ALLOWANCE FOR CREDIT LOSSES, NONACCRUAL LOANS AND LEASES, AND CONCENTRATIONS OF CREDIT RISK

3 Months Ended

Mar. 31, 2022

Receivables [Abstract]

ALLOWANCE FOR CREDIT LOSSES, NONACCRUAL LOANS AND LEASES, AND CONCENTRATIONS OF CREDIT RISK

NOTE 5 - ALLOWANCE FOR CREDIT LOSSES, NONACCRUAL LOANS AND LEASES, AND CONCENTRATIONS OF CREDIT RISK

Allowance for Credit Losses    

Recorded in the ACL is management’s estimate of expected credit losses in the Company’s loan and lease portfolios. See Note 6 in the Company’s 2021 Form 10-K for a detailed discussion of the ACL reserve methodology and estimation techniques as of December 31, 2021. There were no significant changes to the ACL reserve methodology during the three months ended March 31, 2022.

The following table presents a summary of changes in the ACL for the three months ended March 31, 2022:

	Three Months Ended March 31, 2022
(in millions)	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$821	$937	$1,758
Charge-offs	(14)	(87)	(101)
Recoveries	3	39	42
Net charge-offs	(11)	(48)	(59)
Provision expense (benefit) for loans and leases	(32)	53	21
Allowance for loan and lease losses, end of period	778	942	1,720
Allowance for unfunded lending commitments, beginning of period	153	23	176
Provision expense (benefit) for unfunded lending commitments	(6)	(12)	(18)
Allowance for unfunded lending commitments, end of period	147	11	158
Total allowance for credit losses, end of period	$925	$953	$1,878

During the three months ended March 31, 2022 net charge-offs of $59 million and a credit provision of $3 million resulted in a reduction of $56 million to the ACL. The $3 million credit provision includes the “double count” of the $24 million day-one CECL provision expense tied to the HSBC transaction.

The decrease in commercial net charge-offs of $93 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 reflects the strong economic growth that began in the fourth quarter of 2020 and continued solid credit performance. Retail net charge-offs were down $6 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 as consumers continue to benefit from the fiscal support provided during the pandemic, the rapid growth in jobs, and elevated residential mortgage and auto loan collateral values.

To determine the ACL as of March 31, 2022, the Company utilized an economic forecast that generally reflects real GDP growth on an annual average basis of 2.5% and an average unemployment rate of 5.2% in 2022. This forecast reflects a positive overall macroeconomic outlook, generally in-line with December 31, 2021, which reflected real GDP growth on an annual average basis of 2.8% and an average unemployment rate of 6% in 2022. While the U.S. economy has remained strong, uncertainty remains. The Company continues to utilize a qualitative allowance framework to reassess and adjust ACL reserve levels. Macroeconomic forecast risk, driven by uncertainty around and volatility of key macroeconomic variables, is one of the primary factors influencing the qualitative reserve.

The Company’s March 2022 qualitative consideration for macroeconomic risk reflects the strength of the overall economy weighed against the headwinds of tightening monetary and fiscal policies, impacts of elevated inflation, including the gap between wage gains and inflation rate, labor shortages, continuing supply-chain challenges, and possible consequences from Russia’s invasion of Ukraine. The Company expects the combination of these items to likely create volatility in key macroeconomic variables. While COVID has reemerged in certain areas of the world, the impact to the US economy has been limited to date given vaccination rates and material reductions in hospitalizations and deaths, reductions in consumer concerns about the pandemic, and a strong labor market with over 11 million open jobs as of February 2022.

The following table presents a summary of changes in the ACL for the three months ended March 31, 2021:

	Three Months Ended March 31, 2021
(in millions)	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$1,233	$1,210	$2,443
Charge-offs	(134)	(93)	(227)
Recoveries	30	39	69
Net charge-offs	(104)	(54)	(158)
Provision expense (benefit) for loans and leases	17	(108)	(91)
Allowance for loan and lease losses, end of period	1,146	1,048	2,194
Allowance for unfunded lending commitments, beginning of period	186	41	227
Provision expense (benefit) for unfunded lending commitments	(21)	(28)	(49)
Allowance for unfunded lending commitments, end of period	165	13	178
Total allowance for credit losses, end of period	$1,311	$1,061	$2,372

Credit Quality Indicators

The Company presents loan and lease portfolio segments and classes by credit quality indicator and vintage year. Citizens defines the vintage date for the purpose of this disclosure as the date of the most recent credit decision. In general, renewals are categorized as new credit decisions and reflect the renewal date as the vintage date. Loans modified in a TDR are considered a continuation of the original loan and vintage date corresponds with the most recent credit decision.

