Page Introduction 38 Financial Performance 39 Results of Operations - 2021 compared with 2020 41 Net Interest Income 41 Noninterest Income 44 Noninterest Expense 44 Provision for Credit Losses 44 Income Tax Expense 45 Business Operating Segments 45 Results of Operations - 2020 compared with 2019 46 Analysis of Financial Condition 47 Securities 47 Loans and Leases 48 Allowance for Credit Losses and Nonaccrual Loans and Leases 50 Deposits 55 Borrowed Funds 56 Capital and Regulatory Matters 58 Liquidity 62 Critical Accounting Estimates 65 Risk Governance 67 Market Risk 69 Non-GAAP Financial Measures and Reconciliations 77
Citizens Financial Group, Inc.| 37
Citizens Financial Group, Inc.is one of the nation's oldest and largest financial institutions with $188.4 billionin assets as of December 31, 2021. 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 to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a 24/7 customer contact center, the convenience of approximately 3,000 ATMs and approximately 900 branches in 11 states in the New England, Mid-Atlantic, and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer 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, mergers and acquisitions, and debt and equity capital markets capabilities. More information is available at www.citizensbank.com. On May 26, 2021, CBNA entered into an agreement to acquire 80 East Coastbranches and the national online deposit business from HSBC. The HSBC branch acquisition provides an attractive entry into important metro markets and supports our national expansion strategy. The acquisition closed on February 18, 2022. On July 28, 2021Citizens entered into a definitive agreement and a plan of merger under which we will acquire all of the outstanding shares of Investors for a combination of stock and cash. The acquisition of Investors enhances Citizens' banking franchise, adding an attractive middle market, small business and consumer customer base while building our physical presence in the northeast with the addition of 154 branches located in the greater New York Cityand Philadelphiametropolitan areas and across New Jersey. The merger is expected to close in early second quarter 2022, subject to regulatory approvals and other customary closing conditions.
For more information regarding these pending acquisitions, see Note 2 in Item 8.
The following MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements in Item 8, as well as other information contained in this document.
Non-GAAP Financial Measures
This document contains non-GAAP financial measures denoted as "Underlying," "excluding PPP loans", as well as other results excluding the impact of certain items. 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 or results excluding the impact of certain items in any given reporting period reflect our on-going financial performance and increase comparability of period-to-period results, and, accordingly, are useful to consider in addition to our GAAP financial results. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies. We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures. Non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for our results reported under GAAP. Non-GAAP measures are denoted throughout our MD&A by the use of the term Underlying or identified as excluding the impact of certain items. 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."
Citizens Financial Group, Inc.| 38
Net income of
$2.3 billionincreased 119% from 2020, with earnings per diluted common share of $5.16, up 132% from $2.22per diluted common share for 2020. ROTCE of 15.4% increased from 6.9% in 2020. Improved results primarily reflect the impact of the COVID-19 pandemic and associated lockdowns during 2020, resulting in a significant ACL reserve build during 2020. In 2021, results reflect $78 millionof expenses, net of tax benefit, or $0.18per diluted common share, from notable items compared to $83 millionof expenses, net of tax benefit, or $0.19per diluted common share, from notable items in 2020. Table 1: Notable Items Year Ended December 31, 2021 (in millions) Noninterest expense Income tax expense Net Income Reported results (GAAP) $4,081 $658 $2,319Less: Notable items Total integration costs 35 (9) (26) Other notable items(1) 70 (18) (52) Total notable items 105 (27) (78) Underlying results (non-GAAP) $3,976 $685 $2,397
(1) Other notable items include a pension settlement charge and a
compensation-related credit as well as our TOP 6 transformational and revenue
and efficiency initiatives.
Year Ended December 31, 2020 (in millions) Noninterest expense Income tax expense Net Income Reported results (GAAP)
$3,991 $241 $1,057Less: Notable items Total integration costs 10 (2) (8) Other notable items(1) 115 (40) (75) Total notable items 125 (42) (83) Underlying results (non-GAAP) $3,866 $283 $1,1401) Other notable items include noninterest expense of $115 millionrelated to our TOP 6 transformational and revenue and efficiency initiatives and an income tax benefit of $11 millionrelated to an operational restructure and legacy tax matters.
•Net income available to common stockholders of
•On an Underlying basis, which excludes notable items, 2021 net income available
to common stockholders of
•On an Underlying basis, earnings per diluted common share of
•Total revenue of
by declines of 8% and 2% in noninterest income and net interest income,
•Net interest income of
margin, partially offset by 5% growth in interest-earning assets.
•Net interest margin of 2.71% decreased 17 basis points from 2.88% in 2020, reflecting the impact of a lower rate environment, lower interest-earning asset yields and elevated cash balances, partly offset by improved funding mix and deposit pricing, and the benefit of accelerated PPP loan forgiveness.
-Net interest margin on a FTE basis of 2.72% decreased 17 basis points, compared
to 2.89% in 2020.
-Average loans and leases of
$123.6 billiondecreased $1.0 billion, or 1%, from $124.5 billionin 2020, driven by a $3.3 billiondecrease in commercial reflecting line of credit repayments and net payoffs, partially offset by an increase in PPP loans. The decrease in commercial was partially offset by a $2.3 billionincrease in retail given growth in education, residential Citizens Financial Group, Inc.| 39 --------------------------------------------------------------------------------
mortgage and automobile, partially offset by planned run-off of personal
unsecured installment loans and a decrease in home equity.
-Period-end loans increased
in retail and a 1% decline in commercial.
-Average deposits of
$150.5 billionincreased $11.7 billion, or 8%, from $138.7 billionin 2020, reflecting an increase in demand deposits, money market accounts, savings and checking with interest, partially offset by a decrease in term deposits.
-Period-end deposit growth of
elevated liquidity tied to government stimulus associated with the COVID-19
•Noninterest income of
$2.1 billiondecreased $184 million, or 8%, from 2020, driven by a decline in mortgage banking fees partially offset by improved capital markets fees, trust and investment services fees, letter of credit and loan fees, card fees and service charges and fees.
•Noninterest expense of
•On an Underlying basis, noninterest expense increased 3% from 2020, reflecting
higher salaries and employee benefits, outside services and equipment and
software, partially offset by a decrease in other operating expense.
•The efficiency ratio of 61.4% compared to 57.8% in 2020, and ROTCE of 15.4%
compared to 6.9%.
•On an Underlying basis, the efficiency ratio of 59.8% compared to 56.0% in 2020
and ROTCE of 16.0% compared to 7.5%.
•Credit provision benefit of
provision expense in 2020, reflecting strong credit performance across the
retail and commercial loan portfolios and improvement in the economy.
•Tangible book value per common share of
average common shares outstanding was stable over the same period.
Citizens Financial Group, Inc.| 40
RESULTS OF OPERATIONS – 2021 compared with 2020
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."
Citizens Financial Group, Inc.| 41 --------------------------------------------------------------------------------
Table 2: Major Components of Net Interest Income
Year Ended December 31, 2021 2020 Change Average Income/ Yields/ Average Income/ Yields/ Average Yields/ (dollars in millions) Balances Expense Rates Balances Expense Rates Balances Rates (bps) Assets Interest-bearing cash and due from banks and deposits in banks
$11,762 $160.13 % $6,175 $110.18 % $5,587(5) bps Taxable investment securities 27,574 487 1.76 25,160 519 2.06 2,414 (30) Non-taxable investment securities 3 - 2.60 4 - 2.60 (1) - Total investment securities 27,577 487 1.76 25,164 519 2.06 2,413 (30) Commercial and industrial 43,512 1,399 3.17 46,255 1,582 3.36 (2,743) (19) Commercial real estate 14,515 380 2.58 14,452 438 2.98 63 (40) Leases 1,742 49 2.79 2,365 64 2.71 (623) 8 Total commercial 59,769 1,828 3.02 63,072 2,084 3.25 (3,303) (23) Residential mortgages 20,636 613 2.97 19,178 618 3.22 1,458 (25) Home Equity 11,901 370 3.11 12,607 461 3.66 (706) (55) Automobile 12,972 506 3.90 12,064 517 4.29 908 (39) Education 12,666 536 4.23 11,165 560 5.02 1,501 (79) Other retail 5,607 400 7.15 6,458 479 7.41 (851) (26) Total retail 63,782 2,425 3.80 61,472 2,635 4.29 2,310 (49) Total loans and leases 123,551 4,253 3.42 124,544 4,719 3.76 (993) (34) Loans held for sale, at fair value 3,359 82 2.45 2,772 75 2.72 587 (27) Other loans held for sale 262 13 4.87 620 33 5.22 (358) (35) Interest-earning assets 166,511 4,851 2.90 159,275 5,357 3.35 7,236 (45) Allowance for loan and lease losses (2,104) (2,218) 114 Goodwill 7,062 7,049 13 Other noninterest-earning assets 13,637 12,336 1,301 Total assets $185,106 $176,442 $8,664Liabilities and Stockholders' Equity Checking with interest $27,365 $240.09 % $26,002 $640.24 % $1,363(15) Money market accounts 49,148 78 0.16 44,732 192 0.43 4,416 (27) Regular savings 20,276 19 0.10 16,144 50 0.31 4,132 (21) Term deposits 6,802 39 0.58 14,309 203 1.42 (7,507) (84) Total interest-bearing deposits 103,591 160 0.15 101,187 509 0.50 2,404 (35) Short-term borrowed funds 66 1 1.13 334 2 0.52 (268) 61 Long-term borrowed funds 7,412 178 2.39 10,853 260 2.39 (3,441) - Total borrowed funds 7,478 179 2.38 11,187 262 2.33 (3,709) 5 Total interest-bearing liabilities 111,069 339 0.30 112,374 771 0.69 (1,305) (39) Demand deposits 46,898 37,553 9,345 Other liabilities 4,105 4,280 (175) Total liabilities 162,072 154,207 7,865 Stockholders' equity 23,034 22,235 799 Total liabilities and stockholders' equity $185,106 $176,442 $8,664Interest rate spread 2.60 % 2.66 % (6) Net interest income and net interest margin $4,5122.71 % $4,5862.88 % (17) Net interest income and net interest margin, FTE(1) $4,5212.72 % $4,5992.89 % (17) Memo: Total deposits (interest-bearing and demand) $150,489 $1600.11 % $138,740 $5090.37 % $11,749(26) bps
(1) Net interest income and net interest margin is presented on FTE basis using
the federal statutory tax rate of 21%. The FTE impact is predominantly
attributable to commercial and industrial loans for the periods presented.
Net interest income of
$4.5 billiondecreased $74 million, reflecting a 17 basis point decrease in net interest margin given the lower rate and challenging yield curve environment, partially offset by 5% average interest-earning asset growth, improvements in funding mix and deposit pricing and a higher benefit from PPP loan forgiveness. Net interest margin on a FTE basis of 2.72% decreased 17 basis points compared to 2.89% in 2020, primarily reflecting the impact of lower interest rates and elevated cash balances given strong deposit flows, partially offset by improved funding mix and deposit pricing and the benefit of PPP forgiveness. Average interest-earning asset yields of 2.90% decreased 45 basis points from 3.35% in 2020, while average interest-bearing liability costs of 0.30% decreased 39 basis points from 0.69% in 2020. Citizens Financial Group, Inc.| 42
-------------------------------------------------------------------------------- Average interest-earning assets of
$166.5 billionincreased $7.2 billion, or 5%, from 2020, primarily driven by an $8.0 billionincrease in total investment securities and interest-bearing cash and due from banks and deposits in banks, and a $2.3 billionincrease in average retail loans, partially offset by a $3.3 billiondecrease in average commercial loans. Retail loan growth was driven by education, residential mortgage and automobile, partially offset by other retail and home equity. Commercial decreases were driven by commercial and industrial loans and leases. Average deposits of $150.5 billionincreased $11.7 billionfrom 2020, as a result of elevated liquidity tied to government stimulus associated with the COVID-19 disruption. Growth in demand deposits, money market accounts, savings, and checking with interest, were partially offset by a decrease in term deposits. Total interest-bearing deposit costs of $160 milliondecreased $349 million, or 69%, from $509 millionin 2020, primarily due to the lower rate environment and strong pricing discipline. Average total borrowed funds of $7.5 billiondecreased $3.7 billionfrom 2020 reflecting the pay down of senior debt and short-term borrowings given strong customer deposit inflows. Total borrowed funds costs of $179 milliondecreased $83 millionfrom 2020. Total borrowed funds cost of 2.38% increased 5 basis points from 2.33% in 2020. Table 3: Changes in Net Interest Income Due to Average Volume and Average Rate Year Ended December 31, 2021Versus 2020 (in millions)
Average Volume(1) Average Rate(1) Net Change
Interest-bearing cash and due from banks and deposits in banks
$10( $5) $5Taxable investment securities 50 (82) (32) Total investment securities 50 (82) (32) Commercial and industrial (93) (90) (183) Commercial real estate 2 (60) (58) Leases (16) 1 (15) Total commercial (107) (149) (256) Residential mortgages 46 (51) (5) Home Equity (26) (65) (91) Automobile 40 (51) (11) Education 76 (100) (24) Other retail (64) (15) (79) Total retail 72 (282) (210) Total loans and leases (35) (431) (466) Loans held for sale, at fair value 16 (9) 7 Other loans held for sale (19) (1) (20) Total interest income $22( $528) ( $506) Interest Expense Checking with interest $3( $43) ( $40) Money market accounts 20 (134) (114) Regular savings 12 (43) (31) Term deposits (107) (57) (164) Total interest-bearing deposits (72) (277) (349) Short-term borrowed funds (1) - (1) Long-term borrowed funds (64) (18) (82) Total borrowed funds (65) (18) (83) Total interest expense (137) (295) (432) Net interest income $159( $233) ( $74)
(1) Volume and rate changes have been allocated on a consistent basis using the
respective percentage changes in average balances and average rates.
