NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK

The ACL consists of the ALLL and the reserve for unfunded commitments. It is increased through a provision for credit losses that is charged to earnings, based on the Company’s quarterly evaluation of the loan and lease portfolio and related commitments, and is reduced by net charge-offs and the ALLL associated with sold loans. See Note 5 “Allowance for Credit Losses, Nonperforming Assets, and Concentrations of Credit Risk” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2018, for a detailed discussion of the ALLL reserve methodology and estimation techniques.

On a quarterly basis, the Company reviews and refines its estimate of the ACL, taking into consideration changes in portfolio size and composition, historical loss experience, internal risk ratings, current economic conditions, industry performance trends and other pertinent information. As of March 31, 2019, there were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and the reserve for unfunded lending commitments.

A summary of changes in the ACL is presented below:



	Three Months Ended March 31, 2019
(in millions)	Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$690			$552			$1,242
Charge-offs	(26		)	(112		)	(138		)
Recoveries	2			47			49
Net charge-offs	(24		)	(65		)	(89		)
Provision charged to income	25			67			92
Allowance for loan and lease losses, end of period	691			554			1,245
Reserve for unfunded lending commitments, beginning of period	91			—			91
Provision for unfunded lending commitments	(7		)	—			(7		)
Reserve for unfunded lending commitments, end of period	84			—			84
Total allowance for credit losses, end of period		$775			$554			$1,329



	Three Months Ended March 31, 2018
(in millions)	Commercial			Retail			Total
Allowance for loan and lease losses, beginning of period		$685			$551			$1,236
Charge-offs	(3		)	(113		)	(116		)
Recoveries	6			40			46
Net charge-offs	3			(73		)	(70		)
Provision charged to income	23			57			80
Allowance for loan and lease losses, end of period	711			535			1,246
Reserve for unfunded lending commitments, beginning of period	88			—			88
Provision for unfunded lending commitments	(2		)	—			(2		)
Reserve for unfunded lending commitments, end of period	86			—			86
Total allowance for credit losses, end of period		$797			$535			$1,332

The recorded investment in loans and leases based on the Company’s evaluation methodology is presented below:



	March 31, 2019						December 31, 2018
(in millions)	Commercial		Retail		Total		Commercial		Retail		Total
Individually evaluated		$386		$696		$1,082		$391		$723		$1,114
Formula-based evaluation	57,303		59,230		116,533		56,392		59,154		115,546
Total loans and leases		$57,689		$59,926		$117,615		$56,783		$59,877		$116,660

A summary of the ACL by evaluation method is presented below:



	March 31, 2019						December 31, 2018
(in millions)	Commercial		Retail		Total		Commercial		Retail		Total
Individually evaluated		$42		$25		$67		$38		$26		$64
Formula-based evaluation	733		529		1,262		743		526		1,269
Allowance for credit losses		$775		$554		$1,329		$781		$552		$1,333

For commercial loans and leases, Citizens utilizes regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that the Company believes will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness or potential weakness that indicate an increased probability of future loss. “Criticized” loans are grouped into three categories, “special mention,” “substandard” and “doubtful.” Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of the Company’s credit position at some future date. Substandard loans are inadequately protected loans; these loans have well-defined weaknesses that could hinder normal repayment or collection of the debt. Doubtful loans have the same weaknesses as substandard, with the added characteristics that the possibility of loss is high and collection of the full amount of the loan is improbable. For retail loans, the Company primarily uses the loan’s payment and delinquency status to monitor credit quality. The further a loan is past due, the greater the likelihood of future credit loss. These credit quality indicators for both commercial and retail loans are continually updated and monitored.

