DERIVATIVES

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES

NOTE 9 - DERIVATIVES

In the normal course of business Citizens enters into derivative transactions to meet the financing and hedging needs of its customers and reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. These transactions include interest rate swap contracts, interest rate options, foreign exchange contracts, residential loan commitment rate locks, interest rate future contracts, swaptions, certain commodities, forward commitments to sell TBAs, forward sale contracts and purchase options. The Company does not use derivatives for speculative purposes. Information regarding the valuation methodology and inputs used to estimate the fair value of the Company’s derivative instruments is described in Note 20 in the Company’s 2022 Form 10-K.

The following table presents derivative instruments included in the Consolidated Balance Sheets:

	September 30, 2023			December 31, 2022
(dollars in millions)	Notional Amount	Derivative Assets	Derivative Liabilities	Notional Amount	Derivative Assets	Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate contracts	$89,502	$179	$57	$42,250	$16	$53
Derivatives not designated as hedging instruments:
Interest rate contracts	200,389	260	1,785	174,384	331	1,579
Foreign exchange contracts	30,168	530	432	29,475	527	519
Commodities contracts	1,273	707	666	1,103	953	942
TBA contracts	3,561	17	5	2,370	7	14
Other contracts	887	5	3	913	5	4
Total derivatives not designated as hedging instruments	236,278	1,519	2,891	208,245	1,823	3,058
Total gross derivatives	325,780	1,698	2,948	250,495	1,839	3,111
Less: Gross amounts offset in the Consolidated Balance Sheets(1)		(609)	(609)		(623)	(623)
Less: Cash collateral applied(1)		(567)	(230)		(374)	(579)
Total net derivatives presented in the Consolidated Balance Sheets		$522	$2,109		$842	$1,909

(1) Amounts represent the impact of enforceable master netting agreements that allow the Company to net settle positive and negative positions, as well as collateral paid and received.

The Company’s derivative transactions are internally divided into three sub-groups: institutional, customer and residential loan. Certain derivative transactions within these sub-groups are designated as fair value or cash flow hedges, as described below:

Derivatives Designated As Hedging Instruments

The Company’s institutional derivatives qualify for hedge accounting treatment. The net interest accruals on interest rate swaps designated in a fair value or cash flow hedge relationship are treated as an adjustment to interest income or interest expense of the item being hedged. The Company formally documents all hedging relationships at inception, as well as risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Company monitors the effectiveness of its hedge relationships during the duration of the hedge period. The methods utilized to assess hedge effectiveness vary based on the hedge relationship, and the Company monitors each relationship to ensure that management’s initial intent continues to be satisfied. The Company discontinues hedge accounting treatment when it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge and subsequently reflects changes in the fair value of the derivative in earnings after termination of the hedge relationship.

Fair Value Hedges

In a fair value hedge, changes in the fair value of both the derivative instrument and the hedged asset or liability attributable to the risk being hedged are recognized in the same income statement line item in the Consolidated Statements of Operations when the changes in fair value occur. During 2023, the Company entered into fair value hedges to manage interest rate risk within the AFS securities portfolio.

The following table presents the change in fair value of interest rate contracts designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Consolidated Statements of Operations:

	Three Months Ended September 30,		Nine Months Ended September 30,
(dollars in millions)	2023	2022	2023	2022	Affected Line Item in the Consolidated Statements of Operations
Interest rate swaps hedging long-term borrowed funds	($1)	($19)	$—	($71)	Interest expense - long-term borrowed funds
Hedged long-term borrowed funds attributable to the risk being hedged	1	19	—	70	Interest expense - long-term borrowed funds
Interest rate swaps hedging LHFS	—	18	—	15	Interest and fees on other loans held for sale
Hedged loans held for sale attributable to the risk being hedged	—	(19)	—	(15)	Interest and fees on other loans held for sale
Interest rate swaps hedging debt securities available for sale	16	—	28	29	Interest income - investment securities
Hedged debt securities available for sale attributable to the risk being hedged	(16)	—	(28)	(29)	Interest income - investment securities