Citizens Financial Group, Inc.| 43 --------------------------------------------------------------------------------
Noninterest Income Table 4: Noninterest Income Year Ended December 31, (in millions) 2021 2020 Change Percent Capital markets fees
$428 $250 $17871 % Service charges and fees 409 403 6 1 Mortgage banking fees 434 915 (481) (53) Card fees 250 217 33 15 Trust and investment services fees 239 203 36 18 Letter of credit and loan fees 156 140 16 11 Foreign exchange and interest rate products 120 120 - - Securities gains, net 10 4 6 150 Other income(1) 89 67 22 33 Noninterest income $2,135 $2,319( $184) (8 %)
(1) Includes bank-owned life insurance income and other income for all periods
Noninterest income of
reflecting lower mortgage banking fees partially offset by improved capital
markets fees, trust and investment services fees, letter of credit and loan
fees, card fees and service charge and fees.
•Capital markets fees increased driven by loan syndication, underwriting, and mergers and acquisitions advisory fees, notably to record levels in the fourth quarter of 2021.
•Trust and investment services fees increased driven by an increase in assets
under management from higher equity market levels and strong inflows.
•Letter of credit and loan fees increased reflecting higher commitment fees.
•Card fees and service charges and fees increased largely tied to economic
•Mortgage banking fees decreased reflecting increased industry capacity and
heightened competition resulting in lower gain-on-sale margins.
Noninterest Expense Table 5: Noninterest Expense Year Ended December 31, (in millions) 2021 2020 Change Percent Salaries and employee benefits
$2,132 $2,123 $90 % Equipment and software 610 565 45 8 Outside services 595 553 42 8 Occupancy 333 331 2 1 Other operating expense 411 419 (8) (2) Noninterest expense $4,081 $3,991 $902 % Noninterest expense of $4.1 billionincreased $90 million, or 2%, compared to 2020, reflecting higher equipment and software given continued investment in technology and outside services tied to growth 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.
Citizens Financial Group, Inc.| 44 -------------------------------------------------------------------------------- The credit provision benefit of $411 millionreflects strong credit performance and an improving macroeconomic outlook. Net charge-offs of $325 milliondecreased $368 millionfrom 2020, driven by decreases in commercial and retail of $261 millionand $107 million, respectively. The decrease in commercial reflected the economic recovery following the onset of the COVID-19 pandemic and associated lockdowns, whereas the decrease in retail was due to U.S. Governmentstimulus programs and strong collateral values in residential real estate and automobile. The combination of the credit provision benefit and net charge-offs resulted in a reduction in our ACL of $736 millionin 2021.
Income Tax Expense
Income tax expense of
$658 millionincreased $417 millionfrom $241 millionin 2020. The 2021 effective tax rate of 22.1% increased from 18.5% in 2020, driven by the decreased benefit of tax-advantaged investments on higher pre-tax income. An Underlying effective tax rate of 22.2% in 2021 compared to 19.9% in 2020.
Business Operating Segments
We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are derived by specifically attributing managed assets, liabilities, capital and related revenues, provision for credit losses, which at the segment level is equal to net charge-offs, and other expenses. The residual difference between the consolidated provision for credit losses and the business operating segments' net charge-offs is reflected in Other. Non-segment operations includes assets, liabilities, capital, revenues, provision for credit losses, expenses and income tax expense not attributed to our Consumer or Commercial Banking segments as well as treasury and community development. In addition, Other includes goodwill not directly allocated to a business operating segment and any associated goodwill impairment charges. For impairment testing purposes, we allocate all goodwill to our Consumer Banking and Commercial Banking reporting units. Our capital levels are evaluated and managed centrally; however, capital is allocated on a risk-adjusted basis to the business operating segments to support evaluation of business performance. Because funding and asset liability management is a central function, funds transfer-pricing ("FTP") methodologies are utilized to allocate a cost of funds used, or credit for the funds provided, to all business operating segment assets, liabilities and capital, respectively, using a matched-funding concept. The residual effect on net interest income of asset/liability management, including the residual net interest income related to the FTP process, is included in Other. We periodically evaluate and refine our methodologies used to measure financial performance of our business operating segments. Noninterest income and expense are directly attributed to each business operating segment, including fees, service charges, salaries and benefits, and other direct revenues and costs and are respectively accounted for in a manner similar to our Consolidated Financial Statements. Occupancy costs are allocated based on utilization of facilities by each business operating segment. Noninterest expenses incurred by centrally managed operations or business operating segments that directly support another business operating segment's operations are charged to the applicable business operating segment based on its utilization of those services. Income tax expense is assessed to each business operating segment at a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in Other. Developing and applying methodologies used to allocate items among the business operating segments is a dynamic process. Accordingly, financial results may be revised periodically as management systems are enhanced, methods of evaluating performance or product lines are updated, or our organizational structure changes.
Citizens Financial Group, Inc.| 45
-------------------------------------------------------------------------------- The following table presents certain financial data of our business operating segments. Total business operating segment financial results differ from total consolidated net income. These differences are reflected in Other non-segment operations. See Note 26 in Item 8 for further information.
Table 6: Selected Financial
Data for Business Operating
As of and for the Year Ended
December 31, As of and for the
2021 2020 2021 2020 (dollars in millions) Consumer Banking Commercial Banking Net interest income
$3,562 $3,311 $1,706 $1,643Noninterest income 1,223 1,655 809 595 Total revenue 4,785 4,966 2,515 2,238
expense 2,987 2,964 973 860
credit losses 1,798 2,002 1,542 1,378 Net charge-offs 185 288 156 398
income tax expense 1,613 1,714 1,386 980 Income tax expense 410 429 300 206 Net income
$1,203 $1,285 $1,086 $774
$75,509 $72,022 $57,617 $60,839
Total loans and
leases(1)(2) 71,126 68,237 54,734 57,935 Deposits 100,195 91,541 44,747 40,417
assets 72,034 68,535 55,096 58,334 (1) Includes LHFS. (2) The majority of PPP loans are reflected in Consumer Banking in accordance with how they are managed. Consumer Banking Net interest income increased
$251 million, or 8%, from 2020, driven by the benefit of a $2.9 billionincrease in average loans led by residential mortgages, automobile and education, as well as the impact of the PPP loan program. Additionally, higher deposit volumes were offset by improved funding mix and deposit pricing. Noninterest income decreased $432 million, or 26%, from 2020, driven by a decrease in mortgage banking fees attributable to increased industry capacity and heightened competition resulting in lower gain-on-sale margins, partially offset by higher card fees driven by higher debit and credit card volumes given the economic recovery and trust and investment services fees reflecting an increase in assets under management from higher equity market levels and strong net inflows. Noninterest expense increased $23 million, or 1%, from 2020, reflecting higher outside services tied to growth initiatives. Net charge-offs of $185 milliondecreased $103 million, or 36%, driven by the impact of U.S. Governmentstimulus programs and forbearance, as well as strong collateral values in residential real estate and automobile.
Net interest income of
$1.7 billionincreased $63 million, or 4%, from 2020, as the $3.2 billiondecrease in average loans was offset by improved funding mix and deposit pricing on higher deposit volumes. Noninterest income of $809 millionincreased $214 million, or 36%, from $595 millionin 2020, driven by a record increase in capital markets fees reflecting higher mergers and acquisitions advisory and loan syndication fees. Noninterest expense of $973 millionincreased $113 million, from $860 millionin 2020, driven by higher salaries and employee benefits reflecting revenue-based compensation. Net charge-offs of $156 milliondecreased $242 millionfrom 2020, reflecting improving economic conditions following the onset of the COVID-19 pandemic and associated lockdowns.
RESULTS OF OPERATIONS – 2020 compared with 2019
For a description of our results of operations for 2020, see the “Results of
Operations – 2020 compared with 2019” section of Item 7 in our 2020 Form 10-K.
Citizens Financial Group, Inc.| 46 --------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION
Table 7: Amortized Cost and Fair Value of
December 31, 2021 December 31, 2020 Amortized Amortized (in millions) Cost Fair Value Cost Fair Value U.S. Treasury and other
$11 $11 $11 $11State and political subdivisions 2 2 3 3 Mortgage-backed securities, at fair value: Federal agencies and U.S. government sponsored entities 24,607 24,442 21,954 22,506 Other/non-agency 397 405 396 422 Total mortgage-backed securities, at fair value 25,004 24,847 22,350 22,928 Collateralized loan obligations, at fair value 1,208 1,207 - -
Total debt securities available for sale, at fair value
$26,067 $22,364 $22,942Mortgage-backed securities, at cost: Federal agencies and U.S. government sponsored entities $1,505 $1,557 $2,342 $2,464Total mortgage-backed securities, at cost $1,505 $1,557 $2,342 $2,464Asset-backed securities, at cost $737 $732 $893 $893Total debt securities held to maturity $2,242 $2,289 $3,235 $3,357
Total debt securities available for sale and held to
$28,467 $28,356 $25,599 $26,299Equity securities, at fair value $109 $109 $66 $66Equity securities, at cost 624 624 604 604 Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality and market risk while achieving returns that align with our overall portfolio management strategy. The portfolio primarily includes high quality, highly liquid investments reflecting our ongoing commitment to maintain strong contingent liquidity levels and pledging capacity. U.S.government-guaranteed notes and GSE-issued mortgage-backed securities represent 92% of the fair value of our debt securities portfolio holdings at December 31, 2021. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge those securities to the FHLB for collateral purposes. The fair value of the AFS debt securities portfolio of $26.1 billionat December 31, 2021increased $3.1 billionfrom $22.9 billionat December 31, 2020, including $3.9 billionin portfolio growth, offset by a $736 millionreduction in unrealized gains driven by a steepening yield curve. The fair value of the HTM debt securities portfolio decreased $1.1 billionlargely reflecting portfolio runoff. As of December 31, 2021, the portfolio's average effective duration was 4.3 years compared with 2.7 years as of December 31, 2020, as higher long-term rates drove a decrease in both actual and projected securities prepayment speeds. We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetite in the context of the broader interest rate risk framework and limits. Citizens Financial Group, Inc. | 47
Table 8: Amortized Cost of
As of December 31, 2021 Distribution of Maturities(1) After 5 Years Through 10 1 Year or Less After 1 Year Through 5 Years Years After 10 Years Total (dollars in millions) Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2) Amortized cost:
U.S. Treasuryand other $110.34 % $- - % $- - % $- - % $110.34 % State and political subdivisions - - - - - - 2 2.60 2 2.60 Mortgage-backed securities: Federal agencies and U.S.government sponsored entities 7 2.91 66 2.08 1,914 2.27 22,620 2.40 24,607 2.39 Other/non-agency - - - - - - 397 2.81 397 2.81 Collateralized loan obligations - - - - 24 1.46 1,184 1.55 1,208 1.55 Total debt securities available for sale 18 1.33 66 2.08 1,938 2.26 24,203 2.37 26,225 2.36 Mortgage-backed securities: Federal agencies and U.S.government sponsored entities - - - - - - 1,505 2.28 1,505 2.28 Asset-backed securities - - - - 737 2.94 - - 737 2.94 Total debt securities held to maturity - - - - 737 2.94 1,505 2.28 2,242 2.49 Total debt securities $181.33 % $662.08 % $2,6752.44 % $25,7082.36 % $28,4672.37 % (1) Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties. (2) The weighted-average yield is computed based on a constant effective interest rate over the contractual life of each security and considers the contractual coupon, amortization of premiums and accretion of discounts. Yields exclude the impact of related hedging derivatives.
