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
Credit Quality 50
Deposits 55
Borrowed Funds 56
Capital and Regulatory Matters 56
Liquidity 59
Critical Accounting Estimates 62
Accounting and Reporting Developments 65
Risk Governance 66
Market Risk 71
Non-GAAP Financial Measures and Reconciliations 78
Citizens Financial Group, Inc. | 38
INTRODUCTION
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $217.5 billion in assets as of December 31, 2024. 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 3,100 ATMs and more than 1,000 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.
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 and “including AOCI impact.” 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 may be 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.”
Citizens Financial Group, Inc. | 39
FINANCIAL PERFORMANCE
Key Highlights
Net income decreased $99 million, with earnings per diluted common share down $0.10 to $3.03 compared to 2023.
Results reflect notable items of $98 million or $0.21 per diluted common share, net of tax benefit, compared to $357 million or $0.75 per diluted common share, net of tax benefit, in 2023.
Table 1: Notable Items
Less: notable items
Less: notable items
Noninterest income $1,983 $— $— $— $1,983
(1) Includes integration related costs associated with acquisitions.
(2) Primarily includes our TOP revenue and efficiency initiatives for the years ended December 31, 2024 and 2023.
(3) Represents an industry-wide FDIC special assessment. For more information, see “Regulation and Supervision - Deposit Insurance” in Item 1.
•Net income available to common stockholders decreased $119 million to $1.4 billion compared to 2023.
◦On an Underlying basis, net income available to common stockholders of $1.5 billion compared to $1.8 billion in 2023.
◦On an Underlying basis, earnings per diluted common share of $3.24 compared to $3.88 in 2023.
•Total revenue decreased $415 million to $7.8 billion compared to 2023, driven by a decrease of 10% in net interest income.
•The efficiency ratio of 67.0% was stable compared to 2023.
◦On an Underlying basis, the efficiency ratio of 65.2% compared to 60.8% in 2023.
•ROTCE of 9.8% compared to 10.9% in 2023.
◦On an Underlying basis, ROTCE of 10.5%compared to13.5%.
•Tangible book value per common share of $32.34 increased 5% from 2023.
For additional information regarding our financial performance, see “Results of Operations — 2024 compared with 2023” included in this report.
Citizens Financial Group, Inc. | 40
RESULTS OF OPERATIONS — 2024 compared with 2023
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 and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of our 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. Factors that influence our net interest income include, but are not limited to, the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates. For further discussion, refer to the “Market Risk” and “Risk Governance” sections of this report.
Citizens Financial Group, Inc. | 41
The following table presents the major components of our net interest income. Average balance represents amortized cost, excluding the unamortized basis adjustments related to the transfer of certain HTM securities from AFS, and LHFS. The yield/rate is based on annualized interest income or expense for the periods presented and includes the impact of hedging activities associated with the respective asset and liability categories.
Table 2: Major Components of Net Interest Income
Year Ended December 31,
Assets
Non-taxable investment securities 1 — 2.60 2 — 2.68 (1) (8)
Liabilities and Stockholders’ Equity
(1) See Note 1 for information regarding updates to the Consolidated Balance Sheets during 2024.
(2) 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 decreased $608 million, or 10%, compared to 2023, reflecting lower net interest margin and a decrease of 2% in average interest-earning assets.
Net interest margin on a FTE basis decreased 25 basis points compared to 2023, reflecting higher funding and swap costs and the impact of building liquidity, partially offset by higher interest-earning-asset yields and the benefit of Non-Core portfolio runoff.
Citizens Financial Group, Inc. | 42
Average interest-earning assets decreased $3.6 billion compared to 2023, driven by a decline in total loans and leases, partially offset by an increase in investment securities and cash held in interest-bearing deposits.
Average deposits were stable compared to 2023.
Average total borrowed funds decreased $2.5 billion compared to 2023, reflecting a decline in FHLB advances driven by Non-Core portfolio runoff, partially offset by a remix of funding to long-term senior debt and secured borrowings collateralized by loans.
Table 3: Changes in Net Interest Income Due to Average Volume and Average Rate
Year Ended December 31,
(dollars in millions) Average Volume(1) Average Rate(1) Net Change
Interest Income
Interest-bearing cash and due from banks and deposits in banks $55 ($3) $52
Non-taxable investment securities — — —
Commercial real estate (48) 39 (9)
Loans held for sale(2) (22) (3) (25)
Interest Expense
Checking with interest ($14) $59 $45
Short-term borrowed funds (28) — (28)
Long-term borrowed funds (116) 54 (62)
(1) Volume and rate changes are allocated on a consistent basis using the respective percentage changes in average balances and average rates.
(2) See Note 1 for information regarding updates to the Consolidated Balance Sheets during 2024.
Citizens Financial Group, Inc. | 43
Noninterest Income
Table 4: Noninterest Income
Year Ended December 31,
(dollars in millions) 2024 2023 Change Percent
Foreign exchange and derivative products 146 183 (37) (20)
Letter of credit and loan fees 175 168 7 4
(1) See Note 1 for information regarding updates to the Consolidated Statements of Operations during 2024.
(2) Includes bank-owned life insurance income and other income for all periods presented.
The primary drivers for the change in noninterest income for the year ended December 31, 2024, compared to 2023, are described below.
•Capital markets fees increased given higher underwriting, M&A advisory and loan syndication fees.
•Card fees increased driven primarily by higher credit card fees, including favorable vendor contract negotiations.
•Wealth fees reflect increased sales activity and higher asset management fees.
•Foreign exchange and derivative products revenue decreased given reduced client activity related to interest rate and commodities hedging.
•Mortgage banking fees declined reflecting lower production and servicing fees and a decline in MSR valuation, net of hedge impact.
Noninterest Expense
Table 5: Noninterest Expense
Year Ended December 31,
(dollars in millions) 2024 2023 Change Percent
The decrease in noninterest expense for the year ended December 31, 2024, compared to 2023, was driven primarily by other operating expense associated with FDIC deposit insurance, reflecting an estimate of CBNA’s special assessment of $31 million and $225 million, respectively, recognized in 2024 and 2023. Other operating expense also reflects lower fraud losses and marketing and travel-related expenses. These decreases were partially offset by salaries and employee benefits reflecting hiring related to our Private Bank and Private Wealth build-out and commercial middle market bankers in expansion markets, and equipment and software given technology investments and maintenance.
For more information regarding CBNA’s special assessment, see “Regulation and Supervision - Deposit Insurance” in Item 1.
Citizens Financial Group, Inc. | 44
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 — Credit Quality” for more information.
Provision expense of $687 million for 2024 was stable compared to 2023. The provision expense for 2024 reflects higher reserves against the CRE office portfolio, primarily driven by elevated interest rates and return-to-office dynamics and unsecured products and education loans given recent inflationary pressures and government actions, partially offset by a decline in total loans and leases.
Income Tax Expense
Income tax expense of $379 million decreased $43 million and our effective income tax rate of 20.1% decreased from 20.8% compared to 2023. These decreases reflect a higher benefit from tax-advantaged investments.
Business Operating Segments
We have three business operating segments: Consumer Banking, Commercial Banking, and Non-Core. See Note 26 for more information regarding our business operating segments.
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 Non-Core
Year Ended December 31, Year Ended December 31, Year Ended December 31,
Average Balances:
(1) Includes LHFS.