The recorded investment in commercial loans and leases based on regulatory classification ratings is presented below:



	March 31, 2019
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$39,296		$1,096		$892		$213		$41,497
Commercial real estate	12,953		381		36		2		13,372
Leases	2,670		111		39		—		2,820
Total commercial loans and leases		$54,919		$1,588		$967		$215		$57,689



	December 31, 2018
			Criticized
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial		$38,600		$1,231		$828		$198		$40,857
Commercial real estate	12,523		412		82		6		13,023
Leases	2,823		39		41		—		2,903
Total commercial loans and leases		$53,946		$1,682		$951		$204		$56,783

The recorded investment in classes of retail loans, categorized by delinquency status is presented below:



	March 31, 2019
			Days Past Due
(in millions)	Current		1-29		30-59		60-89		90 or More		Total
Residential mortgages		$18,876		$119		$38		$10		$131		$19,174
Home equity loans	883		80		12		4		27		1,006
Home equity lines of credit	11,769		366		76		28		155		12,394
Home equity loans serviced by others	332		22		8		2		11		375
Home equity lines of credit serviced by others	67		14		2		1		11		95
Automobile	10,654		1,067		196		58		17		11,992
Education	9,084		142		22		12		14		9,274
Credit cards	1,879		59		14		9		21		1,982
Other retail	3,502		75		27		17		13		3,634
Total retail loans		$57,046		$1,944		$395		$141		$400		$59,926



	December 31, 2018
			Days Past Due
(in millions)	Current		1-29		30-59		60-89		90 or More		Total
Residential mortgages		$18,664		$131		$37		$13		$133		$18,978
Home equity loans	945		75		12		3		38		1,073
Home equity lines of credit	12,042		386		65		22		195		12,710
Home equity loans serviced by others	355		21		7		3		13		399
Home equity lines of credit serviced by others	79		15		2		1		7		104
Automobile	10,729		1,039		207		59		72		12,106
Education	8,694		159		23		13		11		8,900
Credit cards	1,894		53		14		10		20		1,991
Other retail	3,481		76		26		18		15		3,616
Total retail loans		$56,883		$1,955		$393		$142		$504		$59,877

Nonperforming Assets

The following table presents nonperforming loans and leases and loans accruing and 90 days or more past due:



	Nonperforming				Accruing and 90 days or more past due
(in millions)	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Commercial		$208		$194		$1		$1
Commercial real estate	4		7		—		—
Leases	—		—		—		—
Total commercial loans and leases	212		201		1		1
Residential mortgages⁽¹⁾	138		136		20		15
Home equity loans	42		50		—		—
Home equity lines of credit	217		231		—		—
Home equity loans serviced by others	15		17		—		—
Home equity lines of credit serviced by others	14		15		—		—
Automobile	70		81		—		—
Education	43		38		2		2
Credit card	22		20		—		—
Other retail	7		8		9		7
Total retail loans	568		596		31		24
Total		$780		$797		$32		$25

⁽¹⁾ Nonperforming balances exclude first lien residential mortgage loans that are 100% guaranteed by the Federal Housing Administration. These loans, which are accruing and 90 days or more past due, totaled $13 million and $12 million as of March 31, 2019 and December 31, 2018, respectively. Nonperforming balances also exclude guaranteed residential mortgage loans sold to GNMA for which the Company has the right, but not the obligation, to repurchase. These loans totaled $144 million and $133 million as of March 31, 2019 and December 31, 2018, respectively. These loans are included in the Company’s Consolidated Balance Sheets.

Other nonperforming assets consisted primarily of other real estate owned and was presented in other assets on the Consolidated Balance Sheets. Other real estate owned, net of valuation allowance, was $34 million as of both March 31, 2019 and December 31, 2018.

A summary of nonperforming loan and lease key performance indicators is presented below:



	March 31, 2019		December 31, 2018
Nonperforming commercial loans and leases as a percentage of total loans and leases	0.18	%	0.17	%
Nonperforming retail loans as a percentage of total loans and leases	0.48		0.51
Nonperforming loans and leases as a percentage of total loans and leases	0.66	%	0.68	%

Nonperforming commercial assets as a percentage of total assets	0.13	%	0.13	%
Nonperforming retail assets as a percentage of total assets	0.37		0.39
Nonperforming assets as a percentage of total assets	0.50	%	0.52	%

The recorded investment in mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings are in process was $170 million and $172 million as of March 31, 2019 and December 31, 2018, respectively.

