rate senior notes;
Redeemed $1.0 billion and $750 million of senior notes due February and May 2022, respectively; and
Issued $800 million of 4.575% fixed-to-floating rate senior notes.

CBNA issued $600 million of 6.064% fixed-to-floating rate senior notes during October 2022.

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

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financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our contingent liquidity risk and our funding liquidity risk to be relatively low.

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 21: Credit Ratings
	September 30, 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 September 30, 2022, our wholesale funding consisted primarily of term debt issued by the Parent Company and CBNA and collateralized advances from the FHLB.

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 group 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 September 30, 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 87.4%;
Our total available liquidity, comprised of contingent liquidity and available discount window capacity, was approximately $69.5 billion;

◦Contingent liquidity was $44.0 billion, consisting of unencumbered high-quality liquid securities of $27.4 billion, unused FHLB capacity of $9.7 billion, and our cash balances at the FRB of $6.9 billion; and

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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 $25.5 billion. Use of this borrowing capacity would be considered only during exigent circumstances.

For a summary of our sources and uses of cash by type of activity for the nine months ended September 30, 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 13 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 increased from $1.9 billion at December 31, 2021 to $2.2 billion at September 30, 2022.

Our ACL as of September 30, 2022 accounts for an economic forecast with 2022 real GDP growth of approximately 1.5% and an average unemployment rate of approximately 4%, and 2023 real GDP decline of approximately 0.5% and an average unemployment rate of approximately 6%. This forecast incorporates the increased risk of a shallow recession beginning in the fourth quarter of 2022 and persisting for three consecutive quarters. This compares to our December 31, 2021 forecast which reflected 2022 real GDP growth of 2.8% and an average unemployment rate of 6%, and 2023 real GDP growth of 2.1% and average unemployment rate of 4.3%.

To address economic uncertainty, we utilize our qualitative allowance framework to reassess and adjust ACL reserve levels. Macroeconomic forecast risk, driven by uncertainty and volatility of key macroeconomic variables, is one of the primary factors influencing our qualitative reserve.

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Our September 2022 qualitative consideration for macroeconomic risk reflects the Federal Reserve’s aggressively tightening monetary policy and the contraction of fiscal policy. These conditions, weighed together with the impacts of Russia’s invasion of Ukraine on key global commodity prices, labor shortage-related wage increases and continuing supply-chain challenges contributing to surging inflation, may push the U.S. economy into a shallow recession and create volatility in key macroeconomic variables, including GDP and employment.

Our determination of the ACL is sensitive to changes in forecasted macroeconomic conditions during the reasonable and supportable forecast period. To illustrate the sensitivity, we applied a more pessimistic scenario than that described above which assumes that monetary tightening triggers a deeper real GDP contraction across three consecutive quarters, resulting in a 1.3% percent drop in real GDP over 2023. Excluding consideration of qualitative adjustments, this scenario would result in a quantitative lifetime loss estimate of approximately 1.2x our modeled period-end ACL, or an increase of approximately $310 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 type. 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 macroeconomic 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 September 30, 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. We do not intend to early adopt this Pronouncement. •Adoption is not expected to have a material financial impact on our Consolidated Financial Statements, but is expected to have 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, with early adoption permitted. We do not intend to early adopt this Pronouncement. •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 22: Sensitivity of Net Interest Income
	Estimated % Change in Net Interest Income over 12 Months
Basis points	September 30, 2022		December 31, 2021
Instantaneous Change in Interest Rates
+200	5.0	%	19.4	%
+100	2.3		10.2

-100	(2.7)		(8.5)

Gradual Change in Interest Rates
+200	3.3	%	10.1	%
+100	1.7		5.2

-100	(1.7)		(6.0)

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 3.3% at September 30, 2022, compared to 10.1% at December 31, 2021. The change reflects rising base net interest income, including the impact of the Investors acquisition, and our ongoing hedge activity, which locks in higher forward rates and reduces our exposure to evolving downside risks. This reduction in asset sensitivity is partially offset by growth and a mix shift towards a higher proportion of floating rate consumer and commercial lending. Current levels of asset sensitivity will continue to provide upside benefits to net interest income as we progress through a period of expected higher short-term policy rates from the FRB. Changes in interest rates can also affect the risk positions, which impact the repricing sensitivity or beta of the deposit base as well as the cash flows on assets that allow for early payoff without a penalty. The risk position is managed within our risk limits, and long-term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding.

