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

6 Months Ended

Jun. 30, 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 six months ended June 30, 2022.

The following table presents a summary of changes in the ACL for the three and six months ended June 30, 2022:

	Three Months Ended June 30, 2022			Six Months Ended June 30, 2022
(in millions)	Commercial	Retail	Total	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$778	$942	$1,720	$821	$937	$1,758
Allowance on PCD loans and leases at acquisition	99	2	101	99	2	101
Charge-offs(1)	(13)	(78)	(91)	(27)	(165)	(192)
Recoveries	3	39	42	6	78	84
Net charge-offs	(10)	(39)	(49)	(21)	(87)	(108)
Provision expense (benefit) for loans and leases(2)	120	72	192	88	125	213
Allowance for loan and lease losses, end of period	987	977	1,964	987	977	1,964
Allowance for unfunded lending commitments, beginning of period	147	11	158	153	23	176
Provision expense (benefit) for unfunded lending commitments	18	6	24	12	(6)	6
Allowance on PCD unfunded lending commitments at acquisition	1	—	1	1	—	1
Allowance for unfunded lending commitments, end of period	166	17	183	166	17	183
Total allowance for credit losses, end of period	$1,153	$994	$2,147	$1,153	$994	$2,147

(1) For the three and six months ended June 30, 2022, excludes $33 million of charge-offs previously taken by Investors or recognized upon completion of the Investors acquisition under purchase accounting. The initial allowance for loan and lease losses on PCD assets included these amounts and, after charging these amounts off upon acquisition, the net impact for PCD assets was $101 million of additional allowance for loan and lease losses.

(2) Includes $145 million and $169 million of initial provision expense related to non-PCD loans and leases acquired from Investors and HSBC for the three and six months ended June 30, 2022, respectively.

During the six months ended June 30, 2022, net charge-offs of $108 million, the ACL on PCD loans and leases and unfunded lending commitments at acquisition of $102 million, and a credit provision of $219 million resulted in an increase of $213 million to the ACL.

Retail NCOs reflected modest improvement for the three and six months ended June 30, 2022 compared to the same periods in 2021, as consumers continued to maintain a savings cushion, the economy approached full employment and residential mortgage and automobile loan collateral values remained elevated. Commercial NCOs decreased for the three and six months ended June 30, 2022 compared to the same periods in 2021, as credit performance remained strong.

To determine the ACL as of June 30, 2022, the Company utilized an economic forecast that generally reflects real GDP growth on an annual average basis of 2.1% and an average unemployment rate of 4.3% in 2022. This forecast incorporates the risk of a mild recession beginning in the latter half of the year. This compares to the Company’s December 31, 2021 forecast which reflected real GDP growth on an annual average basis of 2.8% and an average unemployment rate of 6% in 2022.

To address economic uncertainty, the Company utilizes 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 Company’s qualitative reserve.

The Company’s June 2022 qualitative consideration for macroeconomic risk reflects the Federal Reserve’s aggressively tightening monetary policy and the contraction of fiscal policy, as pandemic-related support winds down. These conditions, weighed together with the impacts of Russia’s invasion of Ukraine on key global commodity prices, labor shortage-related wage increases and continuing supply-chain challenges contributing to surging inflation, possibly may push the U.S. economy into a mild recession and create volatility in key macroeconomic variables, including GDP and employment.

The following table presents a summary of changes in the ACL for the three and six months ended June 30, 2021:

	Three Months Ended June 30, 2021			Six Months Ended June 30, 2021
(in millions)	Commercial	Retail	Total	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$1,146	$1,048	$2,194	$1,233	$1,210	$2,443
Charge-offs	(45)	(80)	(125)	(179)	(173)	(352)
Recoveries	4	43	47	34	82	116
Net charge-offs	(41)	(37)	(78)	(145)	(91)	(236)
Provision expense (benefit) for loans and leases	(152)	(17)	(169)	(135)	(125)	(260)
Allowance for loan and lease losses, end of period	953	994	1,947	953	994	1,947
Allowance for unfunded lending commitments, beginning of period	165	13	178	186	41	227
Provision expense (benefit) for unfunded lending commitments	(44)	—	(44)	(65)	(28)	(93)
Allowance for unfunded lending commitments, end of period	121	13	134	121	13	134
Total allowance for credit losses, end of period	$1,074	$1,007	$2,081	$1,074	$1,007	$2,081