Loans and Leases
Table 9: Composition of Loans and Leases, Excluding LHFS
Changes from December 31, 2021-2020 (in millions) 2021 2020 $ % Commercial and industrial(1)
$44,500 $44,173 $3271 % Commercial real estate 14,264 14,652 (388) (3) Leases 1,586 1,968 (382) (19) Total commercial 60,350 60,793 (443) (1) Residential mortgages 22,822 19,539 3,283 17 Home equity 12,015 12,149 (134) (1) Automobile 14,549 12,153 2,396 20 Education 12,997 12,308 689 6 Other retail 5,430 6,148 (718) (12) Total retail 67,813 62,297 5,516 9 Total loans and leases $128,163 $123,090 $5,0734 %
(1) Includes PPP loans fully guaranteed by the SBA of
Total loans and leases increased
$5.1 billion, or 4%, from $123.1 billionas of December 31, 2020, reflecting a $5.5 billionincrease in retail driven by growth in mortgage and automobile, and a $443 milliondecrease in commercial as underlying growth was more than offset by a $3.4 billiondecrease in PPP loans. Citizens Financial Group, Inc.| 48
Table 10: Fixed and Variable Rate Loans and Leases by Maturity
After 1 Year After 5 Years Through 15 Total Loans and (in millions) 1 Year or Less Through 5 Years Years After 15 Years Leases Fixed rate: Commercial and industrial
$289 $2,156 $760 $38 $3,243Commercial real estate 20 189 166 9 384 Leases 128 899 521 - 1,548 Total commercial fixed rate 437 3,244 1,447 47 5,175 Variable rate: Commercial and industrial 6,483 30,020 4,746 8 41,257 Commercial real estate 3,514 9,690 675 1 13,880 Leases 14 21 3 - 38 Total commercial variable rate(1) 10,011 39,731 5,424 9 55,175 Total commercial 10,448 42,975 6,871 56 60,350 Fixed rate: Residential mortgages 783 50 1,043 13,070 14,946 Home equity 85 77 276 186 624 Automobile 517 7,105 6,927 - 14,549 Education 247 1,160 7,569 3,067 12,043 Other retail 858 2,471 45 34 3,408 Total retail fixed rate 2,490 10,863 15,860 16,357 45,570 Variable rate: Residential mortgages - 6 107 7,763 7,876 Home equity 169 7 940 10,275 11,391 Automobile - - - - - Education 3 155 624 172 954 Other retail 2,017 4 1 - 2,022 Total retail variable rate 2,189 172 1,672 18,210 22,243 Total retail 4,679 11,035 17,532 34,567 67,813 Total loans and leases $15,127 $54,010 $24,403 $34,623 $128,163
rate to manage our exposure to the variability in interest cash flows.
Citizens Financial Group, Inc.| 49 --------------------------------------------------------------------------------
Allowance for Credit Losses and Nonaccrual Loans and Leases
The ACL is created through charges to the provision for credit losses in order to provide appropriate reserves 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 6 in Item 8. The ACL of
$1.9 billionas of December 31, 2021compared with the ACL of $2.7 billionas of December 31, 2020, reflecting a reserve release of $736 million. For further information, see Note 6. Table 11: Allocation of the ALLL December 31, (dollars in millions) 2021 2020 Commercial and industrial $55535 % $82136 % Commercial real estate 220 11 360 12 Leases 46 1 52 1 Total commercial 821 47 1,233 49 Residential mortgages 144 18 141 16 Home equity 82 9 134 10 Automobile 154 12 200 10 Education 308 10 361 10 Other retail 249 4 374 5 Total retail 937 53 1,210 51 Total loans and leases $1,758100 % $2,443100 %
Table 12: ACL and Related Coverage Ratios by Portfolio
December 31, 2021 2020 (in millions) Loans and Leases Allowance Coverage Loans and Leases Allowance Coverage Allowance for Loan and Lease Losses Commercial and industrial
$44,500 $5551.25 % $44,173 $8211.86 % Commercial real estate 14,264 220 1.54 14,652 360 2.46 Leases 1,586 46 2.92 1,968 52 2.67 Total commercial 60,350 821 1.36 60,793 1,233 2.03 Residential mortgages 22,822 144 0.63 19,539 141 0.72 Home equity 12,015 82 0.69 12,149 134 1.10 Automobile 14,549 154 1.05 12,153 200 1.65 Education 12,997 308 2.37 12,308 361 2.93 Other retail 5,430 249 4.59 6,148 374 6.07 Total retail loans 67,813 937 1.38 62,297 1,210 1.94 Total loans and leases $128,163 $1,7581.37 % $123,090 $2,4431.98 % Allowance for Unfunded Lending Commitments Commercial(1) $1531.61 % $1862.33 % Retail(2) 23 1.42 41 2.01 Total allowance for unfunded lending commitments 176 227 Allowance for credit losses(3) $128,163 $1,9341.51 % $123,090 $2,670
(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. (3) Excluding the impact of PPP loans, the ACL Coverage Ratio would have been 1.52% and 2.24% for
December 31, 2021and December 31, 2020, respectively. For more information on the computation of non-GAAP financial measures, see "-Introduction - Non-GAAP Financial Measures" and "-Non-GAAP Financial Measures and Reconciliations." Citizens Financial Group, Inc.| 50
Table 13: Nonaccrual Loans and Leases
December 31, (dollars in millions) 2021 2020 Change Percent Commercial and industrial
$171 $280( $109) (39 %) Commercial real estate 11 176 (165) (94) Leases 1 2 (1) (50) Total commercial 183 458 (275) (60) Residential mortgages(1) 201 167 34 20 Home equity 220 276 (56) (20) Automobile 55 72 (17) (24) Education 23 18 5 28 Other retail 20 28 (8) (29) Total retail 519 561 (42) (7) Nonaccrual loans and leases $702 $1,019( $317) (31 %) Nonaccrual loans and leases to total loans and leases 0.55 % 0.83 % (28 bps) Allowance for loan and lease losses to nonaccrual loans and leases 251 240 11 % Allowance for credit losses to nonaccrual loans and leases 276 262 14 %
(1) Loans fully or partially guaranteed by the FHA,
Nonaccrual loans and leases of
$702 millionas of December 31, 2021decreased $317 millionfrom December 31, 2020, reflecting a $42 milliondecrease in retail and a $275 milliondecrease in commercial. As of December 31, 2021, total commercial nonaccrual loans and leases were 0.3% of the commercial portfolio and decreased from 0.8% at December 31, 2020. Commercial nonaccrual loans and leases decreased through loan sale activity, repayments and charge-offs.
Table 14: Ratio of Net Charge-Offs to Average Loans and Leases
December 31, 2021 2020 (dollars in millions) Net Charge-Offs Average Balance Ratio Net Charge-Offs Average Balance Ratio Commercial and industrial
$124 $43,5120.28 % $236 $46,2550.51 % Commercial real estate 22 14,515 0.15 111 14,452 0.77 Leases 18 1,742 1.06 78 2,365 3.32 Total commercial 164 59,769 0.27 425 63,072 0.67 Residential mortgages (3) 20,636 (0.01) 1 19,178 0.01 Home equity (42) 11,901 (0.35) (13) 12,607 (0.11) Automobile 16 12,972 0.12 63 12,064 0.52 Education 50 12,666 0.39 35 11,165 0.31 Other retail 140 5,607 2.49 182 6,458 2.82 Total retail 161 63,782 0.25 268 61,472 0.44 Total loans and leases $325 $123,5510.26 % $693 $124,5440.56 % NCOs of $325 milliondecreased $368 million, or 53%, from $693 millionin 2020, driven by decreases in commercial and retail of $261 millionand $107 million, respectively. For the year ended December 31, 2021, annualized NCOs as a percentage of total average loans and leases of 0.26% decreased 30 basis points compared to 0.56% in 2020. The decline in retail NCOs is primarily due to U.S. Governmentstimulus programs and forbearance, as well as strong collateral values in residential real estate and automobile. The decrease in commercial NCOs reflects the economic recovery following the onset of the COVID-19 pandemic and associated lockdowns. We continue to assess risks to the recovery, including potential for continuing impacts from COVID-19 variants, challenges in the global supply chain and recent inflationary trends, as well as potential impacts from ending monetary and fiscal stimulus programs. We have maintained a variety of measures to identify and monitor areas of potential risk, including direct outreach to commercial clients and close monitoring of retail credit metrics.
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
Citizens Financial Group, Inc.| 51 --------------------------------------------------------------------------------
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.
For commercial, we utilize regulatory classification ratings to monitor credit quality. For more information on regulatory classification ratings, see Note 6 in Item 8. The recorded investment in commercial based on regulatory classification ratings is presented below:
Table 15: Commercial Loans and Leases by Regulatory Classification
December 31, 2021 Criticized Special (in millions) Pass Mention Substandard Doubtful Total Commercial and industrial(1)
$42,254 $809 $1,294 $143 $44,500Commercial 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 $60,350December 31, 2020 Criticized (in millions) Pass Special Mention Substandard Doubtful Total Commercial and industrial(1) $40,878 $1,583 $1,464 $248 $44,173Commercial real estate 13,356 804 416 76 14,652 Leases 1,922 33 12 1 1,968 Total commercial $56,156 $2,420 $1,892 $325 $60,793
are fully guaranteed by the SBA as of
Total commercial criticized balances of
$3.3 billionas of December 31, 2021decreased $1.4 billioncompared with December 31, 2020. Commercial criticized as a percent of total commercial of 5.4% at December 31, 2021decreased from 7.6% at December 31, 2020. Commercial and industrial criticized balances of $2.2 billion, or 5.0% of the total commercial and industrial loan portfolio as of December 31, 2021, decreased from $3.3 billion, or 7.5%, as of December 31, 2020. The decrease was primarily driven by repayments and net charge-offs. Commercial and industrial criticized loans represented 69% of total criticized loans as of December 31, 2021compared to 71% as of December 31, 2020. Commercial real estate criticized balances of $945 million, or 6.6% of the commercial real estate portfolio as of December 31, 2021, decreased from $1.3 billion, or 8.8%, as of December 31, 2020. The decrease was due to repayments and the migration to Pass for a few borrowers. Commercial real estate accounted for 29% of total criticized loans as of December 31, 2021compared to 28% as of December 31, 2020. Citizens Financial Group, Inc.| 52
Table 16: Commercial Loans and Leases by Industry Sector
December 31, 2021 December 31, 2020 % of % of (dollars in millions) Balance Total Loans Balance Total Loans Finance and insurance
$9,3017 % $6,4735 % Health, pharma, and social assistance 2,912 2 3,253 3 Accommodation and food services 3,438 3 3,159 3 Professional, scientific, and technical services 2,665 2 2,804 2 Other manufacturing 4,087 3 3,686 3 Technology 4,220 3 3,546 3 Retail trade 2,237 2 2,312 2 Energy and related 2,017 2 2,237 2 Wholesale trade 2,358 2 1,976 2 Arts, entertainment, and recreation 1,189 1 1,383 1 Other services 2,051 2 1,360 1 Administrative and waste management services 1,396 1 1,327 1 Transportation and warehousing 1,147 1 1,169 1 Consumer products manufacturing 1,192 1 1,078 1 Automotive 1,172 1 1,057 1 Educational services 573 - 844 - Chemicals 896 1 736 - Real estate and rental and leasing 739 - 734 - All other(2) 123 - 884 1 Total commercial and industrial 43,713 34 40,018 32 Real estate and rental and leasing 12,773 10 13,167 11 Accommodation and food services 605 - 749 1 Finance and insurance 624 1 498 - All other(2) 262 - 238 - Total commercial real estate 14,264 11 14,652 12 Total leases 1,586 1 1,968 2 Total commercial(1)(3) $59,56346 % $56,63846 % (1) During 2021, our industry sectors were re-aligned to better reflect sector management and associated risks. Prior period has been adjusted to conform with the current period presentation. (2) Deferred fees and costs are reported in All other. (3) Excludes PPP loans of $787 millionand $4.2 billionas of December 31, 2021and 2020, respectively. Retail Loan Asset Quality For retail loans, we utilize credit scores provided by FICO which are generally refreshed on a quarterly basis and the loan's payment and delinquency status to monitor credit quality. Management believes FICO credit scores are considered the strongest indicator of credit losses over the contractual life of the loan as the scores are based on current and historical national industry-wide consumer level credit performance data, and assist management in predicting the borrower's future payment performance. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-Atlantic and Midwest regions, although we have continued to lend selectively in areas outside the footprint primarily in auto finance and education lending. Citizens Financial Group, Inc. | 53 --------------------------------------------------------------------------------
Table 17: Retail Loan Portfolio Analysis
December 31, 2021 December 31, 2020 Days Past Due and Accruing Days Past Due and Accruing Current 30-59 60-89 90+ Nonaccrual(2)
Current 30-59 60-89 90+ Nonaccrual(2)
mortgages(1) 96.03 % 0.45 % 0.23 % 2.41 % 0.88 % 98.64 % 0.28 % 0.08 % 0.15 % 0.85 %
Home equity 97.75 0.32 0.10 –
1.83 97.13 0.44 0.16 - 2.27 Automobile 98.45 0.90 0.27 - 0.38 97.68 1.29 0.44 - 0.59 Education 99.45 0.26 0.10 0.01 0.18 99.48 0.25 0.10 0.02 0.15 Other retail 98.18 0.74 0.42 0.29 0.37 98.32 0.63 0.46 0.13 0.46
Total retail 97.69 % 0.51 % 0.20 % 0.83 % 0.77 % 98.29 % 0.54 % 0.21 % 0.06 % 0.90 %
(1) 90+ days past due and accruing includes
$544 millionand $21 millionof loans fully or partially guaranteed by the FHA, VA, and USDAat December 31, 2021and 2020, respectively. (2) Beginning in 2021, nonaccrual loans and leases are no longer aged relative to their delinquency status. Prior period has been adjusted to conform with the current period presentation.