Citizens Financial Group, Inc. | 33

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.

We use interest rate 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 23: Interest Rate Derivative Contracts Used to Manage Non-Trading Interest Rate Exposure
	September 30, 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
Swaps
Cash flow - receive fixed/pay variable - conventional ALM(1)(2)	$29,750	3.9	2.1	%	3.5	%	$16,250	3.7	1.0	%	0.1	%
Cash flow - basis swaps - conventional ALM(1)	5,500	3.3	SOFR Overnight		1M Term SOFR		—	—	—		—
Fair value - receive fixed/pay variable - conventional ALM	1,000	1.8	2.7		3.3		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)(3)	437	2.7	3.0		2.8		2,000	2.7	0.1		1.5
Total swaps	36,687						23,450
Options
Interest rate collars(4)(5)	1,500	3.1	2.6		3.9		—	—	—		—

(1) We use interest rate contracts as part of our Asset Liability Management (“ALM”) strategy to manage exposure to the variability in the interest cash flows on our floating-rate commercial loans and wholesale funding, as well as the variability in the fair value of AFS securities and loans held for sale.

(2) As of September 30, 2022, includes $11.0 billion of forward-starting cash flow swaps executed at a weighted average rate of 2.9% with start dates ranging from the fourth quarter of 2022 to the third quarter of 2024.

(3) As of September 30, 2022, includes $437 million of forward-starting fair value swaps that will become effective in the fourth quarter of 2022.

(4) Represents forward-starting interest rate collars with effective dates ranging from the fourth quarter of 2023 to the second quarter of 2024.

(5) Receive and pay rate represent the minimum interest rate received for interest rate floors and the maximum interest rate paid for interest rate caps, respectively.


Table 24: 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 September 30,		Nine Months Ended September 30,
(in millions)	2022	2021	2022	2021
Amount of pre-tax net gains (losses) recognized in OCI(1)	($996)	($15)	($1,901)	$19
Amount of pre-tax net gains (losses) reclassified from OCI into interest income	(48)	46	1	141
Amount of pre-tax net gains (losses) reclassified from OCI into interest expense	2	(13)	(4)	(37)

(1) Using the interest rate curve at September 30, 2022 with respect to cash flow hedge strategies, we estimate that approximately $624 million in pre-tax net losses 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 nine months ended September 30, 2022.

Capital Markets

A key component of our capital markets activities is the underwriting and distribution of corporate credit facilities to 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.

Citizens Financial Group, Inc. | 34

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 September 30, 2022 and December 31, 2021, the fair value of our MSRs was $1.5 billion and $1.0 billion, respectively, and the total notional amount of related derivative contracts was $10.9 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.

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 25: Results of Modeled and Non-Modeled Measures for Regulatory Capital Calculations
(in millions)	For the Three Months Ended September 30, 2022				For the Three Months Ended September 30, 2021
Market Risk Category	Period End	Average	High	Low	Period End	Average	High	Low
Interest Rate	$2	$1	$2	$1	$1	$1	$3	$—
Foreign Exchange Currency Rate	—	—	—	—	1	1	1	1
Credit Spread	2	2	3	2	6	9	14	4
Commodity	—	—	—	—	—	—	—	—
General VaR	3	3	4	2	6	10	14	4
Specific Risk VaR	—	—	—	—	—	—	—	—
Total VaR	$3	$3	$4	$2	$6	$10	$17	$4
Stressed General VaR	$11	$13	$16	$9	$8	$11	$16	$5
Stressed Specific Risk VaR	—	—	—	—	—	—	—	—
Total Stressed VaR	$11	$13	$16	$9	$8	$11	$16	$5
Market Risk Regulatory Capital	$48				$62
Specific Risk Not Modeled Add-on	23				16
de Minimis Exposure Add-on	2				—
Total Market Risk Regulatory Capital	$73				$78
Market Risk-Weighted Assets	$909				$973

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VaR Backtesting

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

The following graph shows our daily net trading revenue and total internal, modeled VaR for the twelve months ended September 30, 2022.

