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

Page

Introduction 39

Financial Performance 40

Net Interest Income 41

Noninterest Income 44

Noninterest Expense 44

Provision for Credit Losses 45

Income Tax Expense 45

Business Operating Segments 45

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 55

Capital and Regulatory Matters 56

Liquidity 59

Critical Accounting Estimates 62

Accounting and Reporting Developments 64

Risk Governance 65

Market Risk 67

Non-GAAP Financial Measures and Reconciliations 76

Citizens Financial Group, Inc. | 38

INTRODUCTION

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $226.7 billion in assets as of December 31, 2022. Headquartered in Providence, Rhode Island, we offer a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. We help our customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, we provide an integrated experience that includes mobile and online banking, a full-service customer contact center and the convenience of approximately 3,400 ATMs and more than 1,100 branches in 14 states and the District of Columbia. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, we offer a broad complement of financial products and solutions, including lending and leasing, deposit and treasury management services, foreign exchange, interest rate and commodity risk management solutions, as well as loan syndication, corporate finance, merger and acquisition, and debt and equity capital markets capabilities. More information is available at www.citizensbank.com.

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

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

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

For additional information regarding these acquisitions see Note 2.

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

Non-GAAP Financial Measures

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

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

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

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FINANCIAL PERFORMANCE

Key Highlights

Net income decreased $246 million, with earnings per diluted common share down $1.06 to $4.10 compared to 2021.

Results reflect notable items of $352 million or $0.74 per diluted common share, net of tax benefit, compared to $78 million or $0.18 per diluted common share, net of tax benefit, in 2021.

Table 1: Notable Items

Less: notable items

Provision (benefit) for credit losses $474 $— $— $169 $305

Less: notable items

Provision (benefit) for credit losses ($411) $— $— $— ($411)

(1) Includes integration related costs associated with acquisitions for the years ended December 31, 2022 and 2021, and mark-to-market losses on loans acquired from Investors classified as LHFS for the year ended December 31, 2022.

(2) Includes our TOP transformational and revenue and efficiency initiatives for the years ended December 31, 2022 and 2021, income tax impacts related to legacy tax matters for the year ended December 31, 2022, and a pension settlement charge and compensation-related credit for the year ended December 31, 2021.

(3) Includes the initial provision for credit losses of $169 million tied to the HSBC transaction and Investors acquisition. As required by purchase accounting, a fair value mark for performing loans including both credit and interest rate components is recorded in addition to the provision for credit losses expense, thus the credit exposure has been “double counted”.

•Net income available to common stockholders decreased $246 million to $2.0 billion compared to 2021.

◦On an Underlying basis, which excludes notable items, net income available to common stockholders of $2.3 billion was stable compared to 2021.

◦On an Underlying basis, earnings per diluted common share of $4.84 compared to $5.34 in 2021, driven primarily by $305 million in provision expense in 2022 versus a $411 million provision benefit in 2021.

•Total revenue increased $1.4 billion to $8.0 billion compared to 2021, driven by an increase of 33% in net interest income, including the impacts of the HSBC transaction and Investors acquisition.

•The efficiency ratio of 61.0% compared to 61.4% in 2021.

◦On an Underlying basis, the efficiency ratio of 57.5% compared to 59.8% in 2021.

•ROTCE of 13.9% compared to 15.4% in 2021.

◦On an Underlying basis, ROTCE of 16.4%compared to16.0%.

•Tangible book value per common share of $27.88 decreased 19% from 2021.

For additional information regarding our financial performance, see “—Results of Operations — 2022 compared with 2021” included in this report.

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RESULTS OF OPERATIONS — 2022 compared with 2021

Net Interest Income

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

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Table 2: Major Components of Net Interest Income

Year Ended December 31,

Assets

Non-taxable investment securities 3 — 2.33 3 — 2.60 — (27)

Liabilities and Stockholders’ Equity

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

Net interest income increased $1.5 billion, or 33%, compared to 2021, reflecting growth of 17% in interest-earning assets, driven by the impacts of the HSBC transaction and Investors acquisition, and higher net interest margin.

Net interest margin on a FTE basis increased 38 basis points to 3.10% compared to 2021, reflecting higher earning-asset yields given higher market interest rates, partially offset by increased funding costs. Average interest-earning asset yields increased 71 basis points to 3.61%, while average interest-bearing liability costs increased 48 basis points to 0.78% compared to 2021.

Average interest-earning assets increased $27.6 billion, or 17%, compared to 2021. Interest earning assets increased, reflecting the impacts of the HSBC transaction and Investors acquisition. Growth in commercial and industrial, commercial real estate, residential mortgage, home equity, and investments was partially offset by a decrease in cash held in interest-bearing deposits reflecting the deployment of elevated liquidity.

Citizens Financial Group, Inc. | 42

Average deposits increased $21.6 billion, or 14%, compared to 2021, primarily attributable to the HSBC transaction and Investors acquisition.

Average total borrowed funds increased $6.2 billion compared to 2021, given an increase in long-term and short-term FHLB borrowings driven by advances acquired from Investors and the funding of loan and security growth, partially offset by a decrease in senior debt.

Table 3: Changes in Net Interest Income Due to Average Volume and Average Rate

Year Ended December 31,

(in millions) Average Volume(1) Average Rate(1) Net Change

Interest Income

Interest-bearing cash and due from banks and deposits in banks ($7) $119 $112

Leases (6) 3 (3)

Loans held for sale, at fair value (38) 23 (15)

Other loans held for sale 46 (2) 44

Interest Expense

Total interest-bearing deposits 22 469 491

Short-term borrowed funds 17 5 22

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

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Noninterest Income

Table 4: Noninterest Income

Year Ended December 31,

(dollars in millions) 2022 2021 Change Percent

Trust and investment services fees 249 239 10 4

Foreign exchange and derivative products 188 120 68 57

Letter of credit and loan fees 159 156 3 2

Securities gains, net 9 10 (1) (10)

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

Noninterest income decreased $126 million, or 6%, compared to 2021, highlighted by the following significant changes.