For more information on the aging of accruing and nonaccrual retail loans, see
Note 6 in Item 8.
Table 18: Retail Asset Quality Metrics
December 31, 2021
Average refreshed FICO for total portfolio 768
CLTV ratio for secured real estate(1) 56 %
Nonaccrual retail loans as a percentage of
total retail 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 TDR is the classification given to a loan that has been restructured in a manner that grants a concession to a borrower experiencing financial hardship that we would not otherwise make. TDRs typically result from our loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship. Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our borrower's financial needs. The types of concessions include interest rate reductions, term extensions, principal forgiveness and other modifications to the structure of the loan that fall outside our lending policy. Depending on the specific facts and circumstances of the customer, restructuring can involve loans moving to nonaccrual, remaining on nonaccrual, or remaining on accrual status. In the first quarter of 2020, we adopted the CARES Act and interagency guidance issued by the bank regulatory agencies which provide that COVID-19-related modifications to retail and commercial loans that met certain eligibility criteria are exempt from classification as a TDR. We generally do not consider payment deferrals and forbearance plans established due to the COVID-19 pandemic and under the CARES Act to be TDRs. Relief provisions granted under the CARES Act, including the TDR classification exemption for certain eligible loans, expired on
December 31, 2021, and therefore any subsequent COVID-19-related loan modifications will likely be classified as TDRs. TDRs generally return to accrual status once repayment capacity and appropriate payment history can be established. TDRs are individually evaluated for impairment and loans, once classified as TDRs, remain classified as TDRs until paid off, sold or refinanced at market terms. For additional information regarding TDRs, see Note 6 in Item 8. Citizens Financial Group, Inc.| 54 --------------------------------------------------------------------------------
Table 19: Accruing and Nonaccrual Troubled Debt Restructurings
December 31, 2021 As a % of Accruing TDRs 30-89 Days 90+ Days (dollars in millions) Accruing Past Due Past Due Nonaccrual Total Commercial and industrial
$196- % - % $74 $270Commercial 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 $8154.5 % 12.1 % $234 $1,049December 31, 2020 As a % of Accruing TDRs 30-89 Days 90+ Days (dollars in millions) Accruing Past Due Past Due
Commercial and industrial
$1340.1 % - % $97 $231Commercial real estate 26 - - - 26 Total commercial 160 0.1 - 97 257 Residential mortgages(1) 172 2.1 2.0 43 215 Home equity loans 221 1.0 - 83 304 Automobile 13 0.4 - 33 46 Education 116 0.5 0.3 10 126 Other retail 25 0.2 - 2 27 Total retail 547 4.2 2.3 171 718 Total $7074.3 % 2.3 % $268 $975(1) Includes $98 millionand $14 millionin 90+ days past due and accruing that are fully or partially guaranteed by the FHA, VA, and USDAat December 31, 2021and 2020, respectively. Deposits
Table 20: Composition of Deposits December 31, (in millions) 2021 2020 Change Percent Demand
$49,443 $43,831 $5,61213 % Money market accounts 47,216 48,569 (1,353) (3) Checking with interest 30,409 27,204 3,205 12 Regular savings 22,030 18,044 3,986 22 Term deposits 5,263 9,516 (4,253) (45) Total deposits $154,361 $147,164 $7,1975 % Total deposits as of December 31, 2021, increased $7.2 billion, or 5%, driven by growth in demand, checking with interest and savings, partially offset by a decrease in money market accounts and terms deposits. Citizens Access®, our national digital platform, attracted $4.4 billionof deposits through December 31, 2021, down from $5.9 billionas of December 31, 2020. Total estimated uninsured deposits, including demand, checking with interest, savings, money market accounts and term deposits, are $77.9 billionand $73.4 billionas of December 31, 2021and 2020, respectively. Citizens Financial Group, Inc. | 55 -------------------------------------------------------------------------------- Table 21: Term Deposits in Excess of the FDIC Insurance Limit by Remaining Maturity (in millions) December 31, 2021 Three months or less $1,054After three months through six months 57 After six months through twelve months 49 After twelve months 32 Total term deposits(1) $1,192
(1) Includes term deposits per account in excess of
Table 22: Summary of Short-Term Borrowed Funds
December 31, (in millions) 2021 2020 Change Percent Securities sold under agreements to repurchase
$1 $231( $230) (100 %) Other short-term borrowed funds 73 12 61 NM Total short-term borrowed funds $74 $243( $169) (70 %) Our advances, lines of credit and letters of credit from the FHLB are collateralized primarily by residential mortgages and home equity products at least sufficient to satisfy the collateral maintenance level established by the FHLB. The utilized borrowing capacity for FHLB advances and letters of credit was $2.3 billionand $3.2 billionat December 31, 2021and 2020, respectively. Our remaining available FHLB borrowing capacity was $15.9 billionand $13.9 billionat December 31, 2021and 2020, respectively. We can also borrow from the FRB discount window to meet short-term liquidity requirements. Collateral, including certain loans, is pledged to support this borrowing capacity. At December 31, 2021, our unused secured borrowing capacity was approximately $63.0 billion, which includes unencumbered securities, FHLB borrowing capacity, and FRB discount window capacity. Citizens Financial Group, Inc. | 56
Table 23: Summary of Long-Term Borrowed Funds
December 31, (in millions) 2021 2020 Parent Company: 2.375% fixed-rate senior unsecured debt, due July 2021(1) $-
$3504.150% fixed-rate subordinated debt, due September 2022(2)(3) 168 182 3.750% fixed-rate subordinated debt, due July 2024(2)(3) 90 159 4.023% fixed-rate subordinated debt, due October 2024(2)(3) 17 25 4.350% fixed-rate subordinated debt, due August 2025(2)(3) 133 193 4.300% fixed-rate subordinated debt, due December 2025(2)(3) 336 450 2.850% fixed-rate senior unsecured notes, due July 2026 498 497 2.500% fixed-rate senior unsecured notes, due February 2030 298 297 3.250% fixed-rate senior unsecured notes, due April 2030 745 745 3.750% fixed-rate reset subordinated debt, due February 2031(2) 69 - 4.300% fixed-rate reset subordinated debt, due February 2031(2) 135 - 4.350% fixed-rate reset subordinated debt, due February 2031(2) 60 - 2.638% fixed-rate subordinated debt, due September 2032(3) 550 543 CBNA's Global Note Program: 2.550% senior unsecured notes, due May 2021 - 1,003 3.250% senior unsecured notes, due February 2022 700 716
0.845% floating-rate senior unsecured notes, due
300 299 0.932% floating-rate senior unsecured notes, due May 2022(4) 250 250 2.650% senior unsecured notes, due May 2022 503 510 3.700% senior unsecured notes, due March 2023 512 527 1.170% floating-rate senior unsecured notes, due March 2023(4) 250 249 2.250% senior unsecured notes, due April 2025 746 746 3.750% senior unsecured notes, due February 2026 524 551
Additional Borrowings by CBNA and Other Subsidiaries:
19 19 Other 29 35 Total long-term borrowed funds
$6,932 $8,346(1) Notes were redeemed on June 28, 2021. (2) December 31, 2021balances reflect the February 2021completion of $265 millionin private exchange offers for five series of outstanding subordinated notes whereby participants received newly issued 3.750%, 4.300%, and 4.350% fixed-rate reset subordinated notes due 2031 which are redeemable by the Company five years prior to their maturity. See "Capital and Regulatory Matters-Regulatory Capital Ratios and Capital Composition" for additional information. (3) December 31, 2020balances reflect the September 2020completion of (i) $621 millionin private exchange offers for five series of outstanding subordinated notes whereby participants received a combination of the Company's newly issued 2.638% fixed-rate subordinated notes due 2032 and an additional cash payment and (ii) $11 millionin related cash tender offers whereby validly tendered and accepted subordinated notes were purchased by Citizens and subsequently cancelled. (4) Rate disclosed reflects the floating rate as of December 31, 2021, or final floating rate as applicable.
Long-term borrowed funds of
significantly lower levels of borrowings.
The Parent Company'slong-term borrowed funds as of December 31, 2021and 2020 included principal balances of $3.2 billionand $3.5 billion, respectively, and unamortized deferred issuance costs and/or discounts of $80 millionand $90 million, respectively. CBNA and other subsidiaries' long-term borrowed funds as of December 31, 2021and 2020 included principal balances of $3.8 billionand $4.8 billion, respectively, with unamortized deferred issuance costs and/or discounts of $7 millionand $11 million, respectively, and hedging basis adjustments of $42 millionand $112 million, respectively. See Note 14 in Item 8 for further information about our hedging of certain long-term borrowed funds. Citizens Financial Group, Inc.| 57
CAPITAL AND REGULATORY MATTERS
As a bank holding company and a financial holding company, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association whose primary federal regulator is the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. For more information, see the "Regulation and Supervision" section in Item 1.
Tailoring of Prudential Requirements
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. On
April 2, 2021, we submitted our 2021 Capital Plan to the FRB under the FRB's 2021 CCAR process. For more information, see the "Tailoring of Prudential Requirements" section in Item 1. Under the FRB's Capital Plan Rule, a firm must update and resubmit its capital plan prior to the next annual submission date under certain circumstances, which includes a material change in the firm's risk profile, financial condition or corporate structure since its last capital plan submission. On July 28, 2021, we announced an agreement to acquire Investors, requiring us to resubmit our capital plan to the FRB. We submitted our updated capital plan on September 15, 2021.
Under the stress capital buffer (“SCB”) framework, the FRB will not object to
capital plans on quantitative grounds and each firm is required to maintain
capital ratios above the sum of its minimum and SCB requirements to avoid
restrictions on capital distributions and discretionary bonus payments.
April 5, 2021, the FRB adopted a final rule to make conforming changes to its Capital Plan Rule and stress capital buffer and capital planning requirements to be consistent with the Tailoring Rules framework. Under the final rule, for Category IV firms, like us, the SCB will be re-calibrated with each biennial supervisory stress test and updated annually to reflect our planned common stock dividends. In addition, Category IV firms may elect to participate in the supervisory stress test and receive an updated SCB requirement in a year in which they are not subject to the supervisory stress test. We did not elect to participate in the 2021 supervisory stress test and on August 5, 2021, the FRB announced that our SCB will remain unchanged at 3.4% from October 1, 2021through September 30, 2022. In light of the heightened uncertainty related to the COVID-19 pandemic and associated lockdowns, the FRB took certain actions to preserve capital at banks beginning in the third quarter of 2020 through the second quarter of 2021. Beginning July 1, 2021, the FRB lifted all temporary restrictions on capital distributions and authorized firms, like us, that are on a two-year cycle and not subject to supervisory stress testing in 2021 to make capital distributions that are consistent with the regulatory capital rules, including normal restrictions under the FRB stress capital buffer framework. In addition, we temporarily suspended share repurchases in connection with entering into the agreement to acquire Investors. We resumed share repurchases after the Investors shareholder vote on November 19, 2021. In January 2021, our board of directors authorized us to repurchase up to $750 millionof our common stock, of which $455 millionis available as of December 31, 2021. All future capital distributions are subject to consideration and approval by our board of directors prior to execution. The timing and amount of future dividends and share repurchases will depend on various factors, including our capital position, financial performance, risk-weighted assets, capital impacts of strategic initiatives, market conditions and regulatory considerations. 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” section in Item 1.
Citizens Financial Group, Inc.| 58
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 December 31, 2021, we did not meet the threshold for these additional capital deductions. MSRs or certain deferred tax assets not deducted from CET1 capital are assigned a 250% risk weight and investments in the capital of unconsolidated financial institutions not deducted from CET1 capital are assigned an exposure category risk weight. In reaction to the COVID-19 pandemic, the FRB and the other federal banking regulators adopted a final rule relative to regulatory capital treatment of ACL under CECL. This rule allowed electing banking organizations to delay the estimated impact of CECL on regulatory capital for a two-year period ending January 1, 2022, followed by a three-year transition period ending January 1, 2025to phase-in the aggregate amount of the capital benefit provided during the initial two-year delay. As of December 31, 2021, the aggregate capital benefit provided during the initial two-year delay was $384 million. Table 24: Regulatory Capital Ratios Under the U.S.Basel III Standardized Rules Required Minimum plus Required Buffer for (in millions, except ratio data) Amount Ratio Non-Leverage Ratios(1)(2) December 31, 2021CET1 capital $15,6569.9 % 7.9 % Tier 1 capital 17,670 11.1 9.4 Total capital 20,244 12.7 11.4 Tier 1 leverage 17,670 9.7 4.0 Risk-weighted assets 158,831 Quarterly adjusted average assets 181,800 December 31, 2020 CET1 capital $14,60710.0 % 7.9 % Tier 1 capital 16,572 11.3 9.4 Total capital 19,602 13.4 11.4 Tier 1 leverage 16,572 9.4 4.0 Risk-weighted assets 146,781 Quarterly adjusted average assets 175,370 (1) Required " Minimum Capitalratio" for 2021 and 2020 are: Common equity tier 1 capital of 4.5%; Tier 1 capital of 6.0%; Total capital of 8.0%; and Tier 1 leverage of 4.0%. (2) " Minimum Capitalratios" include a stress capital buffer of 3.4%; N/A to Tier 1 leverage. At December 31, 2021, our CET1 capital, tier 1 capital and total capital ratios were 9.9%, 11.1% and 12.7%, respectively, as compared with 10.0%, 11.3% and 13.4%, respectively, as of December 31, 2020. The CET1 capital ratio decreased as $12.1 billionof risk-weighted asset ("RWA") growth, and the impact of dividends and common share repurchases as described in "-Capital Transactions" below, a decrease in the modified CECL transitional amount and increases in goodwill and intangibles as a result of acquisitions were mostly offset by net income for the year ended December 31, 2021. The tier 1 capital ratio decreased due to the changes in CET1 capital described above and the redemption of Series A Preferred Stock offset by the issuance of Series G Preferred Stock described in "-Capital Transactions" below. The total capital ratio decreased due to the changes in CET1 and tier 1 capital described above combined with the net change in AACL and a decrease in qualifying subordinated debt resulting from haircut provisions partially offset by the subordinated debt exchange offer in the first quarter of 2021, as described in "-Capital Transactions" below. At December 31, 2021, our CET1 capital, tier 1 capital and total capital ratios were approximately 200 basis points, 170 basis points and 130 basis points, respectively, above their regulatory minimums plus our SCB. All ratios remained well above the U.S.Basel III minimums.