The following table reflects amounts recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:    

(dollars in millions)	September 30, 2023		December 31, 2022
	Debt securities available for sale	Long-term borrowed funds	Debt securities available for sale	Long-term borrowed funds
Carrying amount of hedged assets	$445	$—	$—	$—
Carrying amount of hedged liabilities	—	473	—	972
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items	(17)	(26)	—	(27)

Cash Flow Hedges

In a cash flow hedge the entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is initially recorded in OCI and is subsequently reclassified from AOCI to current period earnings (net interest income) in the same period that the hedged item affects earnings.

Citizens has entered into interest rate swap agreements designed to hedge a portion of the Company’s floating-rate assets and liabilities. All of these swaps have been deemed highly effective cash flow hedges. The Company has also entered into certain interest rate option agreements that utilize interest rate floors and caps, or some combination thereof, providing the ability to hedge the variability in cash flows within different interest rate bands. Option premiums paid and received are excluded from the assessment of hedge effectiveness and are amortized over the life of the instruments.

The following table presents the pre-tax net gains (losses) recorded in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income related to derivative instruments designated as cash flow hedges:

	Three Months Ended September 30,		Nine Months Ended September 30,
(dollars in millions)	2023	2022	2023	2022
Amount of pre-tax net gains (losses) recognized in OCI	($326)	($996)	($773)	($1,901)
Amount of pre-tax net gains (losses) reclassified from AOCI into interest income	(156)	(48)	(420)	1
Amount of pre-tax net gains (losses) reclassified from AOCI into interest expense	(1)	2	—	(4)

Using the interest rate curve at September 30, 2023 with respect to cash flow hedge strategies, the Company estimates that approximately $904 million in pre-tax net losses will be reclassified from AOCI to net interest income over the next 12 months, including $462 million related to terminated swaps. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to September 30, 2023.

Derivatives Not Designated As Hedging Instruments

Economic Hedges

The Company’s economic hedges include those related to offsetting customer derivatives, residential mortgage loan derivatives (including interest rate lock commitments and forward sales commitments) and derivatives to hedge its residential MSRs. Customer derivatives include interest rate, foreign exchange and commodity derivative contracts designed to meet the hedging and financing needs of the Company’s customers, and are economically hedged by the Company to offset its market exposure. Interest rate lock commitments on residential mortgage loans that will be held for sale are considered derivative instruments, and are economically hedged by entering into forward sale commitments to manage changes in fair value due to interest rate risk. Residential MSR derivatives are entered into to hedge the risk of changes in the fair value of the Company’s MSRs.

The following table presents the effect of economic hedges on noninterest income:

	Amounts Recognized in Noninterest Income for the
	Three Months Ended September 30,		Nine Months Ended September 30,		Affected Line Item in the Consolidated Statements of Operations
(dollars in millions)	2023	2022	2023	2022
Economic hedge type:
Customer interest rate contracts	($448)	($840)	($1,028)	($2,015)	Foreign exchange and derivative products
Derivatives hedging interest rate risk	460	852	1,068	2,073	Foreign exchange and derivative products
Customer foreign exchange contracts	(77)	(174)	(72)	(297)	Foreign exchange and derivative products
Derivatives hedging foreign exchange risk	141	271	121	520	Foreign exchange and derivative products
Customer commodity contracts	168	(71)	(401)	1,453	Foreign exchange and derivative products
Derivatives hedging commodity price risk	(158)	77	430	(1,436)	Foreign exchange and derivative products
Residential loan commitments	(21)	(66)	(39)	(289)	Mortgage banking fees
Derivatives hedging residential loan commitments and mortgage LHFS, at fair value	30	105	45	502	Mortgage banking fees
Derivative contracts used to hedge residential MSRs	(76)	(68)	(91)	(310)	Mortgage banking fees
Total	$19	$86	$33	$201