•Mortgage banking fees declined given lower production volumes and gain-on-sale margins, partially offset by higher servicing revenue.

•Foreign exchange and derivative products revenue increased reflecting growth in client hedging activity across foreign exchange, interest rate and commodity products.

•Capital markets fees decreased reflecting lower underwriting, merger and acquisition advisory, and loan syndication fees given challenging market conditions.

•Card fees increased driven by higher debit and credit card volumes.

•Trust and investment services fees increased driven by higher annuity fees.

•Other income declined driven by $31 million of mark-to-market losses on loans acquired from Investors classified as LHFS, partially offset by higher bank-owned life insurance and leasing income.

Noninterest Expense

Table 5: Noninterest Expense

Year Ended December 31,

(dollars in millions) 2022 2021 Change Percent

Noninterest expense increased $811 million, or 20%, compared to 2021, driven primarily by acquisition and integration-related costs, higher salaries and employee benefits and other operating expense associated with FDIC insurance, travel and advertising costs, partially offset by the benefit of efficiency initiatives.

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Provision for Credit Losses

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

The credit provision expense of $474 million for 2022 includes the “double count” for the non-PCD loan CECL provision expense of $169 million tied to the HSBC transaction and Investors acquisition and compares to a credit provision benefit of $411 million for 2021. In addition to the purchase accounting impacts from the HSBC transaction and Investors acquisition, the provision expense for 2022 reflected deterioration in the forecasted macroeconomic environment, including an increased risk of recession. The credit provision benefit for 2021 reflected the strong economic recovery driven by highly accommodative fiscal and monetary policies in place during that time.

Income Tax Expense

Income tax expense of $582 million decreased $76 million compared to 2021. The effective income tax rate of 21.9% decreased from 22.1% compared to 2021, primarily driven by an increase in benefits from tax-advantaged investments, bank-owned life insurance, and other tax credits, partially offset by impacts from the HSBC transaction and Investors acquisition.

Business Operating Segments

We have two business operating segments: Consumer Banking and Commercial Banking. Segment results are determined based on our management reporting system, which assigns balance sheet and statement of operations items to each of the business segments. The process is designed around our organizational and management structure. The results derived are not necessarily comparable with similar information published by other financial institutions.

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.

For more information regarding our business operating segments see Note 26.

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

Table 6: Selected Financial Data for Business Operating Segments

Consumer Banking Commercial Banking

Year Ended December 31, Year Ended December 31,

Average Balances:

(1) Includes LHFS.

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Consumer Banking

Net interest income increased $481 million, or 14%, compared to 2021, driven by higher net interest margin and growth in average interest-earning assets, including the impacts of the HSBC transaction and Investors acquisition. This increase was partially offset by a reduction in PPP loans and higher funding costs. Average loans increased $9.4 billion, or 13%, compared to 2021, reflecting the impacts of the HSBC transaction and Investors acquisition, as well as strength in mortgage and home equity. This increase was partially offset by a decline in PPP loans and planned runoff in auto and personal unsecured installment loans. Average deposits increased $14.3 billion, or 14%, compared to 2021, reflecting the impacts of the HSBC transaction and Investors acquisition.

Noninterest income decreased $160 million, or 13%, compared to 2021, driven by lower mortgage banking fees reflecting lower gain-on-sale margins and production volumes, partially offset by higher servicing revenue. This decrease was partially offset by higher card fees given higher transaction volumes, and higher trust and investment services fees given higher annuity fees.

Noninterest expense increased $404 million, or 14%, compared to 2021, driven primarily by acquisition impacts, higher salaries and employee benefits and other operating expense associated with FDIC insurance, travel and advertising costs, partially offset by the benefit of efficiency initiatives

Net charge-offs increased $41 million, or 22%, compared to 2021, reflecting the normalization of the credit cycle.

Commercial Banking

Net interest income increased $397 million, or 23%, compared to 2021, driven by higher net interest margin and growth in average interest-earning assets, including the impact of the Investors acquisition. This increase was partially offset by higher funding costs.

Noninterest income increased $36 million, or 4%, compared to 2021, driven by higher foreign exchange and derivative products revenue reflecting growth in client hedging activity across foreign exchange, interest rate and commodity products, higher service charges and fees reflecting the benefit of acquisitions, and higher card fees given higher transaction volumes. This increase was partially offset by lower capital markets fees reflecting lower underwriting, merger and acquisition advisory, and loan syndication fees given challenging market conditions.

Noninterest expense increased$250 million, or 26%, compared to 2021, driven primarily by acquisition impacts, higher salaries and employee benefits and other operating expense associated with FDIC insurance, travel and advertising costs, partially offset by the benefit of efficiency initiatives.

Net charge-offs decreased $110 million, or 71%, compared to 2021, as credit performance remained strong.

RESULTS OF OPERATIONS — 2021 compared with 2020

For a description of our results of operations for 2021, see the “Results of Operations — 2021 compared with 2020” section of Item 7 in our 2021 Form 10-K.

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ANALYSIS OF FINANCIAL CONDITION

Securities

Table 7: Amortized Cost and Fair Value of AFS and HTM Securities

(in millions) Amortized Cost Fair Value Amortized Cost Fair Value

State and political subdivisions 2 2 2 2

Mortgage-backed securities:

Mortgage-backed securities:

Our securities portfolio is managed to maintain prudent levels of liquidity, credit quality, and market risk while achieving returns that align with our overall portfolio management strategy. The portfolio primarily includes high quality, highly liquid investments reflecting our ongoing commitment to maintain strong contingent liquidity levels and pledging capacity. As of December 31, 2022, U.S. government-guaranteed notes and GSE-issued mortgage-backed securities represent 94% of the fair value of our debt securities portfolio holdings. Holdings backed by mortgages dominate our portfolio and facilitate our ability to pledge those securities to the FHLB for collateral purposes.

