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FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | NOTE 13 - FAIR VALUE MEASUREMENTS Citizens measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Citizens also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this Note for assets and liabilities that are not required to be reported at fair value in the financial statements. Fair Value Option Citizens elected to account for residential mortgage LHFS and certain commercial and commercial real estate LHFS at fair value.
| September 30, 2020 |  | December 31, 2019
(in millions) | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Greater (Less) Aggregate Unpaid Principal |  | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Greater (Less) Aggregate Unpaid Principal
Residential mortgage loans held for sale, at fair value |  | $3,425 |  |  | $3,256 |  |  | $169 |  |  |  | $1,778 |  |  | $1,727 |  |  | $51 |
Commercial and commercial real estate loans held for sale, at fair value | 162 |  | 172 |  | (10 | ) |  | 168 |  | 175 |  | (7 | )
For more information on the election of the fair value option for these assets see Note 19 in the Company’s 2019 Form 10-K. The following table presents the changes in fair value for assets where the Company has elected the fair value option:
| Three Months Ended September 30, |  | Nine Months Ended September 30, |
(in millions) | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |  | Affected Line Item in the Consolidated Statements of Operations
Residential mortgage loans held for sale, at fair value |  | $46 |  |  |  | ($4 | ) |  |  | $149 |  |  |  | $5 |  | Mortgage banking fees
Commercial and commercial real estate loans held for sale, at fair value | 6 |  |  | — |  |  | (2 | ) |  | 4 |  | Capital market fees
Recurring Fair Value Measurements Citizens utilizes a variety of valuation techniques to measure its assets and liabilities at fair value on a recurring basis. For more information on the valuation techniques utilized to measure recurring fair value see Note 19 in the Company’s 2019 Form 10-K. Asset-backed securities The fair value of securities backed by education loans is estimated using observable inputs, including prices of similar securities that transact in the marketplace and current market assumptions related to yield, as well as unobservable inputs, including expected conditional default rates and prepayment speed estimates. Therefore, the Company classifies these asset-backed securities in Level 3 of the fair value hierarchy given the use of unobservable inputs. Forward commitments to sell to-be-announced mortgage securities The fair value of TBAs is estimated using observable prices of similar loan pools that transact in the marketplace, as well as sector curves and benchmarking techniques. Therefore, the Company classifies TBAs in Level 2 of the fair value hierarchy given the observable market inputs. The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at September 30, 2020:
(in millions) | Total |  | Level 1 |  | Level 2 |  | Level 3 |
Debt securities available for sale: |  |  |  |
Mortgage-backed securities |  | $22,056 |  |  | $— |  |  | $22,056 |  |  | $— |
Asset-backed securities | 813 |  | — |  | — |  | 813 |
State and political subdivisions | 4 |  | — |  | 4 |  | — |
U.S. Treasury and other | 11 |  | 11 |  | — |  | — |
Total debt securities available for sale | 22,884 |  | 11 |  | 22,060 |  | 813 |
Loans held for sale, at fair value: |  |  |  |
Residential loans held for sale | 3,425 |  | — |  | 3,425 |  | — |
Commercial loans held for sale | 162 |  | — |  | 162 |  | — |
Total loans held for sale, at fair value | 3,587 |  | — |  | 3,587 |  | — |
Mortgage servicing rights | 606 |  | — |  | — |  | 606 |
Derivative assets: |  |  |  |
Interest rate contracts | 1,765 |  | — |  | 1,765 |  | — |
Foreign exchange contracts | 239 |  | — |  | 239 |  | — |
TBA contracts | 7 |  | — |  | 7 |  | — |
Other contracts | 275 |  | — |  | 66 |  | 209 |
Total derivative assets | 2,286 |  | — |  | 2,077 |  | 209 |
Equity securities, at fair value: |  |  |  |
Money market mutual fund investments | 57 |  | 57 |  | — |  | — |
Total equity securities, at fair value | 57 |  | 57 |  | — |  | — |
Total assets |  | $29,420 |  |  | $68 |  |  | $27,724 |  |  | $1,628 |
Derivative liabilities: |  |  |  |