Consumer Banking
Net interest income increased $378 million compared to 2023, driven by higher net interest margin reflecting higher interest-earning asset yields and growth in average interest-earning assets. These increases were partially offset by higher funding costs.
Noninterest income increased $64 million compared to 2023, driven by wealth fees reflecting increased sales activity and higher asset management fees, higher credit card fees, and service charges and fees given higher overdraft and cash management fees. These increases were partially offset by mortgage banking fees reflecting lower production and servicing fees and a decline in MSR valuation, net of hedge impact.
Noninterest expense increased $136 million compared to 2023, driven primarily by salaries and benefits reflecting our Private Bank and Private Wealth build-out.
Net charge-offs increased $51 million compared to 2023, driven primarily by other retail and education.
Citizens Financial Group, Inc. | 45
Commercial Banking
Net interest income decreased $342 million compared to 2023, driven by lower net interest margin, a decline in average interest-earning assets and higher funding costs.
Noninterest income increased $124 million compared to 2023, driven by capital markets fees reflecting higher underwriting, M&A advisory and loan syndication fees, partially offset by foreign exchange and derivative products revenue given reduced client activity related to interest rate and commodities hedging.
Noninterest expense decreased$54 million compared to 2023, driven primarily by salaries and employee benefits reflecting lower headcount.
Net charge-offs increased $103 million compared to 2023, driven by the office segment of CRE, partially offset by a decline in commercial and industrial.
Non-Core
Net interest income increased $12 million compared to 2023, driven by a decline in funding costs relative to the highest-cost marginal funding sources during 2024, including secured borrowings collateralized by auto loans and FHLB advances.
Average loans and leases decreased $4.8 billion compared to 2023, driven by planned Non-Core portfolio runoff.
RESULTS OF OPERATIONS — 2023 compared with 2022
For a description of our results of operations for 2023, see the “Results of Operations — 2023 compared with 2022” section of Item 7 in our 2023 Form 10-K.
Citizens Financial Group, Inc. | 46
ANALYSIS OF FINANCIAL CONDITION
Securities
Table 7: Amortized Cost and Fair Value of Securities
(dollars in millions) Amortized Cost(1) Fair Value Amortized Cost(1) Fair Value
State and political subdivisions 1 1 1 1
Mortgage-backed securities:
Mortgage-backed securities:
(1) Excludes portfolio level basis adjustments of $(75) million and $60 million, respectively, for securities designated in active fair value hedge relationships under the portfolio layer method at December 31, 2024 and 2023.
(2) Included in other assets in the Consolidated Balance Sheets.
The primary objective of our securities portfolio is to provide a readily available source of liquidity. 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, 2024, U.S. Treasuries and mortgage-backed securities issued by GNMA and GSEs represented 98% of the fair value of our debt securities portfolio, with approximately $36.0 billion of unencumbered high-quality liquid securities serving as potential collateral for borrowings from the FHLB, FRB discount window, and the Fixed Income Clearing Corporation bilateral repurchase agreement market.
For further discussion of the use of our securities as liquidity collateral and liquidity requirements, see the “Liquidity Risk Management and Governance” and “Regulation and Supervision — Liquidity Requirements” sections in this document.
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 our broader interest rate risk framework and limits. As of December 31, 2024, the portfolio’s average effective duration, including recent hedging actions to reduce duration, was 3.7 years compared to 3.9 years as of December 31, 2023.
Citizens Financial Group, Inc. | 47
Table 8: Amortized Cost of AFS and HTM Securities by Contractual Maturity
Distribution of Maturities(1)
Amortized cost:
State and political subdivisions — — — — — — 1 2.60 1 2.60
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) 2024 2023 Change Percent
See Note 1 for a description of changes made to the Company’s loans and leases presentation during 2024.
The decrease in total loans and leases as of December 31, 2024 compared to December 31, 2023 reflects a $4.7 billion decrease in commercial given market conditions resulting in relatively low client demand and lower line of credit utilization, partially offset by growth in the Private Bank. Retail decreased $2.1 billion, primarily driven by planned Non-Core portfolio runoff, partially offset by growth in home equity and mortgage, including the Private Bank.
Citizens Financial Group, Inc. | 48
Table 10: Fixed and Variable Rate Loans and Leases by Maturity
Fixed rate:
Variable rate:
Fixed rate:
Variable rate:
Automobile — — — — —
(1) Maturity is based on scheduled principal repayment date.
(2) Includes floating-rate commercial loans hedged to fixed rate to manage our exposure to the variability in interest cash flows. See “Market Risk” for additional information regarding our use of interest rate derivatives to hedge our loan portfolio.
Citizens Financial Group, Inc. | 49
Credit Quality
See Note 1 for a description of changes made to the Company’s loans and leases presentation during 2024.
The ACL is comprised of the ALLL and the allowance for unfunded lending commitments. As described in Note 6, the ACL is maintained at a level the Company believes to be appropriate to absorb expected lifetime credit losses over the contractual life of a loan or lease and on unfunded lending commitments, inclusive of recoveries. We consider extensive historical loss experience, including the impact of loss mitigation and restructuring programs that we offer to borrowers experiencing financial difficulty, as well as projected loss severity as a result of loan default.
Management evaluates the appropriateness of the ACL on a quarterly basis. The evaluation of both quantitative and qualitative information is performed by assessing groups of assets that share similar risk characteristics as well as certain individual loans and leases that do not share similar risk characteristics with the collective group. Loans are generally grouped by product type and are assessed for credit losses using econometric models.
The quantitative evaluation of the adequacy of the ACL utilizes a single economic forecast as its foundation and is primarily based on econometric models that use known or estimated data as of the balance sheet date and forecasted data over the reasonable and supportable period. Known and estimated data include current PD, LGD and EAD for commercial loans, timing and amount of expected draws for unfunded lending commitments, and FICO, LTV, and term for retail loans. The mix and level of loan balances, delinquency levels, assigned risk ratings, previous loss experience, current business conditions, amount and timing of expected future cash flows, and factors specific to commercial credits such as competition, business and management performance are also considered. Forward-looking economic assumptions include real GDP, unemployment rate, interest rate curve, and changes in collateral values. Historical information, such as financial statements for commercial customers or consumer credit ratings, may not be as relevant in estimating future expected losses as forecasted inputs to the models during volatile economic time periods.
Management additionally considers qualitative factors in determining the adequacy of the ACL. Qualitative adjustments are used to capture characteristics in the loan and lease portfolio that impact expected credit losses which are not fully reflected within our expected credit loss models. These factors include, but are not limited to: model imprecision, uncertainty in economic scenario assumptions, and emerging risks related to either changes in the economic environment that are affecting specific portfolios, or changes in portfolio concentrations over time that may affect model performance, credit underwriting policy exceptions, and results of internal audit and quality control reviews. The consideration of these qualitative items results in adjustments to amounts included in our ACL for each loan portfolio. The qualitative component of the ACL as of December 31, 2024 did not change significantly from December 31, 2023.
Loans and leases that do not share similar risk characteristics are individually assessed for expected credit losses. Nonaccrual commercial and industrial, and commercial real estate loans with an outstanding balance of $5 million or greater are assessed on an individual basis. Generally, measurement of the ACL on an individual loan or lease is the present value of its future cash flows or the fair value of its underlying collateral, if the loan or lease is collateral dependent.