The fair value of the debt securities portfolio increased $4.7 billion from December 31, 2021, driven in large part by the Investors acquisition as well as net securities purchases.

The amortized cost basis of the HTM portfolio increased $7.6 billion due to the transfer of $8.5 billion from the AFS portfolio during 2022, offset in part by paydowns. The ratio of HTM securities to total securities increased to 29% as of December 31, 2022.

We manage our securities portfolio duration and convexity risk through asset selection and securities structure, and maintain duration levels within our risk appetite in the context of the broader interest rate risk framework and limits. As of December 31, 2022, the portfolio’s average effective duration was 5.8 years compared to 4.3 years as of December 31, 2021, as higher long-term rates drove a decrease in both actual and projected securities prepayment speeds.

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Table 8: Amortized Cost of AFS and HTM Securities by Contractual Maturity

Distribution of Maturities(1)

Amortized cost:

State and political subdivisions — 5.25 — — — — 2 2.60 2 2.68

Mortgage-backed securities:

Mortgage-backed securities:

(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

December 31,

(dollars in millions) 2022 2021 Change Percent

Total loans and leases increased $28.5 billion from $128.2 billion as of December 31, 2021, primarily driven by the HSBC transaction and Investors acquisition, resulting in growth in commercial and retail of 36% and 10%, respectively.

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Table 10: Fixed and Variable Rate Loans and Leases by Maturity

Fixed rate:

Variable rate:

Fixed rate:

Variable rate:

Automobile — — — — —

(1) Includes $31.3 billion of floating-rate commercial loans hedged to fixed rate to manage our exposure to the variability in interest cash flows.

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Allowance for Credit Losses and Nonaccrual Loans and Leases

The ACL is a reserve to absorb estimated future credit losses in accordance with GAAP. For additional information regarding the ACL, see “Critical Accounting Estimates — Allowance for Credit Losses” and Note 6.

The ACL of $2.2 billion at December 31, 2022 compared with an ACL of $1.9 billion as of December 31, 2021, reflecting a reserve increase of $306 million. For further information see Note 6.

Table 11: Allocation of the ALLL

December 31,

Table 12: ACL and Related Coverage Ratios by Portfolio

December 31,

Allowance for Loan and Lease Losses

Allowance for Unfunded Lending Commitments

Total allowance for unfunded lending commitments 257 176

(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.

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Table 13: Nonaccrual Loans and Leases

December 31,

(dollars in millions) 2022 2021 Change Percent

Nonaccrual loans and leases to total loans and leases 0.60 % 0.55 % 5 bps

Allowance for credit losses to nonaccrual loans and leases 237 276 (39 %)

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

Table 14: Ratio of Net Charge-Offs to Average Loans and Leases

December 31,

The NCO ratio decreased 8 basis points compared to 2021.

The retail NCO ratio remained relatively flat compared to 2021. The commercial NCO ratio decreased compared to 2021, as credit performance remained strong.

Commercial Loan Asset Quality

Our commercial portfolio consists of traditional commercial and industrial loans, commercial leases and commercial real estate loans. The portfolio is predominantly focused on customers in our footprint and adjacent states in which we have a physical presence where our local delivery model provides for strong client connectivity. Additionally, we do business in certain specialized industry sectors on a national basis.

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We utilize regulatory classification ratings to monitor credit quality for commercial loans and leases. For more information on regulatory classification ratings see Note 6. The amortized cost basis of commercial loans and leases based on regulatory classification ratings is presented below:

Table 15: Commercial Loans and Leases by Regulatory Classification

Criticized

(in millions) Pass Special Mention Substandard Doubtful Total

Criticized

(in millions) Pass Special Mention Substandard Doubtful Total

Total commercial criticized balances of $5.5 billion at December 31, 2022 increased $2.3 billion compared with December 31, 2021. Commercial criticized as a percent of total commercial of 6.7% at December 31, 2022 increased from 5.4% at December 31, 2021.

Commercial and industrial criticized balances of $3.1 billion at December 31, 2022 increased from $2.2 billion at December 31, 2021, driven by the Investors acquisition, and the impact of the macroeconomic environment and interest rates. Commercial and industrial criticized as a percent of total commercial and industrial was 6.0% at December 31, 2022 and 5.0% at December 31, 2021. Commercial and industrial criticized loans represented 57% of total criticized loans at December 31, 2022 compared to 69% at December 31, 2021.

Commercial real estate criticized balances of $2.4 billion increased from $945 million at December 31, 2021, driven by the Investors acquisition, and the impacts of interest rates and return-to-office dynamics on the Office sector. Commercial real estate criticized as a percent of total commercial real estate increased to 8.2% at December 31, 2022 from 6.6% at December 31, 2021. Commercial real estate accounted for 43% of total criticized loans at December 31, 2022, compared to 29% at December 31, 2021.

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Table 16: Commercial Loans and Leases

Sector

Finance and insurance

Health, pharma, and social assistance 3,056 2 2,912 2

Professional, scientific, and technical services 3,067 2 2,665 2

Real estate and rental and leasing 1,542 1 739 —

Administrative and waste management services 1,710 1 1,396 1

Arts, entertainment, and recreation 1,587 1 1,189 1

Property type

(1) Includes deferred fees and costs.

(2) Excludes PPP loans of $121 million and $787 million as of December 31, 2022 and 2021, respectively.