Interest rate contracts |  | $217 |  |  | $— |  |  | $217 |  |  | $— |
Foreign exchange contracts | 189 |  | — |  | 189 |  | — |
TBA contracts | 34 |  | — |  | 34 |  | — |
Other contracts | 66 |  | — |  | 66 |  | — |
Total derivative liabilities | 506 |  | — |  | 506 |  | — |
Total liabilities |  | $506 |  |  | $— |  |  | $506 |  |  | $— |
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at December 31, 2019:
(in millions) | Total |  | Level 1 |  | Level 2 |  | Level 3 |
Debt securities available for sale: |  |  |  |
Mortgage-backed securities |  | $20,537 |  |  | $— |  |  | $20,537 |  |  | $— |
State and political subdivisions | 5 |  | — |  | 5 |  | — |
U.S. Treasury and other | 71 |  | 71 |  | — |  | — |
Total debt securities available for sale | 20,613 |  | 71 |  | 20,542 |  | — |
Loans held for sale, at fair value: |  |  |  |
Residential loans held for sale | 1,778 |  | — |  | 1,778 |  | — |
Commercial loans held for sale | 168 |  | — |  | 168 |  | — |
Total loans held for sale, at fair value | 1,946 |  | — |  | 1,946 |  | — |
Mortgage servicing rights | 642 |  | — |  | — |  | 642 |
Derivative assets: |  |  |  |
Interest rate contracts | 773 |  | — |  | 773 |  | — |
Foreign exchange contracts | 174 |  | — |  | 174 |  | — |
Other contracts | 37 |  | — |  | 18 |  | 19 |
Total derivative assets | 984 |  | — |  | 965 |  | 19 |
Equity securities, at fair value: |  |  |  |
Money market mutual fund investments | 47 |  | 47 |  | — |  | — |
Total equity securities, at fair value | 47 |  | 47 |  | — |  | — |
Total assets |  | $24,232 |  |  | $118 |  |  | $23,453 |  |  | $661 |
Derivative liabilities: |  |  |  |
Interest rate contracts |  | $133 |  |  | $— |  |  | $133 |  |  | $— |
Foreign exchange contracts | 166 |  | — |  | 166 |  | — |
Other contracts | 23 |  | — |  | 23 |  | — |
Total derivative liabilities | 322 |  | — |  | 322 |  | — |
Total liabilities |  | $322 |  |  | $— |  |  | $322 |  |  | $— |
The following tables present a roll forward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as Level 3:
| Three Months Ended September 30, 2020 |  | Nine Months Ended September 30, 2020
(in millions) | Mortgage Servicing Rights | Asset-Backed Securities | Other Derivative Contracts |  | Mortgage Servicing Rights | Asset-Backed Securities | Other Derivative Contracts
Beginning balance |  | $568 |  |  | $— |  |  | $173 |  |  |  | $642 |  |  | $— |  |  | $19 |
Transfers upon election of fair value method | — |  | — |  | — |  |  | 190 |  | — |  | — |
Beginning balance, adjusted | 568 |  | — |  | 173 |  |  | 832 |  | — |  | 19 |
Purchases | — |  | 813 |  | — |  |  | — |  | 813 |  | — |
Issuances | 85 |  | — |  | 283 |  |  | 238 |  | — |  | 688 |
Settlements (1) | (55 | ) | — |  | (372 | ) |  | (141 | ) | — |  | (792 | )
Changes in fair value during the period recognized in earnings (2) | 8 |  | — |  | 125 |  |  | (323 | ) | — |  | 294 |
Ending balance |  | $606 |  |  | $813 |  |  | $209 |  |  |  | $606 |  |  | $813 |  |  | $209 |
| Three Months Ended September 30, 2019 |  | Nine Months Ended September 30, 2019
(in millions) | Mortgage Servicing Rights | Other Derivative Contracts |  | Mortgage Servicing Rights | Other Derivative Contracts
Beginning balance |  | $531 |  |  | $25 |  |  |  | $600 |  |  | $— |
Issuances | 78 |  | 61 |  |  | 170 |  | 104 |
Settlements (1) | (31 | ) | (64 | ) |  | (88 | ) | (107 | )
Changes in fair value during the period recognized in earnings (2) | (68 | ) | 4 |  |  | (172 | ) | 11 |
Transfers from Level 2 to Level 3 (3) | — |  | — |  |  | — |  | 18 |
Ending balance |  | $510 |  |  | $26 |  |  |  | $510 |  |  | $26 |
(1) Represents changes in value of the MSRs due to i) passage of time including the impact from both regularly scheduled loan principal payments and partial paydowns, and ii) loans that paid off during the period. (2) Represents changes in value primarily driven by market conditions. These changes are recorded in mortgage banking fees in the Consolidated Statements of Operations. (3) Reflects changes in the significance of unobservable inputs on derivative contracts associated with mortgage origination activities. The following table presents quantitative information about the Company’s Level 3 assets, including the range and weighted-average of the significant unobservable inputs used to fair value these assets, as well as valuation techniques used.