For commercial loans and leases, Citizens utilizes regulatory classification ratings to monitor credit quality. The assignment of regulatory classification ratings occurs at loan origination and are periodically re-evaluated by Citizens utilizing a risk-based approach, including any time management becomes aware of information affecting the borrowers' ability to fulfill their obligations. The review process considers both quantitative and qualitative factors. Loans with a “pass” rating are those that the Company believes will fully repay in accordance with the contractual loan terms. Commercial loans and leases identified as “criticized” have some weakness or potential weakness that indicate an increased probability of future loss. Citizens groups “criticized” loans 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 characteristic that the possibility of loss is high and collection of the full amount of the loan is improbable.

The following table presents the amortized cost basis of commercial loans and leases, by vintage date and regulatory classification rating, as of March 31, 2022:

	Term Loans by Origination Year						Revolving Loans
(in millions)	2022	2021	2020	2019	2018	Prior to 2018	Within the Revolving Period	Converted to Term	Total
Commercial and industrial
Pass	$1,944	$9,819	$3,007	$2,908	$2,094	$2,975	$20,729	$118	$43,594
Special Mention	1	74	58	107	105	114	385	1	845
Substandard	—	89	89	222	78	195	419	17	1,109
Doubtful	7	12	19	4	10	25	96	3	176
Total commercial and industrial	1,952	9,994	3,173	3,241	2,287	3,309	21,629	139	45,724
Commercial real estate
Pass	784	2,667	2,420	2,889	1,465	1,587	1,458	3	13,273
Special Mention	—	54	48	228	93	79	10	—	512
Substandard	—	1	—	84	243	141	3	—	472
Doubtful	—	1	9	—	—	1	—	—	11
Total commercial real estate	784	2,723	2,477	3,201	1,801	1,808	1,471	3	14,268
Leases
Pass	68	406	275	126	141	493	—	—	1,509
Special Mention	—	2	2	—	3	1	—	—	8
Substandard	—	1	3	5	2	—	—	—	11
Doubtful	—	—	—	—	—	1	—	—	1
Total leases	68	409	280	131	146	495	—	—	1,529
Total commercial
Pass(1)	2,796	12,892	5,702	5,923	3,700	5,055	22,187	121	58,376
Special Mention	1	130	108	335	201	194	395	1	1,365
Substandard	—	91	92	311	323	336	422	17	1,592
Doubtful	7	13	28	4	10	27	96	3	188
Total commercial	$2,804	$13,126	$5,930	$6,573	$4,234	$5,612	$23,100	$142	$61,521

The following table presents the amortized cost basis of commercial loans and leases, by vintage date and regulatory classification rating, as of December 31, 2021:

	Term Loans by Origination Year						Revolving Loans
(in millions)	2021	2020	2019	2018	2017	Prior to 2017	Within the Revolving Period	Converted to Term	Total
Commercial and industrial
Pass	$10,218	$3,336	$3,599	$2,284	$1,426	$1,863	$19,406	$122	$42,254
Special Mention	47	71	155	114	41	64	316	1	809
Substandard	97	112	215	81	50	201	521	17	1,294
Doubtful	1	9	9	22	10	16	74	2	143
Total commercial and industrial	10,363	3,528	3,978	2,501	1,527	2,144	20,317	142	44,500
Commercial real estate
Pass	2,766	2,417	3,181	1,756	626	1,119	1,451	3	13,319
Special Mention	45	42	113	100	27	79	—	—	406
Substandard	27	—	88	267	78	59	9	—	528
Doubtful	1	9	—	—	—	1	—	—	11
Total commercial real estate	2,839	2,468	3,382	2,123	731	1,258	1,460	3	14,264
Leases
Pass	447	262	134	144	66	459	—	—	1,512
Special Mention	10	15	—	5	3	16	—	—	49
Substandard	1	16	5	2	—	—	—	—	24
Doubtful	—	—	—	—	—	1	—	—	1
Total leases	458	293	139	151	69	476	—	—	1,586
Total commercial
Pass(1)	13,431	6,015	6,914	4,184	2,118	3,441	20,857	125	57,085
Special Mention	102	128	268	219	71	159	316	1	1,264
Substandard	125	128	308	350	128	260	530	17	1,846
Doubtful	2	18	9	22	10	18	74	2	155
Total commercial	$13,660	$6,289	$7,499	$4,775	$2,327	$3,878	$21,777	$145	$60,350

