LOANS AND LEASES

12 Months Ended

Dec. 31, 2023

NOTE 5 - LOANS AND LEASES

Loans are classified as held for investment when management has the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. Loans held for investment are reported at the amount of their outstanding principal, net of charge-offs, unearned income, deferred loan origination fees and costs, and unamortized premiums and discounts on purchased loans. Deferred loan origination fees and costs and premiums and discounts on purchased loans are amortized as an adjustment of yield over the life of the loan using the effective interest method. Unamortized amounts that remain when a loan is prepaid or sold are recorded as interest income or gain (loss) on sale, respectively. Credit card receivables include billed and uncollected interest and fees.

Interest income on loans is determined using the effective interest method, which calculates periodic interest income at a constant effective yield on the net investment in the loan, providing a constant rate of return over the loan term. Loans accounted for using the fair value option are measured at fair value with corresponding changes reported in mortgage banking fees for residential mortgage LHFS and in capital markets fees for commercial LHFS in the Consolidated Statements of Operations.

Commitment fees for loans that are likely to be drawn down, along with other credit-related fees, are deferred and recognized as an adjustment to the effective interest rate over the loan term. Commitment fees are recognized over the commitment period on a straight-line basis if it is unlikely that a loan will be drawn down and are reported in letter of credit and loan fees in the Consolidated Statements of Operations.

Loans and leases are disclosed in portfolio segments and classes. The Company’s loan and lease portfolio segments are commercial and retail. The classes of loans and leases are: commercial and industrial, commercial real estate, leases, residential mortgages, home equity, automobile, education and other retail.

The following table presents loans and leases, excluding LHFS:


	December 31,
(dollars in millions)	2023	2022
Commercial and industrial	$43,826	$51,836
Commercial real estate	29,471	28,865
Leases	1,148	1,479
Total commercial	74,445	82,180
Residential mortgages	31,332	29,921
Home equity	15,040	14,043
Automobile	8,258	12,292
Education	11,834	12,808
Other retail	5,050	5,418
Total retail	71,514	74,482
Total loans and leases	$145,959	$156,662

Accrued interest receivable on loans and leases held for investment totaled $875 million and $820 million as of December 31, 2023 and 2022, respectively, and is included in other assets in the Consolidated Balance Sheets.

Loans pledged as collateral for FHLB borrowing capacity, primarily residential mortgages and home equity products, totaled $36.0 billion and $38.4 billion at December 31, 2023 and 2022, respectively. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, were primarily comprised of education, automobile, commercial and industrial, and commercial real estate loans, and totaled $31.9 billion and $34.8 billion at December 31, 2023 and 2022, respectively.

Loans are classified as held for sale when management does not have the intent and ability to hold the loan for the foreseeable future. LHFS for which the fair value option is not elected are carried at the lower of amortized cost or fair value less costs to sell, with any write-downs or subsequent recoveries recognized in other income in the Consolidated Statements of Operations. Citizens has elected to account for residential mortgage LHFS and certain commercial LHFS at fair value. See Note 20 for additional information.

The following table presents the composition of LHFS:


	December 31, 2023			December 31, 2022
(dollars in millions)	Residential Mortgages(1)	Commercial(2)	Total	Residential Mortgages(1)	Commercial(2)	Total
Loans held for sale at fair value	$614	$62	$676	$666	$108	$774
Other loans held for sale	—	103	103	—	208	208

(1) Residential mortgage LHFS are originated for sale.

(2) Commercial LHFS at fair value consist of loans managed by the Company’s commercial secondary loan desk. Other commercial LHFS primarily consist of loans associated with the Company’s syndication business.

Citizens leases equipment for commercial use with a primary focus on middle-market and mid-corporate clients for large capital equipment acquisitions including railcars, trucks and trailers, and other equipment. The determination of whether an arrangement is a lease and the related lease classification are made at lease inception. Lease terms predominantly range from three to ten years and may include options to purchase the leased property prior to the end of the lease term. The Company does not have lease agreements that contain both lease and non-lease components.

A lessee is evaluated from a credit perspective using the same underwriting standards and procedures for a loan borrower. A lessee is expected to make rental payments based on its cash flows and the viability of its operations. Leases are not typically evaluated as collateral-based transactions and, therefore, the lessee’s overall financial strength is the most important credit evaluation factor.

The components of the net investment in direct financing and sales-type leases, before ALLL, are presented below:


(dollars in millions)	December 31, 2023	December 31, 2022
Total future minimum lease rentals	$942	$1,193
Estimated residual value of leased equipment (non-guaranteed)	322	413
Initial direct costs	5	5
Unearned income	(121)	(132)
Total leases	$1,148	$1,479

Interest income on direct financing and sales-type leases for the years ended December 31, 2023, 2022 and 2021 was $46 million, $46 million and $49 million, respectively, and is reported within interest and fees on loans and leases in the Consolidated Statements of Operations.

A maturity analysis of direct financing and sales-type lease receivables at December 31, 2023 is presented below:


Year			(dollars in millions)
2024			$258
2025			213
2026			156
2027			133
2028			84
Thereafter			98
Total undiscounted future minimum lease rentals			$942