| As of September 30, 2020
| Valuation Technique | Unobservable Input | Range (Weighted Average)
Mortgage servicing rights | Discounted Cash Flow | Constant prepayment rate | 10.87-37.32% CPR (19.4% CPR)
Option adjusted spread | 350-1,060 bps (608 bps)
Asset-Backed Securities | Discounted Cash Flow | Conditional prepayment rate | 8.00%
Constant default rate | 1.85%
Other derivative contracts | Internal Model | Pull through rate | 11.72-100.00% (82.45%)
MSR value | (26.73)-124.27 bps (81.38 bps)
Nonrecurring Fair Value Measurements Fair value is also used on a nonrecurring basis to evaluate collateral-dependent loans for impairment or for disclosure purposes. For more information on the valuation techniques utilized to measure nonrecurring fair value see Note 19 in the Company’s 2019 Form 10-K. The following table presents losses on assets measured at fair value on a nonrecurring basis and recorded in earnings:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in millions) | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Collateral-dependent loans |  | ($21 | ) |  |  | ($8 | ) |  |  | ($65 | ) |  |  | ($36 | )
The following table presents assets measured at fair value on a nonrecurring basis:
| September 30, 2020 |  | December 31, 2019
(in millions) | Total |  | Level 1 |  | Level 2 |  | Level 3 |  |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |
Collateral-dependent loans |  | $633 |  |  | $— |  |  | $633 |  |  | $— |  |  |  | $312 |  |  | $— |  |  | $312 |  |  | $— |
The following table presents the estimated fair value for financial instruments not recorded at fair value in the unaudited interim Consolidated Financial Statements. The carrying amounts are recorded in the Consolidated Balance Sheets under the indicated captions:
| September 30, 2020
| Total |  | Level 1 |  | Level 2 |  | Level 3
(in millions) | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Securities held to maturity |  | $2,578 |  |  | $2,709 |  |  |  | $— |  |  | $— |  |  |  | $2,578 |  |  | $2,709 |  |  |  | $— |  |  | $— |
Equity securities, at cost | 605 |  | 605 |  |  | — |  | — |  |  | 597 |  | 597 |  |  | 8 |  | 8 |
Other loans held for sale | 127 |  | 127 |  |  | — |  | — |  |  | — |  | — |  |  | 127 |  | 127 |
Loans and leases | 124,071 |  | 125,498 |  |  | — |  | — |  |  | 633 |  | 633 |  |  | 123,438 |  | 124,865 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | 142,921 |  | 143,004 |  |  | — |  | — |  |  | 142,921 |  | 143,004 |  |  | — |  | — |
Short-term borrowed funds | 252 |  | 252 |  |  | — |  | — |  |  | 252 |  | 252 |  |  | — |  | — |
Long-term borrowed funds | 9,109 |  | 9,568 |  |  | — |  | — |  |  | 9,109 |  | 9,568 |  |  | — |  | — |
| December 31, 2019
| Total |  | Level 1 |  | Level 2 |  | Level 3
(in millions) | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Securities held to maturity |  | $3,202 |  |  | $3,242 |  |  |  | $— |  |  | $— |  |  |  | $3,202 |  |  | $3,242 |  |  |  | $— |  |  | $— |
Equity securities, at cost | 807 |  | 807 |  |  | — |  | — |  |  | 807 |  | 807 |  |  | — |  | — |
Other loans held for sale | 1,384 |  | 1,384 |  |  | — |  | — |  |  | — |  | — |  |  | 1,384 |  | 1,384 |
Loans and leases | 119,088 |  | 119,792 |  |  | — |  | — |  |  | 312 |  | 312 |  |  | 118,776 |  | 119,480 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | 125,313 |  | 125,340 |  |  | — |  | — |  |  | 125,313 |  | 125,340 |  |  | — |  | — |
Short-term borrowed funds | 274 |  | 274 |  |  | — |  | — |  |  | 274 |  | 274 |  |  | — |  | — |
Long-term borrowed funds | 14,047 |  | 14,228 |  |  | — |  | — |  |  | 14,047 |  | 14,228 |  |  | — |  | — |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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