An analysis of the age of both accruing and nonaccruing loan and lease past due amounts is presented below:



	March 31, 2019								December 31, 2018
	Days Past Due								Days Past Due
(in millions)	30-59		60-89		90 or More		Total		30-59		60-89		90 or More		Total
Commercial		$70		$9		$71		$150		$85		$3		$78		$166
Commercial real estate	56		65		2		123		8		32		5		45
Leases	8		—		—		8		7		—		—		7
Total commercial loans and leases	134		74		73		281		100		35		83		218
Residential mortgages	38		10		131		179		37		13		133		183
Home equity loans	12		4		27		43		12		3		38		53
Home equity lines of credit	76		28		155		259		65		22		195		282
Home equity loans serviced by others	8		2		11		21		7		3		13		23
Home equity lines of credit serviced by others	2		1		11		14		2		1		7		10
Automobile	196		58		17		271		207		59		72		338
Education	22		12		14		48		23		13		11		47
Credit cards	14		9		21		44		14		10		20		44
Other retail	27		17		13		57		26		18		15		59
Total retail loans	395		141		400		936		393		142		504		1,039
Total		$529		$215		$473		$1,217		$493		$177		$587		$1,257

Impaired Loans

Impaired loans include nonaccruing larger balance (greater than $3 million carrying value), non-homogeneous commercial and commercial real estate loans, and restructured loans that are deemed TDRs. A summary of impaired loans by class is presented below:



	March 31, 2019
(in millions)	Impaired Loans With a Related Allowance		Allowance on Impaired Loans		Impaired Loans Without a Related Allowance		Unpaid Contractual Balance		Total Recorded Investment in Impaired Loans
Commercial		$195		$42		$165		$415		$360
Commercial real estate	—		—		26		46		26
Leases	—		—		—		—		—
Total commercial loans and leases	195		42		191		461		386
Residential mortgages	28		2		118		188		146
Home equity loans	30		2		70		135		100
Home equity lines of credit	23		1		179		243		202
Home equity loans serviced by others	20		1		19		51		39
Home equity lines of credit serviced by others	1		—		6		10		7
Automobile	1		—		21		30		22
Education	126		10		23		149		149
Credit cards	25		8		—		25		25
Other retail	3		1		3		7		6
Total retail loans	257		25		439		838		696
Total		$452		$67		$630		$1,299		$1,082



	December 31, 2018
(in millions)	Impaired Loans With a Related Allowance		Allowance on Impaired Loans		Impaired Loans Without a Related Allowance		Unpaid Contractual Balance		Total Recorded Investment in Impaired Loans
Commercial		$186		$31		$167		$450		$353
Commercial real estate	32		7		6		38		38
Leases	—		—		—		—		—
Total commercial loans and leases	218		38		173		488		391
Residential mortgages	28		2		127		201		155
Home equity loans	34		3		76		148		110
Home equity lines of credit	21		1		181		244		202
Home equity loans serviced by others	22		1		19		54		41
Home equity lines of credit serviced by others	1		—		7		11		8
Automobile	1		—		22		31		23
Education	130		11		23		153		153
Credit cards	24		7		1		25		25
Other retail	4		1		2		8		6
Total retail loans	265		26		458		875		723
Total		$483		$64		$631		$1,363		$1,114

Additional information on impaired loans is presented below:



	Three Months Ended March 31,
	2019				2018
(in millions)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Commercial		$3		$301		$2		$293
Commercial real estate	—		26		—		27
Leases	—		—		—		—
Total commercial loans and leases	3		327		2		320
Residential mortgages	1		143		1		149
Home equity loans	2		101		2		118
Home equity lines of credit	2		196		2		194
Home equity loans serviced by others	1		39		1		50
Home equity lines of credit serviced by others	—		7		—		9
Automobile	—		21		—		22
Education	2		150		2		171
Credit cards	—		24		—		24
Other retail	—		6		—		8
Total retail loans	8		687		8		745
Total		$11		$1,014		$10		$1,065