Retail Loan Asset Quality

We utilize credit scores provided by FICO, which are generally refreshed on a quarterly basis, and payment and delinquency status to monitor credit quality for retail loans. Management believes FICO credit scores are the strongest indicator of potential credit losses over the contractual life of the loan. These scores represent current and historical national industry-wide consumer level credit performance data, which management considers to predict a borrower’s future payment performance. The largest portion of the retail portfolio is represented by borrowers located in the New England, Mid-Atlantic and Midwest regions. However, we do lend selectively in areas outside the footprint, primarily in automobile finance and education lending.

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Table 17: Retail Loan Portfolio Analysis

Days Past Due and Accruing Days Past Due and Accruing

(1) 90+ days past due and accruing includes $316 million and $544 million of loans fully or partially guaranteed by the FHA, VA, and USDA at December 31, 2022 and 2021, respectively.

For more information on the aging of accruing and nonaccrual retail loans see Note 6.

Table 18: Retail Asset Quality Metrics

Average refreshed FICO for total portfolio 770 768

CLTV ratio for secured real estate(1) 50 % 56 %

Nonaccrual retail loans as a percentage of total retail 0.79 % 0.77 %

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

Troubled Debt Restructurings

In the first quarter of 2020, the CARES Act and interagency guidance exempted from TDR classification COVID-related modified retail and commercial loans that met certain eligibility criteria. While relief provisions under the CARES Act expired on December 31, 2021, we generally do not consider loans that were modified before January 1, 2022 that met eligibility criteria under the CARES Act to be TDRs.

For additional information regarding TDRs see Note 6.

Table 19: Accruing and Nonaccrual Troubled Debt Restructurings

As a % of Accruing TDRs

Commercial real estate — — — 10 10

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As a % of Accruing TDRs

Commercial and industrial $196 — % — % $74 $270

Commercial real estate 1 — — 9 10

(1) Includes $146 million and $98 million in 90+ days past due and accruing that are fully or partially guaranteed by the FHA, VA, and USDA at December 31, 2022 and 2021, respectively.

Deposits

Table 20: Composition of Deposits

December 31,

(dollars in millions) 2022 2021 Change Percent

The increase in total deposits as of December 31, 2022 compared to December 31, 2021 is driven by $25.4 billion of period-end balances from the HSBC transaction and Investors acquisition.

Total estimated uninsured deposits are $88.9 billionand $77.9 billion as of December 31, 2022 and 2021, respectively.

(in millions) December 31, 2022

Three months or less $879

After three months through six months 33

After six months through twelve months 234

After twelve months 100

Total term deposits(1) $1,246

(1) Includes term deposits per account in excess of $250,000.

Borrowed Funds

Total borrowed funds of $15.9 billion as of December 31, 2022 increased $8.9 billion compared to December 31, 2021, primarily driven by FHLB advances acquired from Investors as part of the acquisition. For more information regarding our borrowed funds see “—Liquidity” and Note 13.

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CAPITAL AND REGULATORY MATTERS

As a BHC and FHC, we are subject to regulation and supervision by the FRB. Our banking subsidiary, CBNA, is a national banking association primarily regulated by the OCC. Our regulation and supervision continues to evolve as the legal and regulatory frameworks governing our operations continue to change. For more information, see the “Regulation and Supervision” section in Item 1.

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 scenario analysis and stress testing, supplement our base line forecast to help inform a range of potential outcomes. 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.

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. We submitted our 2022 Capital Plan to the FRB on April 4, 2022, and must submit our 2023 Capital Plan by April 5, 2023. We expect the FRB to provide us with our preliminary SCB requirement in June 2023 and our final SCB requirement by August 31, 2023.The final SCB requirement will become effective on October 1, 2023 and will remain in effect until September 30, 2024. For more information, see the “Tailoring of Prudential Requirements” section in Item 1.

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

For Category IV firms, like us, the SCB will be re-calibrated with each biennial supervisory stress test and updated annually to reflect our planned common stock dividends. On August 4, 2022, the FRB announced, based on the results of the 2022 CCAR supervisory stress tests, that our SCB will remain at 3.4% through September 30, 2023. To incorporate the effects of the Investors acquisition on our capital requirements, the FRB will require that we participate in the 2023 CCAR supervisory stress test.

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

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Regulatory Capital Ratios and Capital Composition

Under the current U.S. Basel III capital framework, we and our banking subsidiary, CBNA, must meet the following specific minimum requirements: CET1 capital ratio of 4.5%, tier 1 capital ratio of 6.0%, total capital ratio of 8.0% and tier 1 leverage ratio of 4.0%. As a BHC, 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 CBNA.

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, 2022, we did not meet the threshold for these additional capital deductions. MSRs or certain deferred tax assets not deducted from CET1 capital are assigned a 250% risk weight and investments in the capital of unconsolidated financial institutions not deducted from CET1 capital are assigned an exposure category risk weight.

In reaction to the COVID disruption, the federal banking regulators adopted a final rule relative to regulatory capital treatment of the 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 December 31, 2021, followed by a three-year transition period ending December 31, 2024. The three-year transition period will phase-in the reversal of the aggregate amount of the capital benefit provided during the initial two-year delay. On December 31, 2021, the aggregate amount of capital benefit was $384 million. The reduction in the capital benefit in 2022 was $96 million, or approximately 6 basis points.

The table below presents our actual regulatory capital ratios under the U.S. Basel III Standardized rules:

Table 22: Regulatory Capital Ratios Under the U.S. Basel III Standardized Rules

December 31, 2022 December 31, 2021 Required Minimum Capital Ratios(1)

(in millions, except ratio data) Amount Ratio Amount Ratio

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

(2) Represents total average assets less certain amounts deducted from Tier 1 capital.

