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

9 Months Ended

Sep. 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 nine months ended September 30, 2022.

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

	Three Months Ended September 30, 2022			Nine Months Ended September 30, 2022
(in millions)	Commercial	Retail	Total	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$987	$977	$1,964	$821	$937	$1,758
Allowance on PCD loans and leases at acquisition	—	—	—	99	2	101
Charge-offs(1)	(22)	(94)	(116)	(49)	(259)	(308)
Recoveries	7	35	42	13	113	126
Net charge-offs	(15)	(59)	(74)	(36)	(146)	(182)
Provision expense (benefit) for loans and leases(2)	58	32	90	146	157	303
Allowance for loan and lease losses, end of period	1,030	950	1,980	1,030	950	1,980
Allowance for unfunded lending commitments, beginning of period	166	17	183	153	23	176
Provision expense (benefit) for unfunded lending commitments	6	27	33	18	21	39
Allowance on PCD unfunded lending commitments at acquisition	—	—	—	1	—	1
Allowance for unfunded lending commitments, end of period	172	44	216	172	44	216
Total allowance for credit losses, end of period	$1,202	$994	$2,196	$1,202	$994	$2,196

(1) Excludes $33 million of charge-offs previously taken by Investors or recognized upon completion of the Investors acquisition under purchase accounting for the nine months ended September 30, 2022. 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 $169 million of initial provision expense related to non-PCD loans and leases acquired from HSBC and Investors for the nine months ended September 30, 2022.

During the nine months ended September 30, 2022, net charge-offs of $182 million, the ACL on PCD loans and leases and unfunded lending commitments at acquisition of $102 million, and a credit provision of $342 million resulted in an increase of $262 million to the ACL.

Retail NCO ratio increased for the three months ended September 30, 2022 compared to the same period in 2021, reflecting the normalization of the credit cycle; however, the NCO ratio remains below pre-pandemic levels. Retail NCO ratio for the nine months ended September 30, 2022 remained relatively flat compared to the same period in 2021. Commercial NCO ratio remained stable for the three months ended September 30, 2022 and decreased for the nine months ended September 30, 2022 compared to the same periods in 2021, as credit performance remained strong.

Our ACL as of September 30, 2022 accounts for an economic forecast with 2022 real GDP growth of approximately 1.5% and an average unemployment rate of approximately 4%, and 2023 real GDP decline of approximately 0.5% and an average unemployment rate of approximately 6%. This forecast incorporates the increased risk of a shallow recession beginning in the fourth quarter of 2022 and persisting for three consecutive quarters.

To address economic uncertainty, the Company utilizes a qualitative allowance framework to reassess and adjust ACL reserve levels. Macroeconomic forecast risk, driven by uncertainty and volatility of key macroeconomic variables, is one of the primary factors influencing the Company’s qualitative reserve.

The Company’s September 2022 qualitative consideration for macroeconomic risk reflects the Federal Reserve’s aggressively tightening monetary policy and the contraction of fiscal policy. 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, may push the U.S. economy into a shallow 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 nine months ended September 30, 2021:

	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021
(in millions)	Commercial	Retail	Total	Commercial	Retail	Total
Allowance for loan and lease losses, beginning of period	$953	$994	$1,947	$1,233	$1,210	$2,443
Charge-offs	(17)	(70)	(87)	(196)	(243)	(439)
Recoveries	3	40	43	37	122	159
Net charge-offs	(14)	(30)	(44)	(159)	(121)	(280)
Provision expense (benefit) for loans and leases	(72)	24	(48)	(207)	(101)	(308)
Allowance for loan and lease losses, end of period	867	988	1,855	867	988	1,855
Allowance for unfunded lending commitments, beginning of period	121	13	134	186	41	227
Provision expense (benefit) for unfunded lending commitments	9	6	15	(56)	(22)	(78)
Allowance for unfunded lending commitments, end of period	130	19	149	130	19	149
Total allowance for credit losses, end of period	$997	$1,007	$2,004	$997	$1,007	$2,004