Daily VaR Backtesting

Citizens Financial Group, Inc. | 36

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 in the MD&A:


Table 26: Reconciliations of Non-GAAP Measures
		As of and for the Three Months Ended September 30,				As of and for the Nine Months Ended September 30,
(in millions, except share, per share and ratio data)	Ref.	2022		2021		2022		2021
Noninterest income, Underlying:
Noninterest income (GAAP)	A	$512		$514		$1,504		$1,541
Less: Notable items		—		—		(31)		—
Noninterest income, Underlying (non-GAAP)	B	$512		$514		$1,535		$1,541
Total revenue, Underlying:
Total revenue (GAAP)	C	$2,177		$1,659		$5,821		$4,927
Less: Notable items		—		—		(31)		—
Total revenue, Underlying (non-GAAP)	D	$2,177		$1,659		$5,852		$4,927
Noninterest expense, Underlying:
Noninterest expense (GAAP)	E	$1,241		$1,011		$3,652		$3,020
Less: Notable items		46		23		219		54
Noninterest expense, Underlying (non-GAAP)	F	$1,195		$988		$3,433		$2,966
Pre-provision profit:
Total revenue (GAAP)	C	$2,177		$1,659		$5,821		$4,927
Less: Noninterest expense (GAAP)	E	1,241		1,011		3,652		3,020
Pre-provision profit (GAAP)		$936		$648		$2,169		$1,907
Pre-provision profit, Underlying
Total revenue, Underlying (non-GAAP)	D	$2,177		$1,659		$5,852		$4,927
Less: Noninterest expense, Underlying (non-GAAP)	F	1,195		988		3,433		2,966
Pre-provision profit, Underlying (non-GAAP)		$982		$671		$2,419		$1,961
Provision (benefit) for credit losses, Underlying:
Provision (benefit) for credit losses (GAAP)		$123		($33)		$342		($386)
Less: Notable items		—		—		169		—
Provision (benefit) for credit losses, Underlying (non-GAAP)		$123		($33)		$173		($386)
Income before income tax expense, Underlying:
Income before income tax expense (GAAP)	G	$813		$681		$1,827		$2,293
Less: Income (loss) before income tax expense (benefit) related to notable items		(46)		(23)		(419)		(54)
Income before income tax expense, Underlying (non-GAAP)	H	$859		$704		$2,246		$2,347
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP)	I	$177		$151		$407		$504
Less: Income tax expense (benefit) related to notable items		(13)		(7)		(99)		(15)
Income tax expense, Underlying (non-GAAP)	J	$190		$158		$506		$519
Effective income tax rate (GAAP)	I/G	21.80	%	22.35	%	22.29	%	22.01	%
Effective income tax rate, Underlying (non-GAAP)	J/H	22.00		22.45		22.50		22.09
Net income, Underlying:
Net income (GAAP)	K	$636		$530		$1,420		$1,789
Add: Notable items, net of income tax benefit		33		16		320		39
Net income, Underlying (non-GAAP)	L	$669		$546		$1,740		$1,828
Net income available to common stockholders, Underlying:
Net income available to common stockholders (GAAP)	M	$611		$504		$1,339		$1,708
Add: Notable items, net of income tax benefit		33		16		320		39
Net income available to common stockholders, Underlying (non-GAAP)	N	$644		$520		$1,659		$1,747
Return on average common equity and return on average common equity, Underlying:
Average common equity (GAAP)	O	$22,246		$21,326		$21,875		$20,926
Return on average common equity	M/O	10.91	%	9.39	%	8.19	%	10.91	%
Return on average common equity, Underlying (non-GAAP)	N/O	11.52		9.70		10.15		11.17