The Company estimates expected credit losses associated with off-balance sheet financial instruments such as standby letters of credit, financial guarantees and unfunded loan commitments that are not unconditionally cancellable. Off-balance sheet financial instruments are subject to individual reviews and are analyzed and segregated by risk according to the Company’s internal risk rating scale. These risk classifications, in conjunction with historical loss experience, current and future economic conditions, timing and amount of expected draws, and performance trends within specific portfolio segments, are considered to estimate the allowance for unfunded lending commitments. The Company does not recognize a reserve for future draws from credit lines that are unconditionally cancellable (e.g., credit cards).
For additional information regarding the ACL, see “Critical Accounting Estimates — Allowance for Credit Losses” and Note 6.
Citizens Financial Group, Inc. | 50
Table 11: Allocation of the ALLL
December 31,
(1) Represents the percentage of each loan category to total loans and leases.
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 198 220
(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.
The ACL as of December 31, 2024 compared to December 31, 2023 decreased $59 million, driven by a $130 million decline in commercial reflecting lower loan balances and charge-offs. Retail increased $71 million driven by higher reserves related to unsecured products and education loans given recent inflationary pressures and government actions.
Citizens Financial Group, Inc. | 51
Table 13: Nonaccrual Loans and Leases
December 31,
(dollars in millions) 2024 2023 Change Percent
Nonaccrual loans and leases to total loans and leases 1.20 % 0.93 % 27 bps
Allowance for credit losses to nonaccrual loans and leases 136 170 (34 %)
The increase in nonaccrual loans and leases as of December 31, 2024 compared to December 31, 2023 was primarily driven by the general office segment of CRE.
Table 14: Ratio of Net Charge-Offs to Average Loans and Leases
Year Ended December 31,
For the year ended December 31, 2024, net charge-offs increased $137 million and the net charge-off ratio increased 12 basis points compared to 2023. The increase in retail net charge-offs was driven by unsecured products in other retail, and education, partially offset by a decline in auto. The increase in commercial net charge-offs was primarily driven by the office segment of CRE, partially offset by a decline in commercial and industrial.
Commercial Loan Asset Quality
Our commercial portfolio consists of traditional commercial and industrial loans, commercial leases, and commercial real estate loans. We utilize internal risk ratings to monitor credit quality for commercial loans and leases. For more information on internal risk ratings see Note 6.
Total commercial criticized balances of $7.1 billion at December 31, 2024 decreased $1.3 billion compared to December 31, 2023.
Commercial and industrial criticized balances of $2.6 billion at December 31, 2024 decreased from $3.5 billion at December 31, 2023, primarily driven by declines in the healthcare and wholesale trade sectors.
Commercial real estate criticized balances of $4.5 billion at December 31, 2024 decreased from $5.0 billion at December 31, 2023, attributable to the continued impacts of interest rates and return-to-office dynamics on the Office sector and the continued impacts of interest rates on the Multi-family sector. Approximately 96% of commercial real estate loans remain current on payments as of December 31, 2024.
For more information on the distribution of commercial loans by vintage date and regulatory classification rating, see Note 6.
Citizens Financial Group, Inc. | 52
Table 15: Commercial and Industrial Loans by Industry Sector
Industry sector
Finance and insurance
Health, pharma, and social assistance 2,322 2 2,598 2
Professional, scientific, and technical services 2,313 2 2,339 2
Arts, entertainment, and recreation 1,509 1 1,602 1
Administrative and waste management 1,352 1 1,599 1
Consumer products manufacturing 710 1 984 1
Citizens Financial Group, Inc. | 53
Table 16: Commercial Real Estate by Property Type and State
Property type
Office
Credit tenant lease and life sciences(1) 2,135 2 2,268 2
State
(1) Credit tenant lease includes loans to nationally recognized tenants with high credit ratings and life sciences includes loans to provide lab and office space for tenants involved in the study and development of scientific discoveries.
(2) Includes Georgia, Maryland, North Carolina, South Carolina and Virginia.
Citizens Financial Group, Inc. | 54
Retail Loan Asset Quality
We utilize credit scores provided by FICO, which are generally refreshed on a quarterly basis, and payment and delinquency status, among other data points, to monitor credit quality for retail loans. FICO credit scores represent current and historical national industry-wide consumer level credit performance data, which management believes are the strongest indicator of potential credit losses over the contractual life of the loan and a good predictor of a borrower’s future payment performance.
Table 17: Retail Loan Portfolio Analysis
Days Past Due and Accruing Days Past Due and Accruing
Table 18: Retail Asset Quality Metrics
Average refreshed FICO for total portfolio 775 772
CLTV ratio for secured real estate(1) 50 % 50 %
(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.
For more information on the aging of accruing and nonaccrual retail loans, and the distribution of retail loans by vintage date and FICO score, see Note 6.
Deposits
Table 19: Composition of Deposits
Total deposits as of December 31, 2024 decreased compared to December 31, 2023, reflecting a decline in higher-cost Treasury deposits and lower commercial balances, largely offset by growth in Private Bank deposits.
Table 20: Uninsured and Insured/Secured Deposits
Less: Uninsured affiliate deposits eliminated in consolidation 12,705 14,650
Insured/secured deposits to total deposits 67 % 71 %
(1) As reported on CBNA’s Call Report.
(2) Represents uninsured deposits of states and political subdivisions that are secured or collateralized as required under state law.
Citizens Financial Group, Inc. | 55
(dollars in millions) December 31, 2024
Three months or less $1,499
After three months through six months 936
After six months through twelve months 597
After twelve months 19
Total time deposits(1) $3,051
(1) Includes time deposits per account in excess of $250,000.
Borrowed Funds
Total borrowed funds of $12.4 billion as of December 31, 2024 decreased $1.6 billion compared to December 31, 2023, driven by a decline of approximately $4.2 billion in FHLB advances, partially offset by the issuance of senior debt and secured borrowings collateralized by loans. For more information regarding our borrowed funds, see “Liquidity” and Note 13.
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. See the “Regulation and Supervision” section in Item 1 for more information.
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 Board and senior management in oversight and decision-making.
Forward-looking assessments of capital adequacy provide for the development of a single capital plan, which is periodically submitted to the FRB, that covers both us and our banking subsidiary. We prepare this plan in accordance with the Capital Plan Rule and we participate annually in the FRB’s horizontal capital review as part of their normal supervisory process, which includes an assessment of specific capital planning areas.
The FRB regularly supervises and evaluates our capital adequacy and capital planning processes, including the submission of an annual capital plan approved by our Board of Directors or one of its committees. Under the FRB’s capital requirements, we must maintain capital ratios above the sum of the regulatory minimum and SCB requirement to avoid restrictions on capital distributions and discretionary bonus payments. The FRB utilizes the supervisory stress test to determine our SCB, which is re-calibrated with each biennial supervisory stress test and updated annually to reflect our planned common stock dividends. As an institution subject to Category IV standards, we are subject to biennial supervisory stress testing in even-numbered years. Our SCB associated with the 2024 CCAR supervisory stress test was 4.5%, effective October 1, 2024 through September 30, 2025.
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.
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 4.5% 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.