For retail loans, Citizens utilizes FICO credit scores and the loan’s payment and delinquency status to monitor credit quality. Management believes FICO scores are the strongest indicator of credit losses over the contractual life of the loan and assist management in predicting the borrower’s future payment performance. Scores are based on current and historical national industry-wide consumer level credit performance data.

The following table presents the amortized cost basis of retail loans, by vintage date and FICO scores, as of March 31, 2022:

	Term Loans by Origination Year						Revolving Loans
(in millions)	2022	2021	2020	2019	2018	Prior to 2018	Within the Revolving Period	Converted to Term	Total
Residential mortgages
800+	$351	$3,332	$3,066	$1,184	$322	$2,868	$—	$—	$11,123
740-799	866	3,423	1,690	673	240	1,429	—	—	8,321
680-739	192	968	540	275	145	800	—	—	2,920
620-679	18	127	114	170	93	399	—	—	921
<620	—	45	82	171	158	435	—	—	891
No FICO available(1)	—	5	3	4	5	18	—	—	35
Total residential mortgages	1,427	7,900	5,495	2,477	963	5,949	—	—	24,211
Home equity
800+	—	1	1	4	5	122	4,492	310	4,935
740-799	—	—	1	4	6	110	3,564	296	3,981
680-739	—	—	1	8	13	140	1,774	258	2,194
620-679	—	—	2	9	19	118	399	168	715
<620	—	—	2	16	20	103	114	184	439
Total home equity	—	1	7	41	63	593	10,343	1,216	12,264
Automobile
800+	369	1,662	780	481	210	154	—	—	3,656
740-799	487	2,203	915	531	238	157	—	—	4,531
680-739	423	1,751	701	414	190	124	—	—	3,603
620-679	223	919	317	218	109	77	—	—	1,863
<620	32	291	149	145	91	75	—	—	783
No FICO available(1)	2	1	—	—	—	—	—	—	3
Total automobile	1,536	6,827	2,862	1,789	838	587	—	—	14,439
Education
800+	213	1,641	1,687	792	479	1,261	—	—	6,073
740-799	311	1,600	1,391	587	325	739	—	—	4,953
680-739	161	513	425	209	126	354	—	—	1,788
620-679	10	73	64	41	30	121	—	—	339
<620	1	9	14	12	12	52	—	—	100
No FICO available(1)	2	1	—	—	—	50	—	—	53
Total education	698	3,837	3,581	1,641	972	2,577	—	—	13,306
Other retail
800+	42	229	184	102	52	51	414	—	1,074
740-799	62	294	245	140	66	49	813	2	1,671
680-739	54	225	202	103	45	28	810	4	1,471
620-679	37	129	99	36	16	9	349	5	680
<620	5	38	36	15	8	4	129	6	241
No FICO available(1)	37	3	5	—	—	—	381	1	427
Total other retail	237	918	771	396	187	141	2,896	18	5,564
Total retail
800+	975	6,865	5,718	2,563	1,068	4,456	4,906	310	26,861
740-799	1,726	7,520	4,242	1,935	875	2,484	4,377	298	23,457
680-739	830	3,457	1,869	1,009	519	1,446	2,584	262	11,976
620-679	288	1,248	596	474	267	724	748	173	4,518
<620	38	383	283	359	289	669	243	190	2,454
No FICO available(1)	41	10	8	4	5	68	381	1	518
Total retail	$3,898	$19,483	$12,716	$6,344	$3,023	$9,847	$13,239	$1,234	$69,784

(1) Represents loans for which an updated FICO score was unavailable (e.g., due to recent profile changes).