Citizens Financial Group, Inc. | 37


		As of and for the Three Months Ended September 30,				As of and for the Nine Months Ended September 30,
(in millions, except share, per share and ratio data)	Ref.	2022		2021		2022		2021
Return on average tangible common equity and return on average tangible common equity, Underlying:
Average common equity (GAAP)	O	$22,246		$21,326		$21,875		$20,926
Less: Average goodwill (GAAP)		8,131		7,055		7,771		7,052
Less: Average other intangibles (GAAP)		228		52		174		54
Add: Average deferred tax liabilities related to goodwill and other intangible assets (GAAP)		424		383		408		381
Average tangible common equity	P	$14,311		$14,602		$14,338		$14,201
Return on average tangible common equity	M/P	16.96	%	13.71	%	12.49	%	16.08	%
Return on average tangible common equity, Underlying (non-GAAP)	N/P	17.91		14.17		15.48		16.46
Return on average total assets and return on average total assets, Underlying:
Average total assets (GAAP)	Q	$225,473		$186,108		$211,722		$184,391
Return on average total assets	K/Q	1.12	%	1.13	%	0.90	%	1.30	%
Return on average total assets, Underlying (non-GAAP)	L/Q	1.18		1.16		1.10		1.33
Return on average total tangible assets and return on average total tangible assets, Underlying:
Average total assets (GAAP)	Q	$225,473		$186,108		$211,722		$184,391
Less: Average goodwill (GAAP)		8,131		7,055		7,771		7,052
Less: Average other intangibles (GAAP)		228		52		174		54
Add: Average deferred tax liabilities related to goodwill and other intangible assets (GAAP)		424		383		408		381
Average tangible assets	R	$217,538		$179,384		$204,185		$177,666
Return on average total tangible assets	K/R	1.16	%	1.17	%	0.93	%	1.35	%
Return on average total tangible assets, Underlying (non-GAAP)	L/R	1.22		1.21		1.14		1.38
Efficiency ratio and efficiency ratio, Underlying:
Efficiency ratio	E/C	57.02	%	60.92	%	62.74	%	61.30	%
Efficiency ratio, Underlying (non-GAAP)	F/D	54.90		59.55		58.67		60.21
Noninterest income as a % of total revenue, Underlying:
Noninterest income as a % of total revenue	A/C	23.54	%	31.01	%	25.84	%	31.28	%
Noninterest income as a % of total revenue, Underlying (non-GAAP)	B/D	23.54		31.01		26.24		31.28
Operating leverage and operating leverage, Underlying:
Increase (decrease) in total revenue		31.19	%	(7.33)	%	18.14	%	(5.20)	%
Increase in noninterest expense		22.79		2.31		20.92		1.39
Operating leverage		8.40	%	(9.64)	%	(2.78)	%	(6.59)	%
Increase (decrease) in total revenue, Underlying (non-GAAP)		31.19	%	(7.33)	%	18.77	%	(5.20)	%
Increase in noninterest expense, Underlying (non-GAAP)		20.96		3.26		15.73		2.45
Operating leverage, Underlying (non-GAAP)		10.23	%	(10.59)	%	3.04	%	(7.65)	%
Tangible book value per common share:
Common shares - at period end (GAAP)	S	495,843,793		426,199,576		495,843,793		426,199,576
Common stockholders' equity (GAAP)		$21,132		$21,409		$21,132		$21,409
Less: Goodwill (GAAP)		8,160		7,065		8,160		7,065
Less: Other intangible assets (GAAP)		199		51		199		51
Add: Deferred tax liabilities related to goodwill and other intangible assets (GAAP)		424		384		424		384
Tangible common equity	T	$13,197		$14,677		$13,197		$14,677
Tangible book value per common share	T/S	$26.62		$34.44		$26.62		$34.44
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)	U	495,651,083		426,086,717		470,118,265		425,996,867
Average common shares outstanding - diluted (GAAP)	V	497,477,501		427,840,964		471,958,310		427,679,885
Net income per average common share - basic (GAAP)	M/U	$1.23		$1.18		$2.85		$4.01
Net income per average common share - diluted (GAAP)	M/V	1.23		1.18		2.84		3.99
Net income per average common share - basic, Underlying (non-GAAP)	N/U	1.30		1.22		3.53		4.10
Net income per average common share - diluted, Underlying (non-GAAP)	N/V	1.30		1.22		3.52		4.09
Dividend payout ratio and dividend payout ratio, Underlying:
Cash dividends declared and paid per common share	W	$0.42		$0.39		$1.20		$1.17
Dividend payout ratio	W/(M/U)	34	%	33	%	42	%	29	%
Dividend payout ratio, Underlying (non-GAAP)	W/(N/U)	32		32		34		29

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