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 September 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	$6,375	$8,966	$2,479	$2,441	$1,587	$2,404	$23,840	$173	$48,265
Special Mention	55	206	134	139	71	123	321	—	1,049
Substandard	55	158	124	337	91	238	469	15	1,487
Doubtful	10	9	12	4	39	24	88	2	188
Total commercial and industrial	6,495	9,339	2,749	2,921	1,788	2,789	24,718	190	50,989
Commercial real estate
Pass	4,752	6,514	3,674	3,431	2,305	3,962	2,220	3	26,861
Special Mention	1	32	110	273	149	140	9	—	714
Substandard	132	1	—	192	216	530	23	—	1,094
Doubtful	—	1	9	—	—	2	—	—	12
Total commercial real estate	4,885	6,548	3,793	3,896	2,670	4,634	2,252	3	28,681
Leases
Pass	173	377	257	108	133	368	—	—	1,416
Special Mention	2	9	—	5	2	4	—	—	22
Substandard	—	—	3	3	—	—	—	—	6
Doubtful	—	—	—	—	—	—	—	—	—
Total leases	175	386	260	116	135	372	—	—	1,444
Total commercial
Pass	11,300	15,857	6,410	5,980	4,025	6,734	26,060	176	76,542
Special Mention	58	247	244	417	222	267	330	—	1,785
Substandard	187	159	127	532	307	768	492	15	2,587
Doubtful	10	10	21	4	39	26	88	2	200
Total commercial	$11,555	$16,273	$6,802	$6,933	$4,593	$7,795	$26,970	$193	$81,114

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	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 September 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+	$1,501	$4,470	$3,068	$1,142	$331	$2,878	$—	$—	$13,390
740-799	2,362	3,464	1,818	716	300	1,965	—	—	10,625
680-739	669	949	519	297	161	922	—	—	3,517
620-679	104	156	125	164	101	442	—	—	1,092
<620	8	62	77	166	145	438	—	—	896
No FICO available(1)	2	2	2	3	3	16	—	—	28
Total residential mortgages	4,646	9,103	5,609	2,488	1,041	6,661	—	—	29,548
Home equity
800+	2	3	2	5	6	111	4,866	287	5,282
740-799	3	4	2	5	6	108	4,282	286	4,696
680-739	1	1	2	7	13	123	2,106	236	2,489
620-679	—	1	1	9	16	99	498	159	783
<620	—	—	2	12	19	89	140	172	434
Total home equity	6	9	9	38	60	530	11,892	1,140	13,684
Automobile
800+	597	1,516	643	369	147	78	—	—	3,350
740-799	921	1,783	727	397	164	81	—	—	4,073
680-739	866	1,342	527	300	127	63	—	—	3,225
620-679	526	676	234	155	74	40	—	—	1,705
<620	141	303	133	116	65	41	—	—	799
No FICO available(1)	3	—	—	—	—	—	—	—	3
Total automobile	3,054	5,620	2,264	1,337	577	303	—	—	13,155
Education
800+	474	1,714	1,582	719	426	1,131	—	—	6,046
740-799	665	1,456	1,209	517	284	647	—	—	4,778
680-739	333	454	375	182	108	300	—	—	1,752
620-679	44	74	60	37	29	106	—	—	350
<620	4	14	18	12	11	50	—	—	109
No FICO available(1)	12	—	—	1	—	46	—	—	59
Total education	1,532	3,712	3,244	1,468	858	2,280	—	—	13,094
Other retail
800+	149	151	116	64	32	33	460	—	1,005
740-799	194	192	155	86	40	31	932	1	1,631
680-739	155	148	129	65	27	18	948	4	1,494
620-679	97	82	64	23	10	6	427	4	713
<620	27	33	28	11	5	3	167	3	277
No FICO available(1)	42	1	3	—	—	—	378	1	425
Total other retail	664	607	495	249	114	91	3,312	13	5,545
Total retail
800+	2,723	7,854	5,411	2,299	942	4,231	5,326	287	29,073
740-799	4,145	6,899	3,911	1,721	794	2,832	5,214	287	25,803
680-739	2,024	2,894	1,552	851	436	1,426	3,054	240	12,477
620-679	771	989	484	388	230	693	925	163	4,643
<620	180	412	258	317	245	621	307	175	2,515
No FICO available(1)	59	3	5	4	3	62	378	1	515
Total retail	$9,902	$19,051	$11,621	$5,580	$2,650	$9,865	$15,204	$1,153	$75,026