Regulatory Capital Ratios and Capital Composition
CET1 capital under
U.S.Basel III Standardized rules totaled $15.7 billionat December 31, 2021, an increase from $14.6 billionat December 31, 2020, driven by net income for the year ended December 31, 2021 Citizens Financial Group, Inc.| 59 -------------------------------------------------------------------------------- offset by dividends, common share repurchases, a decrease in the modified CECL transitional amount and increases in goodwill and intangibles as a result of acquisitions. Tier 1 capital at December 31, 2021totaled $17.7 billion, reflecting a $1.1 billionincrease from $16.6 billionat December 31, 2020, driven by the changes in CET1 capital and the issuance of Series G Preferred Stock, partially offset by the redemption of Series A Preferred Stock. Total capital of $20.2 billionat December 31, 2021increased $642 millionfrom December 31, 2020, driven by the changes in CET1 and tier 1 capital, partially offset by the net change in AACL and a decrease in qualifying subordinated debt. RWA totaled $158.8 billionat December 31, 2021, based on U.S.Basel III Standardized rules, up $12.1 billionfrom December 31, 2020. This increase was driven by higher commercial loans, automobile loans, commercial commitments, bank-owned life insurance, residential mortgages, agency securities, MSRs, education loans and other retail commitments. These RWA increases were partially offset by lower derivative valuations and other retail loans. As of December 31, 2021, the tier 1 leverage ratio was 9.7%, up from 9.4% at December 31, 2020driven by higher tier one capital, partially offset by the $6.4 billionincrease in quarterly adjusted average assets.
Table 25: Capital Composition Under the
December 31, 2021 December 31, 2020 Total common stockholders' equity
Modified CECL transitional amount 384 568
Net unrealized (gains)/losses recorded in accumulated other
comprehensive income (loss), net of tax:
Debt and equity securities
156 (380) Derivatives 160 11 Unamortized net periodic benefit costs 349 429
Goodwill (7,116) (7,050) Deferred tax liability associated with goodwill 383 379 Other intangible assets (66) (58) Total common equity tier 1 15,656 14,607 Qualifying preferred stock 2,014 1,965 Total tier 1 capital 17,670 16,572 Qualifying subordinated debt(1) 1,138 1,204 Allowance for credit losses 1,934 2,670
Exclusions from tier 2 capital:
Modified AACL transitional amount (498) (682) Excess allowance for credit losses(2) - (162) Adjusted allowance for credit losses
$1,436 $1,826Total capital $20,244 $19,602(1) As of December 31, 2021and 2020, the amount of non-qualifying subordinated debt excluded from regulatory capital was $420 millionand $348 million, respectively. (2) Excess allowance represents the amount excluded from tier 2 capital that is in excess of 1.25% of risk weighted assets, excluding market risk. On February 11, 2021, we completed $265 millionin private exchange offers for five series of outstanding subordinated notes. Exchange offer participants received newly-issued fixed-rate reset subordinated notes due 2031 which are redeemable by us five years prior to their maturity. These subordinated debt exchange offers will benefit our tier 2 and total capital going forward by increasing the amount of subordinated debt eligible for inclusion in tier 2 capital without increasing the aggregate principal amount of subordinated debt outstanding. See Note 13 for more details on our outstanding subordinated debt.
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. Capital requirements are determined for actual and forecasted risk portfolios using applicable regulatory capital methodologies. The assessment also considers the possible impacts of approved and proposed changes to regulatory capital requirements. Key analytical frameworks, including stress testing, which enable the assessment of capital adequacy versus unexpected loss under a variety of stress scenarios, supplement our base
Citizens Financial Group, Inc.| 60
-------------------------------------------------------------------------------- line forecast. A governance framework supports our capital planning process, including capital management policies and procedures that document capital adequacy metrics and limits, as well as our Capital Contingency Plan and the active engagement of both the legal-entity boards and senior management in oversight and decision-making. Forward-looking assessments of capital adequacy feed development of a single capital plan covering us and our banking subsidiary that is periodically submitted to the FRB. We prepare this plan in full compliance with the FRB's Capital Plan Rule and we participate annually in the FRB's horizontal capital review, which is the FRB's assessment of specific capital planning areas as part of their normal supervisory process.
We completed the following capital actions during 2021:
•Redeemed all outstanding shares of 5.500% fixed-to-floating rate non-cumulative
perpetual Series A Preferred Stock in the third quarter;
•Issued 300,000 shares of 4.000% fixed-rate reset non-cumulative perpetual Series G Preferred Stock at an aggregate offering price of
$300 millionin the second quarter;
•Declared and paid quarterly common stock dividends of
first, second, third and fourth quarters of 2021, aggregating to
•Declared a quarterly dividend of
fixed-to-floating rate non-cumulative perpetual Series A Preferred Stock,
•Declared semi-annual dividends of
$30.00per share in the second and fourth quarters of 2021 on the 6.000% fixed-to-floating rate non-cumulative perpetual Series B Preferred Stock, aggregating to $18 million;
•Declared quarterly dividends of
fixed-to-floating rate non-cumulative perpetual Series C Preferred Stock,
•Declared quarterly dividends of
fixed-to-floating rate non-cumulative perpetual Series D Preferred Stock,
•Declared quarterly dividends of
non-cumulative perpetual Series E Preferred Stock, aggregating to
•Declared quarterly dividends of
$14.13per share on the 5.650% fixed-rate non-cumulative perpetual Series F Preferred Stock, aggregating to $23 million; and
•Declared quarterly dividends of
reset non-cumulative perpetual Series G Preferred Stock, aggregating to
Banking Subsidiary’s Capital
Table 26: CBNA’s Capital Ratios Under the
December 31, 2021 December 31, 2020 (dollars in millions, except ratio data) Amount Ratio Amount Ratio CET1 capital
$17,03910.7 % $16,03210.9 % Tier 1 capital 17,039 10.7 16,032 10.9 Total capital 19,600 12.4 18,980 13.0 Tier 1 leverage 17,039 9.4 16,032 9.2 Risk-weighted assets 158,550 146,558 Quarterly adjusted average assets 181,268 174,954 CBNA's CET1 and tier 1 capital totaled $17.0 billionat December 31, 2021, up $1.0 billionfrom $16.0 billionat December 31, 2020. The increase was primarily driven by net income for the year ended December 31, Citizens Financial Group, Inc. | 61 -------------------------------------------------------------------------------- 2021, partially offset by dividend payments to the Parent Company and a decrease in the modified CECL transitional amount. Total capital was $19.6 billionat December 31, 2021, an increase of $620 millionfrom $19.0 billionat December 31, 2020, driven by the change in CET1 capital, partially offset by the net change in AACL. CBNA's RWA totaled $158.6 billionat December 31, 2021, up $12.0 billionfrom December 31, 2020. This increase was driven by higher commercial loans, automobile loans, commercial commitments, bank-owned life insurance, residential mortgages, agency securities, MSRs, education loans and other retail commitments. These RWA increases were partially offset by lower derivative valuations and other retail loans. As of December 31, 2021, the CBNA tier 1 leverage ratio increased to 9.4% from 9.2% at December 31, 2020, driven by higher tier one capital, partially offset by the $6.3 billionincrease in quarterly adjusted average assets.
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 and subordinated debt. Uses of cash include the routine cash flow requirements as a bank holding company, including periodic share repurchases and payments of dividends, interest and expenses; the needs of subsidiaries, including CBNA for additional equity and, as required, its need for debt financing; and the support for extraordinary funding requirements when necessary. To the extent the Parent Company has relied on wholesale borrowings, uses also include payments of related principal and interest.
During the year ended
•Redeemed all outstanding shares of 5.50% fixed-to-floating rate non-cumulative
perpetual Series A Preferred Stock;
•Issued 300,000 shares of 4.00% fixed-rate reset non-cumulative perpetual Series
G Preferred Stock at an aggregate offering price of
For further information on outstanding debt and preferred stock, see Note 13
and Note 17 in Item 8.
During the years ended
December 31, 2021and 2020, the Parent Company declared dividends on common stock of $670 millionand $672 million, respectively, and declared dividends on preferred stock of $113 millionand $107 million, respectively. In addition, the Parent Company repurchased $295 millionand $270 millionof its outstanding common stock, respectively. Our Parent Company's cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $2.3 billionas of December 31, 2021compared with $2.7 billionas of December 31, 2020. The Parent Company'sdouble-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. At December 31, 2021, the Parent Company's double-leverage ratio was 98.5%.
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
Citizens Financial Group, Inc.| 62 -------------------------------------------------------------------------------- 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 13 in Item 8.
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,
FNMAand the FHLMC), by any inability of the FHLBs to provide collateralized advances and/or by a refusal of the FRB to act as a lender of last resort in systemic stress. Similarly, given the structure of its balance sheet, the funding liquidity risk of CBNA would be materially affected by an adverse idiosyncratic event (e.g., a major loss, causing a perceived or actual deterioration in its financial condition), an adverse systemic event (e.g., default or bankruptcy of a significant capital markets participant), or a combination of both. Consequently, and despite ongoing exposure to a variety of idiosyncratic and systemic events, we view our contingent liquidity risk and our funding liquidity risk to be relatively modest. An additional variable affecting our access to unsecured wholesale market funds and to large denomination (i.e., uninsured) customer deposits is the credit ratings assigned by such agencies as Moody's, Standard and Poor's, and Fitch. Table 27: Credit Ratings December 31, 2021 Standard and Moody's 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 Citizens Financial Group, Inc. | 63 --------------------------------------------------------------------------------
unsecured wholesale funding. At
consisted primarily of term debt issued by the Parent Company and CBNA.
Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB, the OCC, and the
FDICregularly 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 the "Regulation and Supervision - Tailoring of Prudential Requirements" and "-Liquidity Requirements" sections in Item 1.
Liquidity Risk Management and Governance
Liquidity risk is measured and managed by the Funding and Liquidity unit within our
Treasuryunit 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 this goal by funding loans with stable deposits; by prudently controlling dependence on wholesale funding, particularly short-term unsecured funding; and by maintaining ample available liquidity, including a contingent liquidity buffer of unencumbered high-quality loans and securities. As of December 31, 2021: •Organically generated deposits continue to be our primary source of funding, resulting in a consolidated year-end loans-to-deposits ratio, excluding LHFS, of 83.0%;
•Our cash position, which is defined as our cash balances at the FRB, totaled
•Our total available liquidity, comprised of contingent liquidity and available
discount window capacity, was approximately
•Contingent liquidity was
$45.1 billion, consisting of unencumbered high-quality liquid securities of $21.3 billion, unused FHLB capacity of $15.9 billion, and our cash balances at the FRB of $7.9 billion. Asset liquidity, a component of contingent liquidity, was $29.2 billion, consisting of our cash balances at the FRB of $7.9 billionand unencumbered high-quality liquid securities of $21.3 billion; •Available discount window capacity, defined as available total borrowing capacity from the FRB based on identified collateral, is secured by non-mortgage commercial and retail loans and totaled $25.8 billion. Use of this borrowing capacity would be considered only during exigent circumstances; and •For a summary of our sources and uses of cash by type of activity for the years ended December 31, 2021, 2020 and 2019, see the Consolidated Statements of Cash Flows in Item 8.
The Funding and Liquidity unit monitors a variety of liquidity and funding
metrics and early warning indicators and metrics, including specific risk
thresholds limits. These monitoring tools are broadly classified as follows:
•Current liquidity sources and capacities, including cash 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.