At December 31, 2022, our CET1 ratio increased, given the common stock issued in connection with the Investors acquisition and net income, partially offset by a $26.4 billion increase in RWA, higher goodwill and intangibles related to the HSBC transaction and Investors acquisition, dividends and a decrease in the modified CECL transition amount as we entered the first year of the CECL three-year transition period. The Tier 1 capital ratio was flat compared to 2021. The total capital ratio increased due to the changes in the CET1 capital ratio described above, combined with a net increase in subordinated debt and AACL related to the Investors acquisition, partially offset by a reduction in the modified AACL transition amount. At December 31, 2022, our CET1 capital, tier 1 capital and total capital ratios were approximately 210 basis points, 170 basis points and 140 basis points, respectively, above their required minimums.

Both the Company and CBNA are subject to the standardized approach for determining RWA. At December 31, 2022, the Company’s RWA totaled $185.2 billion, up $26.4 billion from December 31, 2021, largely driven by the Investors acquisition.

As of December 31, 2022, the tier 1 leverage ratio was 9.3%, down from 9.7% at December 31, 2021, driven by an increase in quarterly adjusted average assets of $39.0 billion, partially offset by higher tier 1 capital.

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Table 23: Capital Composition Under the U.S. Basel III Capital Framework

Exclusions:

Modified CECL transitional amount 288 384

Debt and equity securities 2,771 156

Unamortized net periodic benefit costs 373 349

Deductions:

Goodwill, net of deferred tax liability (7,780) (6,733)

Other intangible assets, net of deferred tax liability (170) (66)

Deferred tax assets that arise from tax loss and credit carryforwards — —

Exclusions from tier 2 capital:

Modified AACL transitional amount (374) (498)

Allowance on PCD assets (126) —

Adjusted allowance for credit losses $1,740 $1,436

(1) As of December 31, 2022 and 2021, the amount of non-qualifying subordinated debt excluded from regulatory capital was $367 million and $420 million, respectively. See Note 13 for more details on our outstanding subordinated debt.

Capital Transactions

We completed the following capital transactions during 2022:

•Repurchased $150 million of our outstanding common stock as part of our Board approved plan;

•Issued $400 million of 5.641% fixed-rate reset subordinated notes in the second quarter;

•Declared and paid quarterly common stock dividends of $0.39 per share in the first and second quarter and $0.42 in the third and fourth quarter, aggregating to $779 million; and

•Declared and paid preferred stock dividends aggregating to $113 million.

For additional detail regarding our common and preferred stock dividends see Note 17.

In June 2022, our Board of Directors increased our common share repurchase authorization to $1.0 billion, which was an increase of $545 million above the $455 million of capacity remaining under the prior $750 million January 2021 authorization. As of December 31, 2022 we had $850 million available for future share repurchases under this authorization. In July 2022, our Board of Directors approved a three-cent increase in our quarterly common stock dividend to $0.42 per share. 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, capital impacts of strategic initiatives, market conditions, receipt of required regulatory approvals and other regulatory considerations.

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Banking Subsidiary’s Capital

Table 24: CBNA's Capital Ratios Under the U.S. Basel III Standardized Rules

(in millions, except ratio data) Amount Ratio Amount Ratio

(1) Represents total average assets less certain amounts deducted from Tier 1 capital.

CBNA’s CET1 and tier 1 capital totaled $20.7 billion at December 31, 2022, up $3.6 billion from $17.0 billion at December 31, 2021. This increase related to a capital contribution from the Parent Company in connection with the Investors acquisition as well as CBNA’s net income, partially offset by higher goodwill and intangibles related to the HSBC transaction and Investors acquisition, a dividend payment to the Parent Company and a decrease in the modified CECL transition amount as we entered the first year of the CECL three-year transition period. Total capital was $23.5 billion at December 31, 2022, an increase of $3.9 billion from $19.6 billion at December 31, 2021, driven by the change in CET1 capital and an increase in AACL related to the Investors acquisition, partially offset by a reduction in the modified AACL transition amount.

CBNA’s RWA totaled $184.8 billion at December 31, 2022, up $26.2 billion from December 31, 2021, largely driven by the Investors acquisition.

As of December 31, 2022, CBNA’s tier 1 leverage ratio remained flat at 9.4% as the increase in quarterly adjusted average assets was offset by higher tier 1 capital.

LIQUIDITY

We define liquidity as our ability to meet our cash-flow and collateral obligations in a timely manner, at a reasonable cost. An institution, such as us, must maintain operating liquidity to meet 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 resulting from investing in bank equity and subordinated debt as well as externally issued preferred stock, senior debt and subordinated debt. Uses of cash include the routine cash flow requirements as a bank holding company, including periodic share repurchases and payments of dividends, interest and expenses; the needs of subsidiaries, including CBNA for additional equity and, as required, its need for debt financing; and the support for extraordinary funding requirements when necessary. To the extent the Parent Company has relied on wholesale borrowings, uses also include payments of related principal and interest.

During the year ended December 31, 2022, the Parent Company issued $400 million of 5.641% fixed-rate reset subordinated notes.

During the years ended December 31, 2022and 2021, the Parent Company declared dividends on common stock of $779 million and $670 million, respectively, and declared dividends on preferred stock of $113 million.

During the years ended December 31, 2022and 2021, the Parent Company repurchased $153 million and $295 million, respectively, of its outstanding common stock.

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Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $1.6 billion and $2.3 billion as of December 31, 2022 and 2021, respectively. The Parent Company’s double-leverage ratio (the combined equity investment in Parent Company subsidiaries divided by Parent Company equity) is a measure of reliance on equity cash flows from subsidiaries to fund Parent Company obligations. The Parent Company’s double-leverage ratio was 101.2% and 98.5% as of December 31, 2022 and 2021, respectively.