Citizens Financial Group, Inc. | 56
For additional discussion of the U.S. Basel III capital framework and its related application, see the “Regulation and Supervision” section in Item 1. The table below presents the regulatory capital ratios for CFG and CBNA under the U.S. Basel III Standardized rules:
Table 22: Regulatory Capital Ratios Under the U.S. Basel III Standardized Rules
CET1 capital
Tier 1 capital
Total capital
Tier 1 leverage
Risk-weighted assets
Quarterly adjusted average assets(2)
(1) Represents minimum requirement under the current capital framework plus the SCB of 4.5% and CCB of 2.5% for CFG and CBNA, respectively. The SCB and CCB are not applicable to the Tier 1 leverage ratio.
(2) Represents total average assets less certain amounts deducted from Tier 1 capital.
At December 31, 2024, CFG’s CET1 and tier 1 capital ratios increased compared to December 31, 2023. Net income and a $6.9 billion decrease in RWA was partially offset by common share repurchases, dividends, and a decrease in the modified CECL transition amount as we entered the third year of the CECL three-year transition period. Lower commercial and auto loans were the key drivers for the decline in RWA. An increase in preferred stock was also a contributing factor to the tier 1 capital ratio increase.
At December 31, 2024, CBNA’s CET1 and tier 1 capital ratios increased compared to December 31, 2023. Net income and a $7.1 billion decrease in RWA, primarily driven by lower commercial and auto loans, was partially offset by dividend payments to the Parent Company and a decrease in the modified CECL transition amount as we entered the third year of the CECL three-year transition period.
At December 31, 2024, CFG’s and CBNA’s total capital ratios increased compared to December 31, 2023, driven by their respective changes in CET1 and tier 1 capital described above and a reduction in the modified AACL transition amount.
At December 31, 2024, CFG’s and CBNA’s tier 1 leverage ratios increased compared to December 31, 2023, reflecting a decline in quarterly adjusted average assets and their respective changes in tier 1 capital described above.
Citizens Financial Group, Inc. | 57
Table 23: Capital Composition Under the U.S. Basel III Capital Framework
Exclusions:
Modified CECL transitional amount 96 192
Net unrealized (gains)/losses recorded in AOCI, net of tax:
Unamortized net periodic benefit costs 301 333
Deductions:
Goodwill, net of deferred tax liability (7,768) (7,779)
Other intangible assets, net of deferred tax liability (128) (134)
Deferred tax assets that arise from tax loss and credit carryforwards (36) (7)
Exclusions from tier 2 capital:
Modified AACL transitional amount (125) (249)
Allowance on PCD assets (147) (152)
Adjusted allowance for credit losses 1,987 1,917
(1) As of December 31, 2024 and 2023, the amount of non-qualifying subordinated debt excluded from regulatory capital was $469 million and $482 million, respectively. See Note 13 for more details on our outstanding subordinated debt.
Capital Transactions
We completed the following capital transactions during 2024:
•Repurchased $1.1 billion of our outstanding common stock;
•Issued 400,000 shares of 7.375% fixed-rate non-cumulative perpetual Series H Preferred Stock at an aggregate offering price of $400 million;
•Redeemed all outstanding shares of the 9.205% floating rate non-cumulative perpetual Series D Preferred Stock on July 8, 2024;
•Declared quarterly common stock dividends of $0.42 per share, aggregating to $769 million; and
•Declared preferred stock dividends aggregating to $137 million.
For additional detail regarding our common and preferred stock dividends see Note 17.
On June 28, 2024, our Board of Directors increased the capacity of our common share repurchase program to $1.25 billion, an increase of $656 million above the $594 million of capacity remaining under the prior February 2023 authorization. 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, and regulatory considerations.
AOCI Impact on Regulatory Capital
Under the current applicable regulatory capital rules we have made the AOCI opt-out election, which enables us to exclude components of AOCI from regulatory capital. As noted in the “Capital and Stress Testing Requirements” section of “Regulation and Supervision” in Item 1, the regulatory agencies are considering the inclusion of AOCI components in regulatory capital for Category IV firms like us, notably the AOCI relative to securities and pension.
Citizens Financial Group, Inc. | 58
The following table presents our regulatory capital ratios including the AOCI impact from securities and pension, which we believe provides useful information in light of recent events and the potential for change in the regulatory capital framework.
Table 24: AOCI Impact on Regulatory Capital
CFG CBNA
(dollars in millions) CET1 Tier 1 Total CET1 Tier 1 Total
Regulatory capital, including AOCI impact:
Deferred tax assets - securities and pension AOCI (33) (33) (33) (34) (34) (34)
Risk-weighted assets, including AOCI impact:
Ratio:
LIQUIDITY
We consider the effective and prudent management of liquidity fundamental to our safety and soundness. We define liquidity as our ability to meet our obligations when they come due. As a financial institution, we 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 maintain additional secured borrowing capacity at the FRB discount window, but do not view this as a primary means of funding, but rather a potential source in a stressed environment or during a market disruption. We manage liquidity at the consolidated enterprise level and at each material legal entity.
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 relies on wholesale borrowings, uses also include payments of related principal and interest.
During the year ended December 31, 2024, the Parent Company completed the following transactions:
•Issued $1.25 billion of 5.841% fixed-to-floating rate senior notes due 2030;
•Issued $750 million of 6.645% fixed-to-floating rate senior notes due 2035;
•Issued 400,000 shares of 7.375% fixed-rate non-cumulative perpetual Series H Preferred Stock at an aggregate offering price of $400 million;
•Redeemed all outstanding shares of the 9.205% floating rate non-cumulative perpetual Series D Preferred Stock on July 8, 2024; and
•Issued $1.25 billion of 5.718% fixed-to-floating rate senior notes due 2032.
Our Parent Company’s cash and cash equivalents represent a source of liquidity that can be used to meet various needs and totaled $2.7 billion and $2.9 billion as of December 31, 2024 and 2023, respectively.
Citizens Financial Group, Inc. | 59
During the years ended December 31, 2024and 2023, the Parent Company declared dividends on common stock of $769 million and $808 million, respectively, and declared dividends on preferred stock of $137 million and $117 million, respectively.
During the year ended December 31, 2024, the Parent Company repurchased $1.1 billion of its outstanding common stock.
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. 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 relies 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, 2024, CBNA completed the following transactions:
•Issued $2.7 billion of secured borrowings collateralized by loans;
•Redeemed $650 million of 4.119%fixed-to-floating rate senior notes due 2025; and
•Redeemed $600 million of 6.064%fixed-to-floating rate senior notes due 2025.
Liquidity Risk
Liquidity risk is the risk arising from the inability to meet our obligations when they come due. We must maintain adequate funding to meet current and future obligations, including customer loan requests, deposit maturities and withdrawals, debt service, leases, and other cash commitments, under both normal operating conditions and periods of company-specific and/or market stress.
We rely on customer deposits to be our primary stable and low-cost source of funding. Our funding sources also include our ability to securitize loans in secondary markets, raise funds in the debt and equity capital markets, pledge loans and/or securities for borrowing from the FHLB, pledge securities as collateral for borrowing under repurchase agreements, and sell AFS securities.
Citizens Financial Group, Inc. | 60
Credit ratings assigned by agencies such as Moody’s, Standard and Poor’s, and Fitch impact our access to unsecured wholesale market funds and to large uninsured customer deposits and are presented in the table below.