Citizens Financial Group, Inc.| 64 --------------------------------------------------------------------------------
In the ordinary course of business, we enter into contractual obligations that may require future cash payments, including customer deposit maturities and withdrawals, debt service, lease obligations and other cash commitments. For more information regarding these obligations, see Notes 9, 12 and 13 in Item 8.
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 19 in Item 8. CRITICAL ACCOUNTING ESTIMATES Our audited 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 audited Consolidated Financial Statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. Our most significant accounting policies and estimates and their related application are discussed below. See Note 1 in Item 8, for further discussion of our significant accounting policies.
Allowance for Credit Losses
The ACL decreased from
improvements in our macroeconomic outlook and continued strength in the Home
Price Index and used automobile values.
To determine the ACL as of
December 31, 2021, we utilized an economic forecast that generally reflects real GDP growth of approximately 1.3% over 2022 and projects the unemployment rate to be in the range of 5.2% to 6.6% throughout 2022. This forecast reflects an overall improved macroeconomic outlook as compared to December 31, 2020, which reflected real GDP growth of approximately 4% over 2021 and unemployment in the range of approximately 7% to 7.5% throughout 2021. While the U.S.economy has continued to improve, with the benefits of vaccination and herd resiliency muting, in part, the ongoing impact of the COVID-19 pandemic, uncertainty remains. We continue to utilize our qualitative allowance framework to reassess and adjust ACL reserve levels. Macroeconomic forecast risk, driven by uncertainty around and volatility of key macroeconomic variables, is one of the primary factors influencing our qualitative reserve. As the economic recovery has continued, we have assessed risks to the recovery, including potential for continuing impacts from COVID-19 variants, challenges in the global supply chain, inflationary trends, potential impacts from ending monetary and fiscal stimulus programs, and potential for longer-term changes in workforce and consumer behaviors. We continued to apply management judgment to adjust the modeled reserves in the commercial industry sectors most impacted by the COVID-19 pandemic, including CRE office. Our determination of the ACL is sensitive to changes in forecasted macroeconomic conditions during the reasonable and supportable period. To illustrate the sensitivity, we applied a more pessimistic scenario than that described above which assumes that challenges in acceptance of vaccines and efficacy of vaccines against new strains cause COVID-19-related infections to abate later than in our base case scenario, with concerns rising about resistant strains. Consumer spending is slower to rebound, with businesses reopening more slowly and vacation spending muted. This pessimistic scenario reflects real GDP growth of approximately 1.3% and unemployment in the range of 6.6% to 7.4% over 2022. Excluding consideration of qualitative adjustments, this scenario would result in a quantitative lifetime loss estimate of approximately 1.15x our modeled period-end ACL, or an increase of approximately $170 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 Citizens Financial Group, Inc.| 65
qualitative factors that could be applied in the actual estimation of the ACL
and does not imply any expectation of future deterioration in our loss rates.
To provide additional context regarding sensitivity to more pessimistic scenarios, our ACL balance of
$1.9 billionrepresents 22% of the $8.6 billionof nine-quarter losses projected in the Federal Reserverun of the December 2020Supervisory Severely Adverse scenario, which forecasted more protracted unemployment and GDP declines compared with our ACL calculation. Our ACL calculation also included the impacts of government stimulus. Comparatively, our ACL represents 38% of the $5.1 billionof projected losses in the Company run results of the Supervisory Severely Adverse scenario. Losses projected under the Company Supervisory Severely Adverse scenario are lower than the Federal Reserveresults due to methodology and modeling differences. As an example, the Federal Reserve'smodels did not recognize contractual loss sharing arrangements in the merchant loan portfolio. Both the Company and Federal Reserveresults include incremental losses associated with loan originations assumed post- December 31, 2020. In contrast, our December 31, 2021ACL balance considers only existing loans and lines of credit as of the reporting date. While the economic recovery from the COVID-19 pandemic continues, significant future uncertainty still exists, including the impacts of COVID-19 variants and challenges from vaccine acceptance rates and efficacy against newer strains on consumer sentiment and spending behavior. It remains difficult to estimate how changes in economic forecasts might affect our ACL because such forecasts consider a wide variety of variables and inputs, and changes in the variables and inputs may not occur at the same time or in the same direction, and such changes may have differing impacts by product types. The variables and inputs may be idiosyncratically affected by risks to the recovery, including potential for continuing impacts from COVID-19 variants, challenges in the global supply chain and recent inflationary trends, as well as potential impacts from ending monetary and fiscal stimulus programs. Changes in one or multiple of the key variables may have a material impact to our estimation of expected credit losses. We continue to monitor the impact of COVID-19 and related fiscal and monetary policy measures on the economy and the resulting potentially material effects on the ACL.
For additional information regarding the ACL, see Note 1 and Note 6 in Item 8.
We measure the fair value of assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is also used on a recurring and nonrecurring basis to evaluate certain assets for impairment or for financial statement disclosure purposes. Examples of nonrecurring uses of fair value include impairment for certain loans, leases and goodwill. Examples of recurring uses of fair value for financial statement disclosure purposes include disclosure of the fair value of certain financial assets and liabilities accounted for on an amortized cost basis, such as HTM securities. For certain assets or liabilities the application of management judgment in the determination of the fair value is more significant due to the lack of observable market data. MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. The fair value is calculated using a discounted cash flow model which uses assumptions, including weighted-average life, prepayment assumptions and weighted-average option adjusted spread. It is important to note that changes in our assumptions may not be independent of each other; changes in one assumption may result in changes to another (e.g., changes in interest rates, which are inversely correlated to changes in prepayment rates, may result in changes to discount rates). The underlying assumptions and estimated values are corroborated by values received from independent third parties based on their review of the servicing portfolio, and comparisons to market transactions.
For additional information regarding our fair value measurements, see Note 1,
Note 4, Note 9, Note 14 and Note 20 in Item 8.
Citizens Financial Group, Inc.| 66 --------------------------------------------------------------------------------
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.
Our risk management framework is embedded in our business through a "Three Lines of Defense" model which defines responsibilities and accountabilities for risk management activities. First Line of Defense The business lines (including their associated support functions) are the first line of defense and are accountable for identifying, assessing, managing, and controlling the risks associated with the products and services they provide. The business lines are responsible for performing regular risk assessments to identify and assess the material risks that arise in their area of responsibility, complying with relevant risk policies, testing and certifying the adequacy and effectiveness of their operational and financial reporting controls on a regular basis, establishing and documenting operating procedures and establishing and owning a governance structure for identifying and managing risk. Second Line of Defense The second line of defense includes independent monitoring and control functions accountable for developing and ensuring implementation of risk and control frameworks and related policies. This centralized risk function is appropriately independent from the business and is accountable for overseeing and challenging our business lines on the effective management of their risks, including credit, market, operational, regulatory, reputational, interest rate, liquidity and strategic risks.
Third Line of Defense
Our Internal Audit function is the third line of defense providing independent assurance with a view of the effectiveness of our internal controls, governance practices, and culture so that risk is managed appropriately for the size, complexity, and risk profile of the organization. Internal Audit has complete and unrestricted access to any and all of our records, physical properties and personnel. Internal Audit issues a report following each internal review and provides an audit opinion to the Board's Audit Committee on a quarterly basis. Credit Review reports to the Chief Audit Executive and provides the legal-entity boards, senior management and other stakeholders with independent assurance on the quality of credit portfolios and adherence to agreed Credit Risk Appetite and Credit Policies and processes. In line with its procedures and regulatory expectations, the Credit Review function undertakes a program of portfolio testing, assessing and reporting through four Risk Pillars of Asset Quality, Rating and Data Integrity, Risk Management and Credit Risk Appetite.
Risk appetite is a strategic business and risk management tool. We define our risk appetite as the maximum limit of acceptable risk beyond which we could be unable to achieve our strategic objectives and capital adequacy obligations. Our principal non-market risks include credit, operational, regulatory, reputational, liquidity and strategic risks. We are also subject to certain market risks which include potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Market risk in our business arises from trading activities that serve customer needs, including hedging of
Citizens Financial Group, Inc.| 67 -------------------------------------------------------------------------------- interest rates, foreign exchange risk and non-trading activities within capital markets. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report on market risk. We actively manage both trading and non-trading market risks. See "-Market Risk" for further information. Our risk appetite is reviewed and approved annually by the Board Risk Committee. Credit Risk Overview Credit risk represents the potential for loss arising from a customer, counterparty, or issuer failing to perform in accordance with the contractual terms of the obligation. While the majority of our credit risk is associated with lending activities, we do engage with other financial counterparties for a variety of purposes including investing, asset and liability management, and trading activities. Given the financial impact of credit risk on our earnings and balance sheet, the assessment, approval and management of credit risk represents a major part of our overall risk-management responsibility.
The independent Credit Risk Function is responsible for reviewing and approving credit risk appetite across all lines of business and credit products, approving larger and higher risk credit transactions, monitoring portfolio performance, identifying problem credit exposures, and ensuring remedial management.
Management and oversight of credit risk is the responsibility of both the business line and the second line of defense. The second line of defense, the independent Credit Risk Function, is led by the Chief Credit Officer who oversees all of our credit risk. The Chief Credit Officer reports to the Chief Risk Officer. The Chief Credit Officer, acting in a manner consistent with Board policies, has responsibility for, among other things, the governance process around policies, procedures, risk acceptance criteria, credit risk appetite, limits and authority delegation. The Chief Credit Officer and team also have responsibility for credit approvals for larger and higher risk transactions and oversight of line of business credit risk activities. Reporting to the Chief Credit Officer are the heads of the second line of defense credit functions specializing in: Consumer Banking, Commercial Banking, Citizens Restructuring Management, Portfolio and Corporate Reporting, ALLL Analytics, Current Expected Credit Loss, and Credit Policy and Administration. Each team under these leaders is composed of highly experienced credit professionals.
The primary mechanisms used to govern our credit risk function are our consumer and commercial credit policies. These policies outline the minimum acceptable lending standards that align with our desired risk appetite. Material changes in our business model and strategies that identify a need to change our risk appetite or highlight a risk not previously contemplated are identified by the individual committees and presented to the Credit Policy Committee, Executive Risk Committee and the Board Risk Committee for approval, as appropriate.
Key Management Processes
We employ a comprehensive and integrated risk control program to proactively
identify, measure, monitor, and mitigate existing and emerging credit risks
across the credit life cycle (origination, account management/portfolio
management, and loss mitigation and recovery).
On the Consumer Banking side of credit risk, our teams use models to evaluate consumer loans across the life cycle of the loan. Starting at origination, credit scoring models are used to forecast the probability of default of an applicant. When approving customers for a new loan or extension of an existing credit line, credit scores are used in conjunction with other credit risk variables such as affordability, length of term, collateral value, collateral type, and lien subordination. To ensure proper oversight of the underwriting teams, lending authority is granted by the second line of defense credit risk function to each underwriter. The amount of delegated authority depends on the experience of the individual. We periodically evaluate the performance of each underwriter and annually reauthorize their delegated authority. Only senior members of the second line of defense credit risk team are authorized to approve significant exceptions to credit policies. It is not uncommon to make exceptions to established policies
Citizens Financial Group, Inc.| 68
when compensating factors are present. There are exception limits which, when
reached, trigger a comprehensive analysis.
Once an account is established, credit scores and collateral values are
refreshed at regular intervals to allow for proactive identification of
increasing or decreasing levels of credit risk. Our approach to managing credit
risk is highly analytical and, where appropriate, is automated to ensure
consistency and efficiency.
On the Commercial Banking side of credit risk, risk management begins with defined credit products and policies and is separated into C&I loans, leases and CRE. Within C&I loans and leases there are separate verticals established for certain specialty products (e.g., asset-based lending, leasing, franchise finance, health care, technology and mid-corporate). A "specialty vertical" is a stand-alone team of industry or product specialists. Substantially all activity that falls under the ambit of the defined industry or product is managed through a specialty vertical when one exists. CRE also operates as a specialty vertical. Commercial transactions are subject to individual analysis and approval at origination and, with few exceptions, are subject to a formal annual review requirement. The underwriting process includes the establishment and approval of credit grades that confirm the PD and LGD. All material transactions then require the approval of both a business line approver and an independent credit approver with the requisite level of delegated authority. The approval level of a particular credit facility is determined by the size of the credit relationship as well as the PD. The checks and balances in the credit process and the independence of the credit approver function are designed to appropriately assess and sanction the level of credit risk being accepted, facilitate the early recognition of credit problems when they occur, and to provide for effective problem asset management and resolution. All authority to grant credit is delegated through the independent Credit Risk function and is closely monitored and regularly updated. The primary factors considered in commercial credit approvals are the financial strength of the borrower, assessment of the borrower's management capabilities, cash flows from operations, industry sector trends, type and sufficiency of collateral, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. In addition to the credit analysis conducted during the approval process at origination and annual review, our Credit Review group performs testing to provide an independent review and assessment of the quality of the portfolio and new originations. This group conducts portfolio reviews on a risk-based cycle to evaluate individual loans and validate risk ratings, as well as test the consistency of the credit processes and the effectiveness of credit risk management. The maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk of each borrower or related group of borrowers. Concentration risk is managed through limits on industry asset class and loan quality factors. We focus predominantly on extending credit to commercial customers with existing or expandable relationships within our primary markets, although we do engage in lending opportunities outside our primary markets if we believe that the associated risks are acceptable and aligned with strategic initiatives.