CBNA Liquidity

As CBNA’s primary business involves taking deposits and making loans, a key role of liquidity management is to ensure that customers have timely access to funds from deposits and for loans. Liquidity management also involves maintaining sufficient liquidity to repay wholesale borrowings, pay operating expenses and support extraordinary funding requirements when necessary. In the ordinary course of business the liquidity of CBNA is managed by matching sources and uses of cash. The primary sources of bank liquidity include deposits from our consumer and commercial customers; payments of principal and interest on loans and debt securities; and wholesale borrowings, as needed, and as described under “—Liquidity Risk Management and Governance.” The primary uses of bank liquidity include withdrawals and maturities of deposits; payment of interest on deposits; funding of loans and related commitments; and funding of securities purchases. To the extent that CBNA has relied on wholesale borrowings, uses also include payments of related principal and interest. For further information on CBNA’s outstanding debt see Note 13.

During the year ended December 31, 2022, CBNA completed the following transactions:

•Issued $650 million of 4.119% fixed-to-floating rate senior notes;

•Issued $800 million of 4.575% fixed-to-floating rate senior notes;

•Issued $600 million of 6.064% fixed-to-floating rate senior notes; and

•Redeemed $1.0 billion and $750 million of senior notes due February and May 2022, respectively.

Liquidity Risk

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

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

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

Factors Affecting Liquidity

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

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

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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 25: Credit Ratings

Moody’s Standard andPoor’s Fitch

Citizens Financial Group, Inc.:

Long-term issuer NR BBB+ BBB+

Short-term issuer NR A-2 F1

Subordinated debt NR BBB BBB

Preferred Stock NR BB+ BB

Citizens Bank, National Association:

Long-term issuer Baa1 A- BBB+

Short-term issuer NR A-2 F1

Long-term deposits A1 NR A-

Short-term deposits P-1 NR F1

NR = Not Rated

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

Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB, OCC, and FDIC regularly evaluate our liquidity as part of the overall supervisory process. In addition, we are subject to existing and evolving regulatory liquidity requirements, some of which are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. For further discussion, see 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 Treasury group in accordance with policy guidelines promulgated by our Board and the Asset Liability Committee. In managing liquidity risk, the Funding and Liquidity unit delivers regular and comprehensive reporting, including current levels versus threshold limits for a broad set of liquidity metrics and early warning indicators, explanatory commentary relating to emerging risk trends and, as appropriate, recommended remedial strategies.

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

•Organically generated deposits continue to be our primary source of funding, resulting in a consolidated period-end loans-to-deposits ratio, excluding LHFS, of 86.7%;

•Our total available liquidity, comprised of contingent liquidity and available discount window capacity, was approximately $72.3 billion;

•Contingent liquidity was $48.1 billion, consisting of unencumbered high-quality liquid securities of $27.6 billion, unused FHLB capacity of $11.5 billion, and our cash balances at the FRB of $9.0 billion; and

•Available discount window capacity was $24.2 billion, defined as available total borrowing capacity from the FRB based on identified collateral, which is primarily secured by non-mortgage commercial and retail loans. Use of this borrowing capacity would be considered only during exigent circumstances.

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For a summary of our sources and uses of cash by type of activity for the years ended December 31, 2022, 2021 and 2020, 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.

Contractual Obligations

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.

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.

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 for further discussion of our significant accounting policies.

Allowance for Credit Losses

The ACL increased from $1.9 billion at December 31, 2021 to $2.2 billion at December 31, 2022.

Our ACL as of December 31, 2022 accounts for an economic forecast over our two-year reasonable and supportable period with peak unemployment of approximately 6%, peak-to-trough GDP decline of approximately 1.4%, and collateral value peak-to-trough declines of approximately 13% in home and approximately 16% in used auto and truck. This forecast incorporates the increased risk of a moderate recession beginning in the fourth quarter of 2022 and persisting for four consecutive quarters. This compares to our December 31, 2021 forecast which reflected 2022 real GDP growth of 2.8% and an average unemployment rate of 6%, and 2023 real GDP growth of 2.1% and average unemployment rate of 4.3%.

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 monetary tightening triggers a deeper real GDP contraction across our two-year reasonable and supportable forecast period, resulting in a 1.7% peak-to-trough decline in real GDP. Excluding consideration of qualitative adjustments, this scenario would result in a quantitative lifetime loss estimate of approximately 1.17x our modeled period-end ACL, or an increase of approximately $300 million. This analysis relates only to the modeled credit loss estimate and not to the overall period-end ACL, which includes qualitative adjustments.

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

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

For additional information regarding the ACL, see Note 1 and Note 6.

Fair Value

We asses the fair value of assets and liabilities by applying various valuation methodologies which often involve a significant degree of judgment, particularly when active markets do not exist for the items being valued. Quoted market prices are used to estimate the fair value of certain assets, such as trading assets, most investment securities, and residential real estate loans held for sale. Assumptions are used to estimate the fair value of items for which an observable active market does not exist. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations, capitalized servicing assets, pension and other postretirement benefit obligations, estimated residual values of property associated with leases, and certain derivative and other financial instruments.

Assumptions management uses to estimate the fair value of items for which an observable active market does not exist include discount rates, rates of return on assets, repayment rates, cash flows, default rates, costs of servicing and liquidation values. The use of different assumptions could produce significantly different estimates of fair value, which could have material positive or negative effects on the Company’s results of operations, financial condition or disclosures of fair value information.

In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that require recognition of a loss in the Consolidated Statements of Operations. Examples include certain investments, capitalized servicing assets, goodwill and core deposit and other intangible assets, among others.

For additional information regarding our fair value measurements, see Notes 1, 2, 4, 5, 6, 8, 9, 10, 14, 15 and 20 in Item 8.