The following table presents the amortized cost basis of retail loans, by vintage date and FICO scores, as of December 31, 2021:

	Term Loans by Origination Year						Revolving Loans
(in millions)	2021	2020	2019	2018	2017	Prior to 2017	Within the Revolving Period	Converted to Term	Total
Residential mortgages
800+	$2,431	$3,017	$1,230	$342	$672	$2,139	$—	$—	$9,831
740-799	4,015	1,876	746	246	360	1,086	—	—	8,329
680-739	1,116	572	335	152	172	585	—	—	2,932
620-679	111	130	161	93	107	276	—	—	878
<620	24	66	164	162	157	257	—	—	830
No FICO available(1)	3	8	1	—	—	10	—	—	22
Total residential mortgages	7,700	5,669	2,637	995	1,468	4,353	—	—	22,822
Home equity
800+	—	2	5	5	3	134	4,394	281	4,824
740-799	—	1	4	5	7	122	3,514	278	3,931
680-739	—	1	7	14	16	134	1,738	243	2,153
620-679	—	3	11	19	17	112	363	167	692
<620	—	2	16	23	20	87	91	176	415
Total home equity	—	9	43	66	63	589	10,100	1,145	12,015
Automobile
800+	1,887	829	538	244	148	57	—	—	3,703
740-799	2,418	1,051	615	288	156	58	—	—	4,586
680-739	1,968	827	500	234	123	48	—	—	3,700
620-679	1,029	378	257	131	72	32	—	—	1,899
<620	164	142	155	103	62	32	—	—	658
No FICO available(1)	3	—	—	—	—	—	—	—	3
Total automobile	7,469	3,227	2,065	1,000	561	227	—	—	14,549
Education
800+	1,361	1,771	840	514	470	880	—	—	5,836
740-799	1,555	1,577	672	371	275	514	—	—	4,964
680-739	512	474	229	140	107	262	—	—	1,724
620-679	50	66	45	34	28	99	—	—	322
<620	5	11	12	12	10	45	—	—	95
No FICO available(1)	4	—	—	—	—	52	—	—	56
Total education	3,487	3,899	1,798	1,071	890	1,852	—	—	12,997
Other retail
800+	233	214	122	65	30	29	386	—	1,079
740-799	323	296	173	84	38	26	764	2	1,706
680-739	246	240	122	56	23	12	709	5	1,413
620-679	149	119	43	19	7	4	299	5	645
<620	32	37	17	10	3	2	100	6	207
No FICO available(1)	44	5	—	—	—	—	330	1	380
Total other retail	1,027	911	477	234	101	73	2,588	19	5,430
Total retail
800+	5,912	5,833	2,735	1,170	1,323	3,239	4,780	281	25,273
740-799	8,311	4,801	2,210	994	836	1,806	4,278	280	23,516
680-739	3,842	2,114	1,193	596	441	1,041	2,447	248	11,922
620-679	1,339	696	517	296	231	523	662	172	4,436
<620	225	258	364	310	252	423	191	182	2,205
No FICO available(1)	54	13	1	—	—	62	330	1	461
Total retail	$19,683	$13,715	$7,020	$3,366	$3,083	$7,094	$12,688	$1,164	$67,813

(1) Represents loans for which an updated FICO score was unavailable (e.g., due to recent profile changes).