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 June 30, 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	$4,730	$9,806	$2,974	$2,830	$1,972	$2,845	$24,106	$90	$49,353
Special Mention	4	127	66	113	17	116	369	1	813
Substandard	3	142	112	332	129	290	458	13	1,479
Doubtful	8	5	14	4	9	24	89	3	156
Total commercial and industrial	4,745	10,080	3,166	3,279	2,127	3,275	25,022	107	51,801
Commercial real estate
Pass	3,193	6,487	3,867	3,638	2,602	4,449	2,171	3	26,410
Special Mention	—	21	75	268	102	93	2	—	561
Substandard	91	23	—	96	239	629	9	—	1,087
Doubtful	—	1	9	—	—	2	—	—	12
Total commercial real estate	3,284	6,532	3,951	4,002	2,943	5,173	2,182	3	28,070
Leases
Pass	114	410	281	125	147	480	—	—	1,557
Special Mention	—	3	2	—	3	1	—	—	9
Substandard	—	1	3	3	1	—	—	—	8
Doubtful	—	—	—	—	—	—	—	—	—
Total leases	114	414	286	128	151	481	—	—	1,574
Total commercial
Pass(1)	8,037	16,703	7,122	6,593	4,721	7,774	26,277	93	77,320
Special Mention	4	151	143	381	122	210	371	1	1,383
Substandard	94	166	115	431	369	919	467	13	2,574
Doubtful	8	6	23	4	9	26	89	3	168
Total commercial	$8,143	$17,026	$7,403	$7,409	$5,221	$8,929	$27,204	$110	$81,445

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 June 30, 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+	$953	$4,170	$3,049	$1,156	$343	$3,023	$—	$—	$12,694
740-799	1,987	3,723	1,936	738	315	2,049	—	—	10,748
680-739	525	1,037	558	313	169	1,005	—	—	3,607
620-679	59	149	135	185	108	463	—	—	1,099
<620	5	51	77	170	151	456	—	—	910
No FICO available(1)	—	3	2	4	4	17	—	—	30
Total residential mortgages	3,529	9,133	5,757	2,566	1,090	7,013	—	—	29,088
Home equity
800+	2	3	2	6	6	122	4,714	301	5,156
740-799	4	5	2	5	6	117	4,017	291	4,447
680-739	1	1	2	7	14	137	1,940	245	2,347
620-679	—	—	2	9	17	110	448	162	748
<620	—	—	2	14	19	95	120	174	424
Total home equity	7	9	10	41	62	581	11,239	1,173	13,122
Automobile
800+	505	1,587	707	423	178	112	—	—	3,512
740-799	760	1,984	816	463	198	115	—	—	4,336
680-739	699	1,537	610	352	157	89	—	—	3,444
620-679	412	787	273	183	90	57	—	—	1,802
<620	86	289	137	128	76	55	—	—	771
No FICO available(1)	3	—	—	—	—	—	—	—	3
Total automobile	2,465	6,184	2,543	1,549	699	428	—	—	13,868
Education
800+	288	1,703	1,623	751	450	1,201	—	—	6,016
740-799	474	1,563	1,299	553	299	683	—	—	4,871
680-739	254	489	395	190	118	316	—	—	1,762
620-679	26	74	61	38	30	114	—	—	343
<620	2	11	15	12	11	48	—	—	99
No FICO available(1)	2	—	—	—	—	48	—	—	50
Total education	1,046	3,840	3,393	1,544	908	2,410	—	—	13,141
Other retail
800+	89	192	147	81	41	41	440	—	1,031
740-799	128	245	196	109	51	39	891	1	1,660
680-739	119	184	161	81	35	22	864	4	1,470
620-679	79	104	79	28	13	7	385	4	699
<620	20	35	30	12	6	3	142	6	254
No FICO available(1)	5	2	4	—	—	—	382	1	394
Total other retail	440	762	617	311	146	112	3,104	16	5,508
Total retail
800+	1,837	7,655	5,528	2,417	1,018	4,499	5,154	301	28,409
740-799	3,353	7,520	4,249	1,868	869	3,003	4,908	292	26,062
680-739	1,598	3,248	1,726	943	493	1,569	2,804	249	12,630
620-679	576	1,114	550	443	258	751	833	166	4,691
<620	113	386	261	336	263	657	262	180	2,458
No FICO available(1)	10	5	6	4	4	65	382	1	477
Total retail	$7,487	$19,928	$12,320	$6,011	$2,905	$10,544	$14,343	$1,189	$74,727