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ACCOUNTING AND REPORTING DEVELOPMENTS

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

Pronouncement Summary of Guidance Effects on Financial Statements

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RISK GOVERNANCE

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

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

Risk Framework

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

First Line of Defense

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

Second Line of Defense

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

Third Line of Defense

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

Credit 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

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

Our principal non-market risks include credit, operational, regulatory, reputational, liquidity and strategic risks. We are also subject to certain market risks which include potential losses arising from changes in interest rates, foreign exchange rates, equity prices, commodity prices and/or other relevant market rates or prices. Market risk in our business arises from trading activities that serve customer needs, including hedging of interest rates, foreign exchange risk and non-trading activities within capital markets. We have established

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enterprise-wide policies and methodologies to identify, measure, monitor and report on market risk. We actively manage both trading and non-trading market risks. See “—Market Risk” for further information. Our risk appetite is reviewed and approved annually by the Board Risk Committee.

Credit Risk

Overview

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

Objective

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

Organizational Structure

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

Governance

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

Key Management Processes

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

Consumer

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

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

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

Commercial

On the Commercial Banking side of credit risk, risk management begins with defined credit products and policies and is separated into commercial and industrial loans, CRE and leases. Within commercial and industrial 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 updated regularly.

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

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 the hedging of interest rate and foreign exchange risk. As described below, more material market risk arises from our non-trading banking activities, such as the origination of loans 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.

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Non-Trading Risk

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

Interest Rate Risk

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

A major source of structural interest rate risk is a difference in the repricing of assets relative to liabilities and equity. There are differences in the timing and drivers of rate changes reflecting the maturity and/or repricing of assets and liabilities. For example, the rate earned on a commercial loan may reprice monthly with changes in the benchmark rate, 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 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 repricing characteristics and balance fluctuations of deposits with indeterminate (i.e., non-contractual) maturities, as well as the pace of mortgage prepayments are the most significant behavioral assumptions. For projections of deposit rates, the bank utilizes product level models that consider the specific product characteristics and composition of the deposit portfolio along with current and forward-looking market dynamics. Similarly, the bank employs dynamic prepayment and mortgage rate models to project prepayment behaviors specific to each of our product offerings. These models have been developed based on internal performance data over prior interest rate cycles and are calibrated to our experience and outlook for rates across a diverse set of market environments. We assess our models and assumptions periodically by running sensitivity analyses to determine the impact of changes to inputs or assumptions on our risk results. The results of these analyses are reported to the Asset Liability Committee.

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Since we cannot predict the future path of interest rates, 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 extreme and 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 limits established and monitored by senior management. While an instantaneous and severe shift in interest rates is included in this analysis, we believe that any actual shift in interest rates would 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 26: Sensitivity of Net Interest Income

Estimated % Change inNet Interest Income over 12 Months

December 31,

Instantaneous Change in Interest Rates

Gradual Change in Interest Rates

We continue to manage asset sensitivity within the scope of our policy, changing market conditions and changes in our balance sheet. Asset sensitivity against a 200-basis point gradual increase in rates was 2.7% on December 31, 2022, compared with 10.1% on December 31, 2021. The change reflects rising base net interest income, including the impact of the Investors acquisition, and our ongoing hedge activity, which locks in higher forward rates and reduces our exposure to evolving downside risks. This reduction in asset sensitivity is partially offset by growth and a mix shift towards a higher proportion of floating rate consumer and commercial lending. Current levels of asset sensitivity will continue to provide upside benefit to net interest income as we progress through a period of expected higher short-term policy rates from the FRB. Changes in interest rates can also affect risk management activities, which impact the repricing sensitivity or beta of the deposit base as well as the cash flows on assets that allow for early payoff without a penalty. The risk position is managed within our risk limits, and long-term view of interest rates through occasional adjustments to securities investments, interest rate swaps and mix of funding.

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

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

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Weighted Average Weighted Average

Swaps - conventional ALM(1)

Cash flow - receive fixed/pay variable

Cash flow - pay fixed/receive variable — — — — 3,000 2.5 0.1 1.7

Fair value - pay fixed/receive variable — — — — 2,000 2.7 0.1 1.5

Forward-starting cash flow - basis swaps(3)(4) 7,000 3.3 4.4 4.4 — — — —

Options

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

(2) As of December 31, 2022, start dates range from the first quarter of 2023 to the third quarter of 2024.

(3) As of December 31, 2022, start dates range from the third quarter of 2023 to the third quarter of 2024.

(4) Receive and pay rates represent SOFR and 1-month term SOFR, respectively.

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

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

Year Ended December 31,

Amount of pre-tax net gains (losses) recognized in OCI ($1,806) ($66)

Using the interest rate curve at December 31, 2022 with respect to cash flow hedge strategies, we estimate that approximately $704 million in pre-tax net losses will be reclassified from AOCI to net interest income over the next 12 months. This amount could differ from amounts recognized due to changes in interest rates, hedge de-designations and the addition of other hedges after December 31, 2022.

LIBOR Transition

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 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, and regulation impacts. On a quarterly basis we track and review the risks associated with the LIBOR transition with a focus on the identification of mitigation actions.

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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 FCA formally announced the future cessation or loss of representation of the LIBOR benchmark settings currently published by the ICE Benchmark Administration. Further, the FCA stated that the 1-week and 2-month U.S. Dollar LIBOR rates will cease as of December 31, 2021 and 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 urged 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 FCA announcement. 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 2022 included, but are not limited to, the following:

•Upgraded standard form provisions and issued implementation guidance to require the 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;

•Offered new product issuances with alternative reference rates;

•Launched remediation of existing LIBOR loans and derivatives to alternative reference rates;

•Completed operational readiness of systems, models and applications to handle all potential alternative reference rates;

•Analyzed existing fallback language in legacy contracts to devise a strategy for those requiring remediation;

•Continued to develop and enhance internet and intranet sites for the LIBOR transition; and

•Participated in industry and ARRC working groups to ascertain market developments and assess the impact to us and our customers.