Nonaccrual and Past Due Assets

The following tables present an aging analysis of accruing loans and leases, and nonaccrual loans and leases:

	March 31, 2022
		Days Past Due and Accruing
(in millions)	Current	30-59	60-89	90+	Nonaccrual	Total	Nonaccrual with no related ACL
Commercial and industrial	$45,477	$18	$16	$13	$200	$45,724	$31
Commercial real estate	14,256	—	1	—	11	14,268	1
Leases	1,478	45	—	5	1	1,529	—
Total commercial	61,211	63	17	18	212	61,521	32
Residential mortgages(1)	23,077	57	42	792	243	24,211	179
Home equity	11,969	42	14	—	239	12,264	188
Automobile	14,236	120	31	—	52	14,439	10
Education	13,244	26	11	2	23	13,306	3
Other retail	5,447	61	22	14	20	5,564	1
Total retail	67,973	306	120	808	577	69,784	381
Total	$129,184	$369	$137	$826	$789	$131,305	$413

	December 31, 2021
		Days Past Due and Accruing
(in millions)	Current	30-59	60-89	90+	Nonaccrual	Total	Nonaccrual with no related ACL
Commercial and industrial	$44,247	$47	$26	$9	$171	$44,500	$36
Commercial real estate	14,247	6	—	—	11	14,264	1
Leases	1,570	14	1	—	1	1,586	—
Total commercial	60,064	67	27	9	183	60,350	37
Residential mortgages(1)	21,918	102	52	549	201	22,822	137
Home equity	11,745	38	12	—	220	12,015	186
Automobile	14,324	131	39	—	55	14,549	22
Education	12,926	34	13	1	23	12,997	2
Other retail	5,331	40	23	16	20	5,430	2
Total retail	66,244	345	139	566	519	67,813	349
Total	$126,308	$412	$166	$575	$702	$128,163	$386

(1) 90+ days past due and accruing includes $792 million and $544 million of loans fully or partially guaranteed by the FHA, VA, and USDA at March 31, 2022 and December 31, 2021, respectively.

Interest income is generally not recognized for loans and leases that are on nonaccrual status. The Company reverses accrued interest receivable with a charge to interest income upon classifying the loan or lease as nonaccrual.

    At March 31, 2022 and December 31, 2021, the Company had collateral-dependent residential mortgage and home equity loans totaling $579 million and $542 million, respectively. At March 31, 2022 and December 31, 2021, the Company had collateral-dependent commercial loans totaling $21 million and $103 million, respectively.

The amortized cost basis of mortgage loans collateralized by residential real estate for which formal foreclosure proceedings were in process was $189 million and $142 million as of March 31, 2022 and December 31, 2021, respectively.

Troubled Debt Restructurings

The following tables summarize loans modified during the three months ended March 31, 2022 and 2021. The balances represent the post-modification outstanding amortized cost basis and may include loans that became TDRs during the period and were subsequently 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, 2022
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	10	$—	$24	$7	$31
Total commercial	10	—	24	7	31
Residential mortgages	1,181	22	14	214	250
Home equity	178	2	—	9	11
Automobile	165	1	—	1	2
Education	143	—	—	6	6
Other retail	521	2	—	—	2
Total retail	2,188	27	14	230	271
Total	2,198	$27	$38	$237	$302

		Three Months Ended March 31, 2021
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	7	$—	$3	$—	$3
Total commercial	7	—	3	—	3
Residential mortgages	42	4	6	3	13
Home equity	147	2	5	4	11
Automobile	669	—	—	8	8
Education	147	—	—	4	4
Other retail	630	3	—	1	4
Total retail	1,635	9	11	20	40
Total	1,642	$9	$14	$20	$43

(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.

Modified TDRs resulted in charge-offs of $1 million and $2 million for the three months ended March 31, 2022 and 2021, respectively.

Unfunded commitments related to TDRs were $76 million and $56 million at March 31, 2022 and December 31, 2021, respectively.

The following table provides a summary of TDRs that defaulted (became 90 days or more past due) within 12 months of their modification date:

	Three Months Ended March 31,
(dollars in millions)	2022	2021
Commercial TDRs	$—	$22
Retail TDRs(1)	15	15
Total	$15	$37

(1) Includes $10 million and $2 million of loans fully or partially government guaranteed by the FHA, VA, and USDA for the three months ended March 31, 2022 and 2021, 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, 2022 and December 31, 2021, Citizens had a significant amount of loans collateralized by residential and commercial real estate. There were no significant concentration risks within the commercial 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 facts surrounding the transaction.