(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:

	June 30, 2022
		Days Past Due and Accruing
(in millions)	Current	30-59	60-89	90+	Nonaccrual	Total	Nonaccrual with no related ACL
Commercial and industrial	$51,514	$37	$9	$39	$202	$51,801	$24
Commercial real estate	27,827	172	1	33	37	28,070	7
Leases	1,554	17	3	—	—	1,574	—
Total commercial	80,895	226	13	72	239	81,445	31
Residential mortgages(1)	28,119	59	34	623	253	29,088	208
Home equity	12,834	36	12	—	240	13,122	186
Automobile	13,660	120	38	—	50	13,868	9
Education	13,068	26	13	3	31	13,141	3
Other retail	5,409	35	24	14	26	5,508	1
Total retail	73,090	276	121	640	600	74,727	407
Total	$153,985	$502	$134	$712	$839	$156,172	$438

	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 $623 million and $544 million of loans fully or partially guaranteed by the FHA, VA, and USDA at June 30, 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 June 30, 2022 and December 31, 2021, the Company had collateral-dependent residential mortgage and home equity loans totaling $552 million and $542 million, respectively. At June 30, 2022 and December 31, 2021, the Company had collateral-dependent commercial loans totaling $27 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 $228 million and $142 million as of June 30, 2022 and December 31, 2021, respectively.

Troubled Debt Restructurings

The following tables summarize loans modified during the three and six months ended June 30, 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 June 30, 2022
		Amortized Cost Basis
(dollars in millions)	Number of Contracts		Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	9		$—	$—	$27	$27
Total commercial	9		—	—	27	27
Residential mortgages	290		16	39	21	76
Home equity	72		—	1	5	6
Automobile	147		—	—	1	1
Education	93		—	—	5	5
Other retail	567		3	—	1	4
Total retail	1,169		19	40	33	92
Total	1,178		$19	$40	$60	$119

		Three Months Ended June 30, 2021
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	15	$—	$3	$54	$57
Total commercial	15	—	3	54	57
Residential mortgages	671	8	120	44	172
Home equity	102	1	3	3	7
Automobile	379	1	—	5	6
Education	265	—	—	9	9
Other retail	585	1	—	—	1
Total retail	2,002	11	123	61	195
Total	2,017	$11	$126	$115	$252

		Six Months Ended June 30, 2022
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	19	$—	$24	$34	$58
Total commercial	19	—	24	34	58
Residential mortgages	1,471	38	53	235	326
Home equity	250	2	1	14	17
Automobile	312	1	—	2	3
Education	236	—	—	11	11
Other retail	1,088	5	—	1	6
Total retail	3,357	46	54	263	363
Total	3,376	$46	$78	$297	$421

		Six Months Ended June 30, 2021
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	22	$—	$6	$54	$60
Total commercial	22	—	6	54	60
Residential mortgages	713	12	126	47	185
Home equity	249	3	8	7	18
Automobile	1,048	1	—	13	14
Education	412	—	—	13	13
Other retail	1,215	4	—	1	5
Total retail	3,637	20	134	81	235
Total	3,659	$20	$140	$135	$295

(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 June 30, 2022 and 2021, respectively, and $2 million and $4 million for the six months ended June 30, 2022 and 2021, respectively.

Unfunded commitments related to TDRs were $90 million and $56 million at June 30, 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 June 30,		Six Months Ended June 30,
(dollars in millions)	2022	2021	2022	2021
Commercial TDRs	$—	$1	$—	$23
Retail TDRs(1)	181	14	196	29
Total	$181	$15	$196	$52

(1) Includes $146 million and $1 million of loans fully or partially government guaranteed by the FHA, VA, and USDA for the three months ended June 30, 2022 and 2021, respectively, and $156 million and $3 million for the six months ended June 30, 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 June 30, 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.