Table 25: Credit Ratings
Moody’s Standard andPoor’s Fitch
Citizens Financial Group, Inc.:
Long-term issuer Baa1 BBB+ BBB+
Short-term issuer NR A-2 F1
Subordinated debt Baa1 BBB BBB
Preferred Stock Baa3 BB+ BB
Citizens Bank, National Association:
Long-term issuer A3 A- BBB+
Short-term issuer (P) P-2 A-2 F1
Long-term deposits A1 NR A-
Short-term deposits P-1 NR F1
NR = Not Rated
We currently have a “stable” outlook at Standard & Poor’s, a “negative” outlook at Moody’s and a “positive” outlook at Fitch. Changes in our public credit ratings could affect both the cost and availability of our wholesale funding.
Existing and evolving regulatory liquidity requirements represent another key driver of systemic liquidity conditions and liquidity management practices. The FRB and OCC 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 “Liquidity Requirements” section under “Regulation and Supervision” 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. The Funding and Liquidity unit is responsible for maintaining a liquidity management framework that effectively manages liquidity risk. Processes within this framework include, but are not limited to, 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, liquidity stress testing, contingency funding plans, and collateral management.
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.
We maintain a contingency funding plan designed to ensure that liquidity sources are sufficient to meet ongoing obligations and commitments, particularly in a stressed environment or during a market disruption. The plan identifies members of the liquidity contingency team and provides a framework for management to follow, including notification and escalation of potential liquidity stress events.
Citizens Financial Group, Inc. | 61
As of December 31, 2024:
•Organically generated deposits continue to be our primary source of funding, resulting in a consolidated period-end loans-to-deposits ratio, excluding LHFS, of 79.6%;
◦Estimated insured/secured deposits comprise 67% of our consolidated deposit base of $174.8 billion.
•Our total available liquidity, comprised of contingent liquidity and available discount window capacity, was approximately $83.1 billion;
◦Contingent liquidity was $66.2 billion, consisting of unencumbered high-quality liquid securities of $36.0 billion, unused FHLB capacity of $21.1 billion, and our cash balances at the FRB of $9.1 billion; and
◦Available discount window capacity was $16.9 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.
For a summary of our sources and uses of cash by type of activity for the years ended December 31, 2024, 2023 and 2022, 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 borrowing capacity at the FHLB and FRB discount window;
•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.
Citizens Financial Group, Inc. | 62
Allowance for Credit Losses
The ACL of $2.3 billion at December 31, 2024 remained stable compared to December 31, 2023.
As of December 31, 2024, the ACL economic forecast over a two-year reasonable and supportable period was consistent with December 31, 2023, with peak unemployment of approximately 5.1% and start-to-trough real GDP decline of approximately 0.4%. These forecasts reflect a mild recession over the two-year reasonable and supportable period.
Our determination of the ACL is sensitive to changes in forecasted macroeconomic conditions during the reasonable and supportable forecast period. To illustrate the sensitivity, we applied a more pessimistic scenario than that described above which reflects deeper real GDP contraction across our two-year reasonable and supportable forecast period with peak unemployment of approximately 6.0% and start-to-trough real GDP decline of approximately 2.0%. Excluding consideration of qualitative adjustments, this scenario would result in a quantitative lifetime loss estimate of approximately 1.2x our modeled period-end ACL, or an increase of approximately $400 million. This analysis relates only to the modeled credit loss estimate and not to the overall period-end ACL, which includes qualitative adjustments.
Because several quantitative and qualitative factors are considered in determining the ACL, this sensitivity analysis does not necessarily reflect the nature and extent of future changes in the ACL or even what the ACL would be under these economic circumstances. The sensitivity analysis is intended to provide insights into the impact of adverse changes in the macroeconomic environment and the corresponding impact to modeled loss estimates. The hypothetical determination does not incorporate the impact of management judgment or other qualitative factors that could be applied in the actual estimation of the ACL and does not imply any expectation of future deterioration in our loss rates.
It remains difficult to estimate how changes in economic forecasts might affect our ACL because such forecasts consider a wide variety of variables and inputs, and changes in the variables and inputs may not occur at the same time or in the same direction, and such changes may have differing impacts by product type. The variables and inputs may be idiosyncratically affected by risks to the economy, including changing monetary and fiscal policies, impacts from the recent stress on the banking industry, and their impact on inflationary trends. Changes in one or multiple of the key macroeconomic variables may have a material impact on our estimation of expected credit losses.
For additional information regarding the ACL, see Note 6.
Goodwill
The acquisition method of accounting requires that assets acquired and liabilities assumed in business combinations are recorded at fair value. Business combinations typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the goodwill has been attributed. At December 31, 2024, goodwill totaled $8.2 billion and is assigned to our reporting units as follows: $5.5 billion to Commercial Banking and $2.7 billion to Consumer Banking.
The process of evaluating the fair value of a reporting unit is subjective, involving management assumptions, estimates and forecasts, and the use of external or internal valuations. Valuation techniques include discounted cash flow and market approach analysis. In the fourth quarter of 2024, the quantitative impairment test estimated the fair value of the reporting units using an equal weighting of an income approach (i.e., discounted cash flows method) and market-based approach (i.e., the guideline public company method). The guideline public company method utilizes comparable public company information and key valuation multiples, and considers a market control premium associated with cost synergies and other cash flow benefits that arise from obtaining control over a reporting unit, and guideline transactions, when applicable.
Under the income approach, cash flow projections are based on multi-year financial forecasts developed for each reporting unit that consider key business drivers such as new business initiatives, customer retention standards, market share changes, anticipated loan and deposit growth, fees and expenses, forward interest rates, historical performance, credit performance, and industry and economic trends, among other considerations. The projection of net interest income and noninterest expense are the most significant inputs to the financial projections of the Commercial Banking and Consumer Banking reporting units. Discount rates are estimated based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta, and unsystematic risk adjustments specific to a particular reporting unit. The discount rates are also calibrated based on risks related to the projected cash flows of each reporting unit.
Citizens Financial Group, Inc. | 63
We performed a quantitative goodwill impairment assessment in the fourth quarter of 2024 as part of our annual impairment assessment. Based on this quantitative assessment, we concluded that the estimated fair value of the Consumer Banking and Commercial Banking reporting units exceeded their carrying value; therefore, goodwill is not impaired.
For additional information regarding Goodwill, see Note 10.
Fair Value
We assess the fair value of assets and liabilities by applying various valuation methodologies which may 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, investment securities and residential real estate LHFS. Assumptions are used to estimate the fair value of items for which an observable active market does not exist and 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 fair value estimates, which could have a material impact on our results of operations, financial condition or fair value disclosures.
We also assess whether there are any declines in fair value below the carrying value of assets that require recognition of a loss in the Consolidated Statements of Operations, including certain investments, loans, goodwill, and core deposit and other intangible assets.
For additional information regarding our fair value measurements, see Note 20.
Citizens Financial Group, Inc. | 64
ACCOUNTING AND REPORTING DEVELOPMENTS
Accounting standards issued but not adopted as of December 31, 2024
Pronouncement Summary of Guidance Effects on Financial Statements
Citizens Financial Group, Inc. | 65
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 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 the development of risk and control frameworks and related policies, and their associated implementation. This centralized risk function is independent from the business and is accountable for overseeing and challenging our business lines on the effective management of their risks including, but not limited to, credit, market, operational, regulatory, reputational, interest rate, liquidity, legal and strategic risks.
Third Line of Defense
Our Internal Audit function is the third line of defense providing independent assurance of the effectiveness of our internal controls and governance practices so that risk is managed appropriately for the size, complexity, and risk profile of the organization. Internal Audit has complete and unrestricted access to 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 Board, 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.