(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:

	September 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	$50,637	$71	$34	$13	$234	$50,989	$52
Commercial real estate	28,483	136	23	2	37	28,681	3
Leases	1,443	1	—	—	—	1,444	—
Total commercial	80,563	208	57	15	271	81,114	55
Residential mortgages(1)	28,779	66	42	425	236	29,548	199
Home equity	13,393	41	15	—	235	13,684	190
Automobile	12,934	131	38	—	52	13,155	9
Education	13,006	32	19	4	33	13,094	3
Other retail	5,436	39	27	18	25	5,545	1
Total retail	73,548	309	141	447	581	75,026	402
Total	$154,111	$517	$198	$462	$852	$156,140	$457

	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 $425 million and $544 million of loans fully or partially guaranteed by the FHA, VA, and USDA at September 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 a loan or lease as nonaccrual.

At September 30, 2022 and December 31, 2021, the Company had collateral-dependent residential mortgage and home equity loans totaling $537 million and $542 million, respectively. At September 30, 2022 and December 31, 2021, the Company had collateral-dependent commercial loans totaling $18 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 $219 million and $142 million as of September 30, 2022 and December 31, 2021, respectively.

Troubled Debt Restructurings

The following tables summarize loans modified during the three and nine months ended September 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 September 30, 2022
		Amortized Cost Basis
(dollars in millions)	Number of Contracts		Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	6		$—	$2	$46	$48
Total commercial	6		—	2	46	48
Residential mortgages	185		6	21	13	40
Home equity	68		2	—	2	4
Automobile	135		—	—	1	1
Education	245		—	—	8	8
Other retail	590		2	—	—	2
Total retail	1,223		10	21	24	55
Total	1,229		$10	$23	$70	$103

		Three Months Ended September 30, 2021
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	7	$—	$38	$10	$48
Total commercial	7	—	38	10	48
Residential mortgages	101	2	7	7	16
Home equity	69	—	1	3	4
Automobile	224	—	—	1	1
Education	226	—	—	8	8
Other retail	549	3	—	1	4
Total retail	1,169	5	8	20	33
Total	1,176	$5	$46	$30	$81

		Nine Months Ended September 30, 2022
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	25	$—	$26	$80	$106
Total commercial	25	—	26	80	106
Residential mortgages	1,656	44	74	248	366
Home equity	318	4	1	16	21
Automobile	447	1	—	3	4
Education	481	—	—	19	19
Other retail	1,678	7	—	1	8
Total retail	4,580	56	75	287	418
Total	4,605	$56	$101	$367	$524

		Nine Months Ended September 30, 2021
		Amortized Cost Basis
(dollars in millions)	Number of Contracts	Interest Rate Reduction(1)	Maturity Extension(2)	Other(3)	Total
Commercial and industrial	29	$—	$44	$64	$108
Total commercial	29	—	44	64	108
Residential mortgages	814	14	133	54	201
Home equity	318	3	9	10	22
Automobile	1,272	1	—	14	15
Education	638	—	—	21	21
Other retail	1,764	7	—	2	9
Total retail	4,806	25	142	101	268
Total	4,835	$25	$186	$165	$376

(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 for the three months ended September 30, 2021, and $2 million and $5 million for the nine months ended September 30, 2022 and 2021, respectively.

Unfunded commitments related to TDRs were $117 million and $56 million at September 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 September 30,		Nine Months Ended September 30,
(in millions)	2022	2021	2022	2021
Commercial TDRs	$—	$—	$—	$23
Retail TDRs(1)	28	37	224	66
Total	$28	$37	$224	$89

(1) Includes $18 million and $34 million of loans fully or partially government guaranteed by the FHA, VA, and USDA for the three months ended September 30, 2022 and 2021, respectively, and $174 million and $37 million for the nine months ended September 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 September 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.