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to the borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. TDRs typically result from the Company’s loss mitigation efforts and are undertaken in order to improve the likelihood of recovery and continuity of the relationship with the borrower. The Company’s loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower’s financial needs. Concessions granted in TDRs for all classes of loans may include lowering the interest rate, forgiving a portion of principal, extending the loan term, lowering scheduled payments for a specified period of time, waiving or delaying a scheduled payment of principal or interest for other than an insignificant time period, or capitalizing past due amounts. A rate increase can be a concession if the increased rate is lower than a market rate for debt with risk similar to that of the restructured loan. TDRs for commercial loans and leases may also involve creating a multiple note structure, accepting non-cash assets, accepting an equity interest, or receiving a performance-based fee. In some cases, a TDR may involve multiple concessions. The financial effects of TDRs for all loan classes may include lower income (either due to a lower interest rate or a delay in the timing of cash flows), larger loan loss provisions, and accelerated charge-offs if the modification renders the loan collateral-dependent. In some cases, interest income throughout the term of the loan may increase if, for example, the loan is extended or the interest rate is increased as a result of the restructuring.

Because TDRs are impaired loans, Citizens measures impairment by comparing the present value of expected future cash flows, or when appropriate, the fair value of collateral less costs to sell, to the loan’s recorded investment. Any excess of recorded investment over the present value of expected future cash flows or collateral value is included in the ALLL. Any portion of the loan’s recorded investment the Company does not expect to collect as a result of the modification is charged off at the time of modification. For retail TDR accounts where the expected value of cash flows is utilized, any recorded investment in excess of the present value of expected cash flows is recognized by increasing the ALLL. For retail TDR accounts assessed based on the fair value of collateral, any portion of the loan’s recorded investment in excess of the collateral value less costs to sell is charged off at the time of modification or at the time of subsequent and regularly recurring valuations.

The table below summarizes TDRs by class and total unfunded commitments:



(in millions)	March 31, 2019		December 31, 2018
Commercial		$296		$304
Retail	696		723
Unfunded commitments related to TDRs	25		30

The table below summarizes how loans were modified during the three months ended March 31, 2019 and 2018. The reported balances represent the post-modification outstanding recorded investment and can include loans that became TDRs during the period and were paid off in full, charged off, or sold prior to period end. Pre-modification balances for modified loans approximate the post-modification balances shown.



	Three Months Ended March 31, 2019
	Primary Modification Types
	Interest Rate Reduction¹			Maturity Extension²			Other³
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial	—		$—	5		$1	12		$40
Commercial real estate	—	—		—	—		—	—
Total commercial loans	—	—		5	1		12	40
Residential mortgages	4	2		11	2		30	4
Home equity loans	7	—		—	—		27	1
Home equity lines of credit	29	4		35	6		105	8
Home equity loans serviced by others	—	—		—	—		4	—
Home equity lines of credit serviced by others	—	—		—	—		2	—
Automobile	25	—		5	—		289	4
Education	—	—		—	—		67	2
Credit cards	616	4		—	—		—	—
Other retail	—	—		—	—		1	—
Total retail loans	681	10		51	8		525	19
Total	681		$10	56		$9	537		$59



	Three Months Ended March 31, 2018
	Primary Modification Types
	Interest Rate Reduction¹			Maturity Extension²			Other³
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial	1		$—	6		$1	18		$75
Commercial real estate	—	—		1	—		—	—
Total commercial loans	1	—		7	1		18	75
Residential mortgages	7	1		7	1		53	6
Home equity loans	11	1		—	—		32	2
Home equity lines of credit	15	1		42	5		93	7
Home equity loans serviced by others	1	—		—	—		7	—
Home equity lines of credit serviced by others	2	—		—	—		3	—
Automobile	36	1		17	1		269	4
Education	—	—		—	—		112	1
Credit cards	594	3		—	—		—	—
Other retail	1	—		—	—		4	—
Total retail loans	667	7		66	7		573	20
Total	668		$7	73		$8	591		$95

⁽¹⁾ Includes modifications that consist of multiple concessions, one of which is an interest rate reduction.