Citizens Financial Group, Inc. | 66
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 interest rate hedging, foreign exchange risk and non-trading activities within capital markets. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report on market risk. We actively manage both trading and non-trading market risks. See “Market Risk” for further information. Our risk appetite is reviewed and approved annually by the Board Risk Committee.
Credit Risk Management
Credit risk represents the potential for loss arising from the failure of a customer, counterparty, or issuer to perform in accordance with the contractual terms of an 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 significant part of our overall risk-management responsibility.
Our independent Credit Risk Function is responsible for reviewing and approving the 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. Credit Risk actively monitors and manages concentrations of loan limits, loan types, industries, and geographies to ensure that our risk appetite is well balanced to achieve our goals.
Management and oversight of credit risk is the responsibility of each respective business line and the second line of defense. Our second line of defense, the independent Credit Risk Function, is led by the Chief Credit Officer who oversees all credit risk and 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, Private Banking, Citizens Restructuring Management, Portfolio and Corporate Reporting, ACL Analytics, Current Expected Credit Loss, and Credit Policy and Administration. Each team under these leaders is composed of experienced credit professionals.
The primary mechanisms that govern our risk management include, but are not limited to, credit assessments, models, scorecards, credit limits, exposure management, concentration limits, balance sheet diversification, portfolio management, collateral requirements and individual credit policies tailored for Consumer and Commercial lending. Our policies outline the minimum acceptable lending standards and their alignment 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.
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 including origination, account/portfolio management, and loss mitigation and recovery.
Consumer
We utilize several distinct business processes and channels to originate consumer credit, including traditional branch lending and mobile and online banking. Each distinct underwriting and origination activity includes unique credit risk characteristics, with loan pricing commensurate with the differing risk profiles. Consumer credit approvals are typically based on the financial strength and payment history of the borrower, type of exposure, and transaction structure, among other factors.
Citizens Financial Group, Inc. | 67
Lending authority is granted to each first line approver by the second line of defense credit risk function to ensure proper oversight of the underwriting teams. We periodically evaluate the performance of each first line approver and annually reauthorize their delegated authority. Only senior members of the second line of defense credit risk function are authorized to approve significant exceptions to credit policies, which are not uncommon when compensating factors are present. Established exception limits, when reached or exceeded, trigger a comprehensive analysis.
For Consumer Banking, our teams use models to evaluate consumer loans across their life cycle. Credit scoring models are used to forecast the probability of default of an applicant prior to origination. 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.
Our consumer banking portfolio is comprised of five categories of loans to consumers: residential mortgages, home equity, education, automobile, and other retail.
Residential Mortgages and Home Equity
Residential mortgages are loans to consumers to purchase or refinance 1-4 family residential properties and are generally structured with repayment terms ranging from 15 to 30 years. We originate both fixed- and adjustable-rate (traditional and interest-only) residential mortgages, with the properties securing such mortgages primarily located within our geographic footprint. We do not originate residential mortgages that allow negative amortization or multiple payment options. Residential mortgage applications are underwritten using consistent credit policies and processes, with a focus on higher-quality borrowers.
Residential mortgages are originated based on an appraisal completed during the credit underwriting process, with borrower performance tracked monthly by segmenting the mortgage portfolio into pools based on product type. The portfolio is also segmented based upon delinquency, nonperforming status, modification and bankruptcy status, FICO scores, LTV and geographic concentrations as part of our overall risk management analysis and monitoring.
Home equity loans primarily include lines of credit secured by a first- or second-lien on the borrower’s residence, which enable the customer to borrow against the equity in their home or refinance existing mortgage debt. The product is a variable-rate, interest-only line of credit that allows the borrower to draw against the available line with no required principal payments during an initial 10-year revolving period. At the end of the revolving period, the home equity line of credit converts into a 15-year amortizing structure.
Home equity applications are underwritten using full income and credit standards with underwriting criteria based on minimum credit scores, debt-to-income ratios, and combined LTV ratios utilizing current collateral valuations. The underwriting for variable-rate lines of credit also incorporates a stress analysis for rising interest rates. We actively manage lines of credit and adjust their lending limit when we believe it is necessary based on a borrower’s FICO score and any associated credit deterioration.
Borrower performance of the home equity portfolio is tracked on a monthly basis for internal reporting and risk management purposes by segmenting the portfolio into pools, which are typically based on origination vintage tranches. The performance of any related mortgage loans is also tracked regardless of whether we hold a lien on such loans. A third-party service provider is utilized to obtain updated loan information, including lien and collateral data that is aggregated from both public and private sources.
LTV information on our outstanding residential mortgages and home equity portfolios is updated quarterly based on a combination of automated valuation model updates and relevant home price indices. LTV is the ratio of the loan’s outstanding principal balance to the current property value estimate. For home equity and second mortgages, CLTV is the ratio of the first mortgage original principal balance and the second lien outstanding principal balance combined to the current property value estimate.
Property values for both residential mortgages and home equity loans are refreshed quarterly after an account is established to allow for proactive identification of changing levels of credit risk and to facilitate our portfolio management, including workout and loss mitigation functions. Our approach to managing credit risk is highly analytical and, where appropriate, is automated to ensure consistency and efficiency.
Citizens Financial Group, Inc. | 68
Education
The education portfolio is primarily comprised of two products, in-school loans and education refinance loans. An in-school loan is generally financed over a 5, 10, or 15-year term and provides for fixed or variable rate financing to students while enrolled in school, with the option to pay while in school or to defer payment until after graduation. An education refinance loan provides a refinancing option on an existing education loan for students and parents, with 5 to 20-year terms and fixed or variable rates.
The performance of the education portfolio is measured monthly, including updated FICO, or equivalent, scores. We analyze the portfolio by product channel and type, and regularly evaluate default and delinquency experience for internal reporting and risk management purposes.
Automobile
The automobile portfolio consists of loans originated primarily through independent franchised dealers, including some located in select states outside of our primary geographic footprint. This portfolio is in runoff as we discontinued the origination of automobile loans in 2023.
The performance of the automobile loan portfolio is measured monthly, including updated collateral values and FICO, or equivalent, scores. We analyze the portfolio by product channel and type and regularly evaluate default and delinquency experience for internal reporting and risk management purposes.
Other Retail
Other retail loans primarily consist of unsecured consumer lending products, including credit cards and point-of-sale loans originated through partnerships with third-party companies. These loans are underwritten in accordance with our established credit policies and guidelines. Certain point-of-sale loans originated with third-party companies include credit loss protection agreements provided by those companies, which mitigate our risk of loss. Given the variable nature of the credit card portfolio, we actively monitor interest rate impacts and portfolio performance to ensure alignment with our risk tolerance.
Commercial
Our commercial banking portfolio consists of traditional commercial and industrial loans, commercial leases, and commercial real estate loans.
For Commercial Banking, risk management includes defined credit products and policies and is separated into commercial and industrial loans, CRE and leases. Separate verticals are established within commercial and industrial loans and leases for certain specialty products. Substantially all activity that falls under a defined industry or product is managed through a specialty vertical and a stand-alone team of industry, product, and credit risk specialists. CRE also operates as a specialty vertical.