Capital Markets

A key component of our capital markets activities is the underwriting and distribution of corporate credit facilities to partially finance merger and acquisition transactions for our clients. We have a rigorous risk management process around these activities, including a limit structure capping our underwriting risk, 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, 2022 and 2021, the fair value of our MSRs was $1.5 billion and $1.0 billion, respectively, and the total notional amount of related derivative contracts was $12.9 billion and $11.8 billion, respectively. Gains and losses on MSRs and the related derivatives used for hedging are included in mortgage banking fees in the Consolidated Statements of Operations.

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

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Trading Risk

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

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 the 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 annually at a minimum. 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 currency positions and single name risk, are monitored daily 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.

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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, 2022 and 2021, respectively, including high, low, average and period end VaR for interest rate and foreign exchange rate risks, as well as total VaR.

Market Risk Regulatory Capital

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

Market Risk Category Period End Average High Low Period End Average High Low

Interest Rate $3 $2 $3 $1 $2 $1 $2 $—

Foreign Exchange Currency Rate — — — — — 1 2 —

Commodity — — — — — — — —

Specific Risk VaR — — — — — — — —

Stressed Specific Risk VaR — — — — — — — —

Market Risk Regulatory Capital $39 $50

Specific Risk Not Modeled Add-on 20 20

de Minimis Exposure Add-on — —

Total Market Risk Regulatory Capital $59 $70

Market Risk-Weighted Assets $739 $877

Stressed 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.

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Sensitivity Analysis

Sensitivity analysis is the measure of exposure to a single risk factor, such as a one basis point change in rates or credit spread. We conduct and monitor sensitivity on interest rates, basis spreads, foreign exchange exposures, option prices and credit spreads. Since 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 daily. 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.

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 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. The quantitative impact of the major underlying modeling assumptions is estimated (e.g., through developing alternative models), if possible. Results of such reviews are shared with our 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 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.

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

Daily VaR Backtesting

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NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS

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

Table 30: Reconciliations of Non-GAAP Measures

Year Ended December 31,

(in millions, except share, per share and ratio data) Ref. 2022 2021

Noninterest income, Underlying:

Noninterest income (GAAP) A $2,009 $2,135

Less: Notable items (31) —

Noninterest income, Underlying (non-GAAP) B $2,040 $2,135

Total revenue, Underlying:

Less: Notable items (31) —

Total revenue, Underlying (non-GAAP) D $8,052 $6,647

Noninterest expense, Underlying:

Noninterest expense (GAAP) E $4,892 $4,081

Noninterest expense, Underlying (non-GAAP) F $4,630 $3,976

Pre-provision profit:

Less: Noninterest expense (GAAP) E 4,892 4,081

Pre-provision profit (GAAP) $3,129 $2,566

Pre-provision profit, Underlying:

Total revenue, Underlying (non-GAAP) D $8,052 $6,647

Less: Noninterest expense, Underlying (non-GAAP) F 4,630 3,976

Pre-provision profit, Underlying (non-GAAP) $3,422 $2,671

Provision (benefit) for credit losses, Underlying:

Provision (benefit) for credit losses (GAAP) $474 ($411)

Less: Notable items 169 —

Provision (benefit) for credit losses, Underlying (non-GAAP) $305 ($411)

Income before income tax expense, Underlying:

Income before income tax expense (GAAP) G $2,655 $2,977

Income before income tax expense, Underlying (non-GAAP) H $3,117 $3,082

Income tax expense and effective income tax rate, Underlying:

Income tax expense (GAAP) I $582 $658

Less: Income tax expense (benefit) related to notable items (110) (27)

Income tax expense, Underlying (non-GAAP) J $692 $685

Effective income tax rate (GAAP) I/G 21.93 % 22.10 %

Effective income tax rate, Underlying (non-GAAP) J/H 22.19 22.21

Net income, Underlying:

Add: Notable items, net of income tax benefit 352 78

Net income, Underlying (non-GAAP) L $2,425 $2,397

Net income available to common stockholders, Underlying:

Net income available to common stockholders (GAAP) M $1,960 $2,206

Add: Notable items, net of income tax benefit 352 78

Return on average common equity and return on average common equity, Underlying:

Return on average common equity M/O 9.02 % 10.49 %

Return on average common equity, Underlying (non-GAAP) N/O 10.64 10.86

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Year Ended December 31,

(in millions, except share, per share and ratio data) Ref. 2022 2021

Less: Average goodwill (GAAP) 7,872 7,062

Less: Average other intangibles (GAAP) 181 54

Return on average tangible common equity M/P 13.91 % 15.44 %

Return on average tangible common equity, Underlying (non-GAAP) N/P 16.41 15.98

Return on average total assets and return on average total assets, Underlying:

Return on average total assets K/Q 0.96 % 1.25 %

Return on average total assets, Underlying (non-GAAP) L/Q 1.13 1.30

Less: Average goodwill (GAAP) 7,872 7,062

Less: Average other intangibles (GAAP) 181 54

Return on average total tangible assets K/R 1.00 % 1.30 %

Return on average total tangible assets, Underlying (non-GAAP) L/R 1.17 1.34

Efficiency ratio and efficiency ratio, Underlying:

Efficiency ratio, Underlying (non-GAAP) F/D 57.51 59.82

Noninterest income as a % of total revenue, Underlying:

Noninterest income as a % of total revenue A/C 25.04 % 32.11 %

Operating leverage and operating leverage, Underlying:

Increase (decrease) in total revenue 20.68 % (3.74 %)

Increase in noninterest expense 19.88 2.25

Operating Leverage 0.80 % (5.99) %