⁽²⁾ Includes modifications that consist of multiple concessions, one of which is a maturity extension (unless one of the other concessions was an interest rate reduction).

⁽³⁾ Includes modifications other than interest rate reductions or maturity extensions, such as lowering scheduled payments for a specified period of time, principal forgiveness, and capitalizing arrearages. Also included are the following: deferrals, trial modifications, certain bankruptcies, loans in forbearance and prepayment plans. Modifications can include the deferral of accrued interest resulting in post modification balances being higher than pre-modification.

The net change to ALLL resulting from modification for the three months ended March 31, 2019 and 2018 was $2 million and $1 million, respectively. Charge-offs may also be recorded on TDRs. Citizens recorded $1 million of charge-offs resulting from the modification of loans in the three months ended March 31, 2019 and 2018.

A payment default refers to a loan that becomes 90 days or more past due under the modified terms. Loan data includes loans meeting the criteria that were paid off in full, charged off, or sold prior to March 31, 2019 and 2018. If a TDR of any loan type becomes 90 days past due after being modified, the loan is written down to the fair value of collateral less cost to sell. The amount written off is charged to the ALLL. For commercial loans, recorded investment in TDRs that defaulted within 12 months of their modification date for the three months ended March 31, 2018 were $3 million. There were none for the three months ended March 31, 2019. For retail loans, there were $9 million and $10 million of loans which defaulted within 12 months of their restructuring date for the three months ended March 31, 2019 and 2018, respectively.

Concentrations of Credit Risk

Most of the Company’s lending activity is with customers located in the New England, Mid-Atlantic and Midwest regions. Generally, loans are collateralized by assets including real estate, inventory, accounts receivable, other personal property and investment securities. As of March 31, 2019 and December 31, 2018, Citizens had a significant amount of loans collateralized by residential and commercial real estate. There were no significant concentration risks within the commercial loan or retail loan portfolios. Exposure to credit losses arising from lending transactions may fluctuate with fair values of collateral supporting loans, which may not perform according to contractual agreements. The Company’s policy is to collateralize loans to the extent necessary; however, unsecured loans are also granted on the basis of the financial strength of the applicant and the facts surrounding the transaction.

Certain loan products, including residential mortgages, home equity loans and lines of credit, and credit cards, have contractual features that may increase credit exposure to the Company in the event of an increase in interest rates or a decline in housing values. These products include loans that exceed 90% of the value of the underlying collateral (high LTV loans), interest-only and negative amortization residential mortgages, and loans with low introductory rates. Certain loans have more than one of these characteristics. The following tables present balances of loans with these characteristics:



	March 31, 2019
(in millions)	Residential Mortgages		Home Equity Loans and Lines of Credit		Home Equity Products Serviced by Others		Credit Cards		Total
High loan-to-value		$342		$79		$134		$—		$555
Interest-only/negative amortization	1,724		—		—		—		1,724
Low introductory rate	—		—		—		219		219
Multiple characteristics and other	2		—		—		—		2
Total		$2,068		$79		$134		$219		$2,500



	December 31, 2018
(in millions)	Residential Mortgages		Home Equity Loans and Lines of Credit		Home Equity Products Serviced by Others		Credit Cards		Education		Total
High loan-to-value		$318		$87		$148		$—		$—		$553
Interest-only/negative amortization	1,794		—		—		—		1		1,795
Low introductory rate	—		—		—		217		—		217
Multiple characteristics and other	1		—		—		—		—		1
Total		$2,113		$87		$148		$217		$1		$2,566