Commercial transactions are subject to individual analysis and approval before 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 establish the probability of default and loss given default. Material transactions require both a business line approver and an independent credit approver with the requisite level of delegated authority as determined by the size of the credit relationship as well as the probability of default. 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, actively monitor the portfolio to facilitate the early recognition of credit problems, and provide for effective problem asset management and resolution. Authority to grant credit is delegated through the independent Credit Risk Function and is closely monitored and updated annually, at a minimum.
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, geography, transaction structure including loan covenants, 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 before origination and during an 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 tests the consistency of the credit processes and the effectiveness of credit risk management.
Citizens Financial Group, Inc. | 69
Credit exposure to individual borrowers is managed by policy guidelines based on the perceived risk of each borrower, or related group of borrowers, with concentration risk managed through limits on industry sectors, asset classes and loan quality factors.
Our standardized loan grading system considers many components that directly correlate to loan quality and likelihood of repayment. Substantially all loans categorized as Classified are managed by Citizens Restructuring Management, a specialized group of credit professionals that handle the day-to-day management of loan workouts, commercial recoveries, and problem loan sales to reduce losses and maximize recoveries. Their responsibilities include developing and implementing action plans, assessing risk ratings, and determining the adequacy of the ACL, accrual status, and ultimate collectability of the Classified loan portfolio.
Commercial and Industrial
The commercial and industrial portfolio includes both loans and leases made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, capital call facilities, or other projects/acquisitions. The loans and leases are generally underwritten individually to assess the quality of multiple sources of repayment including cash flow for debt service, collateral, and any guarantees from the business owner. Although real estate exists as collateral for these loans, the operation, sale, rental, or refinancing of the real estate is not considered the primary repayment source.
The risks inherent in the commercial and industrial portfolio are managed through origination policies, a defined loan concentration policy with established limits, ongoing loan- and portfolio-level reviews, recourse requirements, and continuous portfolio risk management activities. Our origination policies for the commercial and industrial portfolio include policies specific to loan product type, such as LTV and debt service coverage ratios, as applicable.
Commercial Real Estate
The CRE portfolio consists of both commercial property and construction loans that support a wide range of property development and investment activities including, but not limited to, multi-family, office spaces, industrial facilities, and retail shopping centers. These loans are typically repaid through cash flows generated from the operation, sale, or refinance of the property. Risk on these loans is mitigated by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement.
Our CRE construction portfolio primarily consists of multi-family, warehouse, office and data center property types. Loans in this portfolio are generally for construction projects that have been pre-sold or pre-leased, have secured permanent financing, or are made to real estate companies with significant equity invested in the project. A specialized real estate lending group is responsible for this portfolio and actively monitors the construction phase and manages the loan disbursements according to the predetermined construction schedule. Construction loans, which are generally short term in nature, are utilized to fund the development or renovation of real estate, with repayment often tied to the successful completion and stabilization of the property.
Risks inherent in this portfolio are managed by focusing on the financial strength and experience of the developer, market conditions and other specific attributes associated with each project. We limit our loan amounts based on appraised values, minimum equity investments by our borrowers, and adequate cash flows to support the debt.
Both macro- and loan-level stress-test scenarios based on existing and forecasted market conditions are part of the ongoing portfolio management process for the CRE portfolio. Ongoing portfolio-level reviews are performed that generate action plans based on occupancy levels or leasing revenues associated with the projects being reviewed. This highly individualized process requires working closely with all of our borrowers, as well as an in-depth knowledge of CRE project lending and the current market environment.
Property-type concentrations and both geographic and property-type performance metrics are actively monitored for all CRE loan types, with a focus on loans identified as higher risk based on our risk rating methodology. The portfolio is diversified by property type and loan size, representing a significant portion of the credit risk management strategies employed for this portfolio. Subsequent to the origination, the Credit Review group provides an independent review and assessment of the quality of the underwriting and risk from new loan originations.
Citizens Financial Group, Inc. | 70
Appraisal values are obtained in conjunction with all originations and renewals, and on an as-needed basis, to both comply with regulatory requirements and to ensure appropriate decisions regarding the ongoing management of the portfolio with respect to changing market conditions. Appraisals are obtained from approved vendors and are reviewed by an internal appraisal review group, which is composed of certified appraisers to ensure the quality of the valuation used in the underwriting process.
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, the market risk arising from our non-trading banking activities, such as the origination of loans and deposit-gathering, is more significant. We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. We actively manage market risk for both non-trading and trading activities.
Non-Trading Risk
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. There may also be differences in the drivers of rate changes. Loans may be tied to a specific index rate such as SOFR or Prime, while deposits may not be as correlated with such rates and more dependent upon competitive demand. Due to these basis differences, net interest income is sensitive to changes in spreads between certain indices or repricing rates.
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.
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.
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- and long-term horizons. To ensure that exposure to interest rate risk is managed within our risk appetite, we 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- 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 these scenarios.
Citizens Financial Group, Inc. | 71
Key assumptions in this simulation analysis relate to the behavior of interest rates and spreads, changes in product balances and the behavior of our loan and deposit customers in different rate environments. 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. We utilize product level models that consider specific product characteristics and composition of the deposit portfolio, along with current and forward-looking market dynamics, to project deposit rates. Similarly, we employ dynamic prepayment and mortgage rate models to project prepayment behaviors specific to each of our product offerings. These models are developed based on internal performance data over prior interest rate cycles and 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, which are reported to the Asset Liability Committee.
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 presents the sensitivity of net interest income to various parallel yield curve shifts from the market implied forward yield curve. 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.
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. The Company’s base case net interest income assumes the forward-rate path implied by the period-end yield curve is realized. The rate risk exposure is then measured based on assumed changes from that base case rate path.
Our risk position is slightly asset sensitive to a gradual change in rates as of December 31, 2024, compared to our broadly neutral position as of December 31, 2023. Our interest rate sensitivity incorporates the impacts of changes in our balance sheet mix, including securities, loans, deposits, borrowed funds and hedge activity, which is primarily comprised of received fixed swaps that offset our naturally asset-sensitive balance sheet.
Citizens Financial Group, Inc. | 72
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. We employ sophisticated models for prepayments and deposit pricing and attrition, which provide a granular view of cash flows based on the unique characteristics of the underlying products and customer segments. The change in value is expressed as a percentage of regulatory capital.
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 assets and wholesale funding, the variability in the fair value of AFS securities, and to hedge market risk on fixed-rate capital markets debt issuances.
The following table presents interest rate derivative contracts that we have entered into as of December 31, 2024 and 2023.
Table 27: Interest Rate Hedges Used to Manage Non-Trading Interest Rate Exposure
Weighted Average Weighted Average
Fair value hedges:
Asset conversion swaps:
AFS securities:
Liability conversion swaps:
Long-term borrowed funds:
Cash flow hedges:
Asset conversion swaps:
Loans:
Swaps
Basis swaps
Floor Rate Cap Rate Floor Rate Cap Rate
Options
Interest rate collars - forward-starting(1) — — — — 500 2.5 2.7 4.4
Floor spreads - forward-starting(2) — — — — 2,500 2.8 2.2/3.2 —
(1) Weighted average floor and cap rates represent strike rates through which CFG will receive interest if the SOFR rate falls below the floor strike rate and pay interest if the SOFR rate exceeds the cap strike rate.
(2) Weighted average floor rate represents strike rates for the short and long interest rate floors, respectively. CFG will receive interest if the SOFR rate falls below the upper strike rate and pay interest if the SOFR rate falls below the lower strike rate, effectively hedging the corridor between the two strike rates. The structure also includes a short cap and a long floor which are utilized to neutralize the initial premium.