Substantially all loans categorized as Classified are managed by a specialized
group of credit professionals.
Market risk 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.
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.
Citizens Financial Group, Inc.| 69
Interest Rate Risk
Interest rate risk emerges from the balance sheet after the aggregation of our assets, liabilities and equity. We refer to this non-trading risk embedded in the balance sheet as "structural interest rate risk" or "interest rate risk in the banking book." A major source of structural interest rate risk is a difference in the repricing of assets relative to liabilities and equity. There are differences in the timing and drivers of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a commercial loan may reprice monthly with changes in LIBOR, while the rate paid on debt or certificates of deposit may be fixed for a longer period. There may also be differences in the drivers of rate changes. Loans may be tied to a specific index rate such as LIBOR or Prime, while deposits may be only loosely correlated with LIBOR and dependent upon competitive demand. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.
Another important source of structural interest rate risk relates to the
potential exercise of explicit or embedded options. For example, most consumer
loans can be prepaid without penalty and most consumer deposits can also be
withdrawn without penalty. The exercise of such options by customers can
exacerbate the timing differences discussed above.
A primary source of our structural interest rate risk relates to faster
repricing of floating-rate loans relative to core deposit funding. This source
of asset sensitivity is more biased toward the short end of the yield curve.
The secondary source of our interest rate risk is driven by longer term rates comprising the rollover or reinvestment risk on fixed-rate loans, as well as prepayment risk on mortgage-related loans and securities funded by non-rate sensitive deposits and equity. The primary goal of interest rate risk management is to control exposure to interest rate risk within policy limits approved by our Board. These limits and guidelines reflect our tolerance for interest rate risk over both short-term and long-term horizons. To ensure that exposure to interest rate risk is managed within our risk appetite, we must measure the exposure and hedge it, as necessary. The Treasury Asset and Liability Management team is responsible for measuring, monitoring and reporting on our structural interest rate risk position. These exposures are reported on a monthly basis to the Asset Liability Committee and at Board meetings. We measure structural interest rate risk through a variety of metrics intended to quantify both short-term and long-term exposures. The primary method we use to quantify interest rate risk is simulation analysis in which we model net interest income from assets, liabilities and hedge derivative positions under various interest rate scenarios over a three-year horizon. Exposure to interest rate risk is reflected in the variation of forecasted net interest income across the scenarios. Key assumptions in this simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances and the behavior of loan and deposit clients in different rate environments. The most material of these behavioral assumptions relate to the repricing characteristics and balance fluctuations of deposits with indeterminate (i.e., non-contractual) maturities, as well as the pace of mortgage prepayments. Assessments are periodically made by running sensitivity analyses to determine the impact of key assumptions. The results of these analyses are reported to the Asset Liability Committee. As the future path of interest rates cannot be known in advance, we use simulation analysis to project net interest income under various interest rate scenarios including a "most likely" (implied forward) scenario, as well as a variety of deliberately extreme and perhaps unlikely scenarios. These scenarios may assume gradual ramping of the overall level of interest rates, immediate shocks to the level of rates and various yield curve twists in which movements in short- or long-term rates predominate. Generally, projected net interest income in any interest rate scenario is compared to net interest income in a base case where market forward rates are realized. The table below reports net interest income exposures against a variety of interest rate scenarios. Our policies involve measuring exposures as a percentage change in net interest income over the next year due to either instantaneous or gradual parallel changes in rates relative to the market implied forward yield curve. As the following table illustrates, our balance sheet is asset-sensitive; net interest income would benefit from an increase in interest rates, while exposure to a decline in interest rates is within limit. While an instantaneous and
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-------------------------------------------------------------------------------- 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 28: Sensitivity of Net Interest Income
Estimated % Change in
Net Interest Income over 12 Months
December 31, Basis points 2021 2020 Instantaneous Change in Interest Rates 200 19.4 % 21.2 % 100 10.2 11.2 -25 (3.0) (2.7) Gradual Change in Interest Rates 200 10.1 % 10.8 % 100 5.2 5.5 -25 (1.5) (1.5) We continue to manage asset sensitivity within the scope of our policy and changing market conditions. Asset sensitivity against a 200 basis point gradual increase in rates was 10.1% at
December 31, 2021, compared with 10.8% at December 31, 2020. Current levels of asset sensitivity continue to provide meaningful upside benefit to net interest income as we enter a period of expected higher short-term policy rates from the Federal Reserve. Changes in interest rates can also affect the risk positions, which impacts the repricing sensitivity or beta of the deposit base as well as the cash flows on assets that allow for early payoff without a penalty. The risk position is managed within our risk limits, and long term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding. We use a valuation measure of exposure to structural interest rate risk, Economic Value of Equity ("EVE"), as a supplement to net interest income simulations. EVE complements net interest income simulation analysis as it estimates risk exposure over a long-term horizon. EVE measures the extent to which the economic value of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. The change in value is expressed as a percentage of regulatory capital.
We use interest rate swap contracts to manage the interest rate exposure to
variability in the interest cash flows on our floating-rate assets and
floating-rate wholesale funding, and to hedge market risk on fixed-rate capital
markets debt issuances.
Table 29: Interest Rate Swap Contracts Used to Manage Non-Trading Interest Rate Exposure December 31, 2021 December 31, 2020 Weighted Average Weighted Average (dollars in millions) Notional Amount Maturity (Years) Receive Rate Pay Rate Notional Amount Maturity (Years) Receive Rate
Cash flow – receive-fixed/pay-variable – conventional ALM(1)
3.7 1.0 % 0.1 %
$12,3501.0 1.5 % 0.2 % Fair value - receive-fixed/pay-variable - conventional debt 2,200 1.3 2.5 0.2 3,200 1.7 2.1
Cash flow – pay-fixed/receive-variable – conventional
3,000 2.5 0.1 1.7 4,750 3.9 0.2
Fair value - pay-fixed/receive-variable - conventional ALM(1) 2,000 2.7 0.1 1.5 2,000 3.7 0.2 1.5 Total portfolio swaps
$23,4503.3 1.0 % 0.4 % $22,3002 1.2 % 0.6 % (1) Asset Liability Management ("ALM") strategies used to manage interest rate exposures include interest rate swap contracts used to manage exposure to the variability in the interest cash flows on our floating-rate commercial loans and floating-rate wholesale funding, as well as the variability in the fair value of AFS securities. (2) December 31, 2020includes $1.8 billionof forward-starting, pay-fixed interest rate swaps that were terminated in the first quarter of 2021. Citizens Financial Group, Inc. | 71 --------------------------------------------------------------------------------
The following table presents the pre-tax net gains (losses) recorded in the
Consolidated Statements of Operations and in the Consolidated Statements of
Comprehensive Income relating to derivative instruments designated as cash flow
the Consolidated Statements of Comprehensive Income
Amounts Recognized for the Year
(in millions) 2021
Amount of pre-tax net gains (losses)
recognized in OCI (
Amount of pre-tax net gains (losses)
reclassified from OCI into interest
Amount of pre-tax net gains (losses)
reclassified from OCI into interest
(1) Using the interest rate curve at
hedge strategies, we estimate that approximately
reclassified from AOCI to net interest income over the next 12 months.
As previously disclosed, many of our lending products, securities, derivatives, and other financial transactions utilize the LIBOR benchmark rate, requiring us to develop plans for its discontinuance. In late 2018, we formed a LIBOR Transition Program ("the Program") designed to guide the organization through the planned discontinuation of LIBOR. The Program, with direction and oversight from our Chief Financial Officer, is responsible for developing, maintaining and executing against a coordinated strategy to ensure a timely and orderly transition from LIBOR. The Program is structured to address various initiatives including program governance, transition management, communications, exposure management, new alternative reference rate product delivery, risk management, contract remediation, operations and technology readiness, accounting and reporting, as well as tax and regulation impacts. On a quarterly basis we tracked and reviewed the risks associated with the LIBOR transition with a focus on the identification of mitigation actions. The ARRC recommended that banks be systemically and operationally capable of supporting transactions in alternative reference rates, such as SOFR, by the end of
September 2020. Guided by this milestone, we are systemically and operationally prepared to support alternative reference rate transactions. On March 5, 2021, the FCAformally announced the future cessation or loss of representation of the LIBOR benchmark settings currently published by the Intercontinental Exchange ("ICE") Benchmark Administration. Further, the FCAstated that the 1-week and 2-month U.S.Dollar LIBOR rates will cease as of December 31, 2021and all other U.S.Dollar LIBOR tenors will cease as of June 30, 2023. With the FRB, OCC, and FDIC(collectively, the agencies) supporting this announcement, the Program adjusted LIBOR transition activities and timelines accordingly. The agencies continue to urge market participants to stop entering into new U.S.Dollar LIBOR contracts as soon as practicable, but no later than the end of 2021. We moved new originations to alternative reference rates over the course of 2021 in anticipation of this deadline. However, our plans for legacy contract remediation now extend through mid-2023 given the FCAannouncement. More broadly, program governance remains robust, and progress has been made in the above-outlined initiatives as management continues to closely monitor industry and regulatory developments pertaining to the transition. Upon commencement of the Program, we conducted an impact assessment to identify all areas that were likely to be impacted by the LIBOR transition. The impact assessment identified where LIBOR-related products, systems, models, policies and procedures existed. We used the assessment results to develop a robust transition roadmap and an implementation plan, which continues to evolve, based on market and regulatory developments. Key LIBOR transition efforts over the course of 2021 include, but are not limited to, the following: •Upgraded standard form provisions and issued implementation guidance to require use of reference rate fallback language in any new and existing LIBOR contracts in connection with contract amendments made in the ordinary course of business;
•Launched new product issuances with alternative reference rates;
•Completed operational readiness of systems, models, and applications to handle
all potential alternative reference rates;
•Remediated legacy contracts that reference non-
•Analyzed existing fallback language in legacy contracts to assess robustness
and devise a strategy for those requiring remediation;
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•Continued to develop and enhance internet and intranet sites for the LIBOR
•Participated in industry and ARRC working groups to ascertain market
developments and assess the impact to us and our customers.
A key component of our capital markets activities is the underwriting and distribution of corporate credit facilities to partially finance merger and acquisition transactions for our clients. We have a rigorous risk management process around these activities, including a limit structure capping our underwriting risk, our potential loss, and sub-limits for specific asset classes. Further, the ability to approve underwriting exposure is delegated only to senior level individuals in the credit risk management and capital markets organizations with each transaction adjudicated in the Loan Underwriting Approval Committee. Mortgage Servicing Rights
We have market risk associated with the value of residential MSRs, which are
impacted by various types of inherent risks, including duration, basis,
convexity, volatility and yield curve.
As part of our overall risk management strategy relative to the fair market value of the MSRs we enter into various free-standing derivatives, such as interest rate swaps, interest rate swaptions, interest rate futures, and forward contracts to purchase mortgage-backed securities to economically hedge the changes in fair value. As of
December 31, 2021and 2020, the fair value of our MSRs was $1.0 billionand $658 million, respectively, and the total notional amount of related derivative contracts was $11.8 billionand $11.4 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.
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. Client facilitation activities consist primarily of interest rate derivatives, financially settled commodity derivatives and foreign exchange contracts where we enter into offsetting trades with a separate counterparty or exchange to manage our market risk exposure. In addition to the aforementioned activities, we operate trading desks covering secondary loans, corporate bonds, and equity securities; all with the objective to meet secondary liquidity needs of our issuing clients' transactions and investor clients. We do not engage in any trading activities with the intent to benefit from short-term price differences. We record these rate and commodity derivatives and foreign exchange contracts as derivative assets and liabilities on our Consolidated Balance Sheets. Trading assets and liabilities are carried at fair value with income earned related to these activities included in net interest income. Changes in fair value of trading assets and liabilities are reflected in other income, a component of noninterest income on the Consolidated Statements of Operations.
Market Risk Governance
The market risk limit setting process is established in-line with the formal enterprise risk appetite process and policy. This appetite reflects the strategic and enterprise level articulation of opportunities for creating franchise value set to the boundaries of how much market risk to assume. Dealing authorities represent the key control tool in the management of market risk that allows the cascading of the risk appetite throughout the enterprise. A dealing authority sets the operational scope and tolerances within which a business and/or trading desk is permitted to operate, which is reviewed at least annually. Dealing authorities are structured to accommodate client facing trades and hedges needed to manage the risk profile. Primary responsibility for keeping within established tolerances resides with the business. Key risk indicators, including VaR, open foreign
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currency positions and single name risk, are monitored on a daily basis and
reported against tolerances consistent with our risk appetite and business
strategy to relevant business line management and risk counterparts.