Citizens Financial Group, Inc. | 73
The following table presents the average active notional amounts for our interest rate derivatives, based on contract effective date, for the next five years:
Table 28: Average Active Notional for Interest Rate Derivative Contracts
Year Ended
Fair value hedges
Receive fixed/pay SOFR(2) 441 — — — —
Cash flow hedges
Weighted average receive fixed rate 3.2 % 3.5 % 3.6 % 3.6 % 3.6 %
Weighted average pay fixed rate 3.8 3.8 3.8 3.7 3.7
(1) Pay fixed rate leg of the interest rate derivative contract is included in the computation of the weighted average pay fixed rate.
(2) Receive fixed rate leg of the interest rate derivative contract is included in the computation of the weighted average receive fixed rate.
Year Ended December 31,
Pre-tax net gains (losses) recognized in OCI ($725) ($145)
Pre-tax net gains (losses) reclassified from AOCI into interest expense (1) —
Using the December 31, 2024 interest rate curve we estimate that $718 million in pre-tax net losses related to cash flow hedge strategies will be reclassified from AOCI to net interest income over the next 12 months. These losses could differ from amounts recognized due to changes in interest rates, hedge de-designations or the addition of other hedges after December 31, 2024.
Included in AOCI is a net loss from terminated swaps of $732 million that will reduce net interest income by $127 million in the first quarter of 2025, $119 million in the second quarter of 2025, $109 million in the third quarter of 2025, and $103 million in the fourth quarter of 2025. The remaining $274 million will reduce net interest income by $230 million in 2026 and $44 million after 2026.
Capital Markets
A key component of our capital markets activities is the underwriting and distribution of corporate credit facilities to finance merger and acquisition transactions for our clients. We have a rigorous risk management process around these activities, including a limit structure capping our underwriting risk, 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 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 of our MSRs. For more information regarding the fair value of our MSRs and associated derivatives see Note 8 and Note 14.
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 consistent with the definition used by banking regulators.
Citizens Financial Group, Inc. | 74
Trading Risk
We are exposed to market risk primarily through client facilitation activities from certain derivative and foreign exchange products as well as underwriting and market making activities. Market risk exposure arises from fluctuations in interest rates, basis spreads, volatility, foreign exchange rates, equity prices, and credit spreads across various financial instruments. Securities underwriting and trading activities are conducted through CBNA and Citizens JMP Securities, LLC.
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, we operate trading desks covering secondary loans, corporate bonds, and equity securities, with the objective of meeting secondary liquidity needs of our issuing clients’ transactions and investor clients. We do not engage in any trading activities to benefit from short-term price differences.
Market Risk Governance
The process of setting our market risk limit is established in accordance with the formal enterprise risk appetite process and policy, which 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, with responsibility for remaining within established tolerances residing 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 the appropriate business line management and risk counterparts.
Market Risk Measurement
We use VaR as a statistical measure for estimating the 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 and 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 such as sensitivity analysis, market value and stress testing are employed.
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 management and regulatory capital purposes.
VaR Overview
The market risk measurement model is based on historical simulation. The VaR measure estimates the extent of any fair value losses on trading positions that may occur due to broad market movements (General VaR) such as changes in the level of interest rates, foreign exchange rates, equity prices and commodity prices. It is calculated on the basis that current positions remain relatively unaltered over the course of a given holding period with the assumption that markets are sufficiently liquid to allow the business to close its positions, if required, within this holding period. 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, indicating 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 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, 2024 and 2023.
Citizens Financial Group, Inc. | 75
Market Risk Regulatory Capital
The U.S. banking regulators’ “Market Risk Rule” covers the calculation of market risk capital. Under this rule, all of our client facing trades and associated hedges maintain a net low risk and qualify as “covered positions.” The internal management VaR measure is calculated based on the same population of trades that is utilized for regulatory VaR.
Market Risk Category Period End Average High Low Period End Average High Low
Foreign Exchange Currency Rate — — — — — — 2 —
Commodity — — — — — — — —
Specific Risk VaR — — — — — — — —
Stressed Specific Risk VaR — — — — — — — —
Market Risk Regulatory Capital $28 $33
Specific Risk Not Modeled Add-on 25 17
de Minimis Exposure Add-on — 1
Total Market Risk Regulatory Capital $53 $51
Market Risk-Weighted Assets $665 $643
Stressed VaR
SVaR is an extension of VaR and utilizes a longer historical look-back horizon, fixed from January 3, 2005, to identify headline risks from more volatile periods and 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 its utilization for risk management purposes, SVaR is a component of market risk regulatory capital. We calculate SVaR daily under its own dynamic window regime whereby values of the ten-day, 99% VaR are calculated over all 260-day periods that can be obtained from the complete historical data set. Refer to “Market Risk Regulatory Capital” above for SVaR metrics.
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 select 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 occur simultaneously and no repositioning or hedging activity takes place to mitigate losses as market events unfold. Stress tests of our trading positions are generated daily.
Citizens Financial Group, Inc. | 76
VaR Model Review and Validation
Our market risk measurement models are independently reviewed and subject to ongoing performance analysis by the model owners. This independent review and validation focuses on model methodology, market data and performance and is the responsibility of Citizens’ Model Risk Management and Validation team. This team challenges the assumptions used and quantitative techniques employed, including the theoretical justification supporting them, and performs 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. 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 conducts 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, aggregated 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 combined portfolio’s VaR number is taken as an exception. The number of exceptions determines the multiplication factor used to derive the VaR and SVaR-based capital requirement for regulatory reporting purposes, when applicable. The multiplication factor, which increases from a minimum of three to a maximum of four, depending on the number of exceptions, did not change during 2024 based on the Company’s two observed exceptions during the year. Further, we perform sub-portfolio backtesting as required under the Market Risk Rule, using models approved by our banking regulators for interest rate, credit spread, commodity and foreign exchange positions.
Citizens Financial Group, Inc. | 77
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 table presents computations of non-GAAP financial measures representing our “Underlying” results used in the MD&A:
Table 31: Reconciliations of Non-GAAP Measures
Year Ended December 31,
(dollars in millions, except per share data) Ref. 2024 2023
Noninterest income, Underlying:
Noninterest income (GAAP) A $2,176 $1,983
Less: Notable items 15 —
Noninterest income, Underlying (non-GAAP) B $2,161 $1,983
Total revenue, Underlying:
Less: Notable items 15 —
Total revenue, Underlying (non-GAAP) D $7,794 $8,224
Noninterest expense, Underlying:
Noninterest expense (GAAP) E $5,234 $5,507
Noninterest expense, Underlying (non-GAAP) F $5,078 $5,001
Pre-provision profit:
Less: Noninterest expense (GAAP) E 5,234 5,507
Pre-provision profit (non-GAAP) $2,575 $2,717
Pre-provision profit, Underlying:
Total revenue, Underlying (non-GAAP) D $7,794 $8,224
Less: Noninterest expense, Underlying (non-GAAP) F 5,078 5,001
Pre-provision profit, Underlying (non-GAAP) $2,716 $3,223
Income before income tax expense, Underlying:
Income before income tax expense (GAAP) G $1,888 $2,030
Income before income tax expense, Underlying (non-GAAP) H $2,029 $2,536
Income tax expense and effective income tax rate, Underlying:
Income tax expense (GAAP) I $379 $422