Market Risk Measurement
We use VaR as a statistical measure for estimating potential exposure of our traded market risk in normal market conditions. Our VaR framework for risk management and regulatory reporting is the same. Risk management VaR is based on a one day holding period to a 99% confidence level, whereas regulatory VaR is based on a ten-day holding period to the same confidence level. In addition to VaR, non-statistical measurements for measuring risk are employed, such as sensitivity analysis, market value and stress testing. Our market risk platform and associated market risk and valuation models capture correlation effects across all our "covered positions" and allow for aggregation of market risk across products, risk types, business lines and legal entities. We measure, monitor and report market risk for both management and regulatory capital purposes. VaR Overview The market risk measurement model is based on historical simulation. The VaR measure estimates the extent of any fair value losses on trading positions that may occur due to broad market movements (
General VaR) such as changes in the level of interest rates, foreign exchange rates, equity prices and commodity prices. It is calculated on the basis that current positions remain broadly unaltered over the course of a given holding period. It is assumed that markets are sufficiently liquid to allow the business to close its positions, if required, within this holding period. VaR's benefit is that it captures the historic correlations of a portfolio. Based on the composition of our "covered positions," we also use a standardized add-on approach for the loan trading and high yield bond desks' Specific Risk capital which estimates the extent of any losses that may occur from factors other than broad market movements. The General VaR approach is expressed in terms of a confidence level over the past 500 trading days. The internal VaR measure (used as the basis of the main VaR trading limits) is a 99% confidence level with a one day holding period, meaning that a loss greater than the VaR is expected to occur, on average, on only one day in 100 trading days (i.e., 1% of the time). Theoretically, there should be a loss event greater than VaR two to three times per year. The regulatory measure of VaR is done at a 99% confidence level with a ten-day holding period. The historical market data applied to calculate the VaR is updated on a two-business day lag. Refer to " Market Risk Regulatory Capital" below for details of our ten-day VaR metrics for the quarters ended December 31, 2021and 2020, respectively, including high, low, average and period end VaR for interest rate and foreign exchange rate risks, as well as total VaR. Citizens Financial Group, Inc.| 74 --------------------------------------------------------------------------------
U.S.banking regulators' "Market Risk Rule" covers the calculation of market risk capital. For the purposes of the Market Risk Rule, all of our client facing trades and associated hedges maintain a net low risk and do qualify, as "covered positions." The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR.
Table 31: Results of Modeled and Non-Modeled Measures for Regulatory Capital Calculations
For the Three Months Ended December 31, 2021 For the Three Months Ended December 31, 2020 Market Risk Category Period End Average High Low Period End Average High Low Interest Rate
$2 $1 $2$- $2 $2 $4$- Foreign Exchange Currency Rate - 1 2 - - - - - Credit Spread 3 7 10 3 9 10 12 3 Commodity - - - - - - - - General VaR6 8 10 5 9 8 13 4 Specific Risk VaR - - - - - - - - Total VaR $6 $8 $10 $5 $9 $8 $13 $4Stressed General VaR $8 $9 $12 $6 $13 $10 $16 $6Stressed Specific Risk VaR - - - - - - - - Total Stressed VaR $8 $9 $12 $6 $13 $10 $16 $6Market Risk Regulatory Capital $50 $56Specific Risk Not Modeled Add-on 20 14 de Minimis Exposure Add-on - - Total Market Risk Regulatory Capital $70 $70Market Risk-Weighted Assets $877 $871Stressed VaR SVaR is an extension of VaR as it uses a longer historical look-back horizon that is fixed from January 3, 2005. This is done not only to identify headline risks from more volatile periods, but also to provide a counterbalance to VaR which may be low during periods of low volatility. The holding period for profit and loss determination is ten days. In addition to risk management purposes, SVaR is also a component of market risk regulatory capital. We calculate SVaR daily under its own dynamic window regime. In a dynamic window regime, values of the ten-day, 99% VaR are calculated over all possible 260-day periods that can be obtained from the complete historical data set. Refer to " Market Risk Regulatory Capital" above for details of SVaR metrics, including high, low, average and period end SVaR for the combined portfolio.
Sensitivity analysis is the measure of exposure to a single risk factor, such as a one basis point change in rates or credit spread. We conduct and monitor sensitivity on interest rates, basis spreads, foreign exchange exposures, option prices and credit spreads. Whereas VaR is based on previous moves in market risk factors over recent periods, it may not be an accurate predictor of future market moves. Sensitivity analysis complements VaR as it provides an indication of risk relative to each factor irrespective of historical market moves and is an effective tool in evaluating the appropriateness of hedging strategies and concentrations. Stress Testing Conducting a stress test of a portfolio consists of running risk models with the inclusion of key variables that simulate various historical or hypothetical scenarios. For historical stress tests, profit and loss results are simulated for selected time periods corresponding to the most volatile underlying returns while hypothetical stress tests aim to consider concentration risk, illiquidity under stressed market conditions and risk arising from our trading activities that may not be fully captured by our other risk measurement methodologies. Hypothetical scenarios also assume that market moves happen simultaneously and no repositioning or hedging activity takes place to mitigate losses as market events unfold. We generate stress tests of our trading positions on a daily basis. For example, we currently include a stress test that simulates a "
Lehman-type" crisis scenario by taking the worst 20-trading day peak to trough moves for the various risk factors that go into VaR from that period, and assumes they occurred simultaneously. Citizens Financial Group, Inc.| 75 --------------------------------------------------------------------------------
VaR Model Review and Validation
Market risk measurement models used are independently reviewed and subject to ongoing performance analysis by the model owners. The independent review and validation focuses on the model methodology, market data, and performance. Independent review of market risk measurement models is the responsibility of Citizens' Model Risk Management and Validation team. Aspects covered include challenging the assumptions used, the quantitative techniques employed and the theoretical justification underpinning them and an assessment of the soundness of the required data over time. Where possible, the quantitative impact of the major underlying modeling assumptions will be estimated (e.g., through developing alternative models). Results of such reviews are shared with our
U.S.banking regulators. The market risk models may be periodically enhanced due to changes in market price levels and price action regime behavior. The Market Risk Management and Validation team will conduct internal validation before a new or changed model element is implemented and before a change is made to a market data mapping. VaR Backtesting Backtesting is one form of validation of the VaR model and is run daily. The Market Risk Rule requires a comparison of our internal VaR measure to the actual net trading revenue (excluding fees, commissions, reserves, intra-day trading and net interest income) for each day over the preceding year (the most recent 250 business days). Any observed loss in excess of the VaR number is taken as an exception. The level of exceptions determines the multiplication factor used to derive the VaR and SVaR-based capital requirement for regulatory reporting purposes, when applicable. We perform sub-portfolio backtesting as required under the Market Risk Rule, using models approved by our banking regulators, for interest rate, credit spread, and foreign exchange positions.
The following graph shows our daily net trading revenue and total internal,
modeled VaR for the year ended
Daily VaR Backtesting
[[Image Removed: cfg-20211231_g3.jpg]]
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NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
For more information on the computation of non-GAAP financial measures, see
“-Introduction – Non-GAAP Financial Measures,” included in this Report. The
following tables present computations of non-GAAP financial measures
representing our “Underlying” results used throughout the MD&A:
Table 32: Reconciliations of Non-GAAP Measures
Year Ended December 31, (in millions, except share, per share and ratio data) Ref. 2021 2020 Total revenue, Underlying: Total revenue (GAAP) A
$6,647 $6,905Less: Notable items - - Total revenue, Underlying (non-GAAP) B $6,647 $6,905Noninterest expense, Underlying: Noninterest expense (GAAP) C $4,081 $3,991Less: Notable items 105 125 Noninterest expense, Underlying (non-GAAP) D $3,976 $3,866Pre-provision profit: Total revenue (GAAP) A $6,647 $6,905Less: Noninterest expense (GAAP) C 4,081 3,991 Pre-provision profit (GAAP) $2,566 $2,914Pre-provision profit, Underlying: Total revenue, Underlying (non-GAAP) B $6,647 $6,905Less: Noninterest expense, Underlying (non-GAAP) D 3,976 3,866 Pre-provision profit, Underlying (non-GAAP) $2,671 $3,039Income before income tax expense, Underlying: Income before income tax expense (GAAP) E $2,977 $1,298
Less: Income (loss) before income tax expense (benefit)
related to notable items
(105) (125) Income before income tax expense, Underlying (non-GAAP) F
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP)
$658 $241Less: Income tax expense (benefit) related to notable items (27) (42) Income tax expense, Underlying (non-GAAP) H $685 $283Effective income tax rate (GAAP) G/E 22.10 % 18.54 % Effective income tax rate, Underlying (non-GAAP) H/F 22.21 19.92 Net income, Underlying: Net income (GAAP) I $2,319 $1,057Add: Notable items, net of income tax benefit 78 83 Net income, Underlying (non-GAAP) J $2,397 $1,140
Net income available to common stockholders, Underlying:
Net income available to common stockholders (GAAP)
$2,206 $950Add: Notable items, net of income tax benefit 78 83
Net income available to common stockholders, Underlying
Return on average common equity and return on average common
Average common equity (GAAP)
$21,025 $20,438Return on average common equity K/M 10.49 % 4.65 % Return on average common equity, Underlying (non-GAAP) L/M 10.86 5.05
Return on average tangible common equity and return on
average tangible common equity, Underlying:
Average common equity (GAAP)
$21,025 $20,438Less: Average goodwill (GAAP) 7,062 7,049 Less: Average other intangibles (GAAP) 54 64
Add: Average deferred tax liabilities related to goodwill
381 376 Average tangible common equity N
$14,290 $13,701Return on average tangible common equity K/N 15.44 % 6.93 % Return on average tangible common equity, Underlying (non-GAAP) L/N 15.98 7.53 Citizens Financial Group, Inc. | 77
-------------------------------------------------------------------------------- Year Ended December 31, (in millions, except share, per share and ratio data) Ref. 2021 2020
Return on average total assets and return on average total
Average total assets (GAAP)
$185,106 $176,442Return on average total assets I/O 1.25 % 0.60 % Return on average total assets, Underlying (non-GAAP) J/O 1.30 0.65
Return on average total tangible assets and return on average
total tangible assets, Underlying:
Average total assets (GAAP)
$185,106 $176,442Less: Average goodwill (GAAP) 7,062 7,049 Less: Average other intangibles (GAAP) 54 64
Add: Average deferred tax liabilities related to goodwill
381 376 Average tangible assets P
$178,371 $169,705Return on average total tangible assets I/P 1.30 % 0.62 %
Return on average total tangible assets, Underlying (non-GAAP) J/P
Efficiency ratio and efficiency ratio, Underlying:
C/A 61.40 % 57.80 % Efficiency ratio, Underlying (non-GAAP) D/B 59.82 55.99
Operating leverage and operating leverage, Underlying:
(Decrease) increase in total revenue
(3.74) % 6.38 % Increase in noninterest expense 2.25 3.73 Operating Leverage (5.99) % 2.65 % (Decrease) increase in total revenue, Underlying (non-GAAP) (3.74) % 6.39 % Increase in noninterest expense, Underlying (non-GAAP) 2.85 2.30 Operating Leverage, Underlying (non-GAAP) (6.59) % 4.09 % Tangible book value per common share: Common shares - at period end (GAAP) Q 422,137,197 427,209,831 Common stockholders' equity (GAAP)
$21,406 $20,708Less: Goodwill (GAAP) 7,116 7,050 Less: Other intangible assets (GAAP) 64 58 Add: Deferred tax liabilities related to goodwill (GAAP) 383 379 Tangible common equity R $14,609 $13,979Tangible book value per common share R/Q $34.61 $32.72
Net income per average common share – basic and diluted and
net income per average common share – basic and diluted,
Average common shares outstanding – basic (GAAP)
S 425,669,451 427,062,537 Average common shares outstanding - diluted (GAAP) T 427,435,818 428,157,780 Net income per average common share - basic (GAAP) K/S
$5.18 $2.22Net income per average common share - diluted (GAAP) K/T 5.16 2.22
Net income per average common share-basic, Underlying
L/S 5.37 2.42
Net income per average common share-diluted, Underlying
L/T 5.34 2.41
Dividend payout ratio and dividend payout ratio, Underlying:
Cash dividends declared and paid per common share
$1.56 $1.56Dividend payout ratio U/(K/S) 30 % 70 % Dividend payout ratio, Underlying (non-GAAP) U/(L/S) 29 65 Citizens Financial Group, Inc. | 78
The following table presents computations of non-GAAP financial measures
representing certain metrics excluding the impact of PPP loans used throughout
Table 33: Reconciliations of Non-GAAP Measures – Excluding
(in millions, except ratio data)
Ref. December 31, 2021 December 31, 2020 Allowance for credit losses to total loans and leases, excluding the impact of PPP loans: Total loans and leases (GAAP) A
$128,163 $123,090Less: PPP loans 787 4,155
Total loans and leases, excluding the impact of PPP loans
$127,376 $118,935Allowance for credit losses (GAAP) C $1,934 $2,670
Allowance for credit losses to total loans and leases (GAAP) C/A
1.51 % 2.17 %
Allowance for credit losses to total loans and leases,
excluding the impact of PPP loans (non-GAAP)
C/B 1.52 % 2.24 %
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented in the "Market Risk" section of Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
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