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FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | NOTE 12 - 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 industrial, and commercial real estate LHFS at fair value. The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of LHFS measured at fair value:
| September 30, 2021 |  | December 31, 2020
(in millions) | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Greater (Less) Than Aggregate Unpaid Principal |  | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Greater (Less) Than Aggregate Unpaid Principal
Residential mortgage loans held for sale, at fair value | $3,104 |  | $3,029 |  | $75 |  |  | $3,416 |  | $3,260 |  | $156 |
Commercial and industrial, and commercial real estate loans held for sale, at fair value | 73 |  | 75 |  | (2) |  |  | 148 |  | 153 |  | (5) |
For more information on the election of the fair value option for these assets see Note 19 in the Company’s 2020 Form 10-K. 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 2020 Form 10-K. Collateralized Loan Obligations The fair value of CLOs is estimated using observable inputs, including prices of similar securities that trade in the market. The Company classifies these securities in Level 2 of the fair value hierarchy using these observable inputs. Derivatives - Commodities Contracts The fair value of commodity derivatives uses the mid-point of market observable quoted prices as an input into the fair value model. The model uses the observed market prices combined with other market observed inputs to derive the fair value of the instrument, which generally classifies it as Level 2 instrument. The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities, on a recurring basis at September 30, 2021:
(in millions) | Total | Level 1 | Level 2 | Level 3
Debt securities available for sale: |  |  |  |
Mortgage-backed securities | $24,131 |  | $— |  | $24,131 |  | $— |
Collateralized loan obligations | 767 |  | — |  | 767 |  | — |
State and political subdivisions | 2 |  | — |  | 2 |  | — |
U.S. Treasury and other | 11 |  | 11 |  | — |  | — |
Total debt securities available for sale | 24,911 |  | 11 |  | 24,900 |  | — |
Loans held for sale, at fair value: |  |  |  |
Residential loans held for sale | 3,104 |  | — |  | 3,104 |  | — |
Commercial loans held for sale | 73 |  | — |  | 73 |  | — |
Total loans held for sale, at fair value | 3,177 |  | — |  | 3,177 |  | — |
Mortgage servicing rights | 978 |  | — |  | — |  | 978 |
Derivative assets: |  |  |  |
Interest rate contracts | 930 |  | — |  | 930 |  | — |
Foreign exchange contracts | 249 |  | — |  | 249 |  | — |
Commodities contracts | 822 |  | — |  | 822 |  | — |
TBA contracts | 44 |  | — |  | 44 |  | — |
Other contracts | 53 |  | — |  | — |  | 53 |
Total derivative assets | 2,098 |  | — |  | 2,045 |  | 53 |
Equity securities, at fair value | 88 |  | 88 |  | — |  | — |
Total assets | $31,252 |  | $99 |  | $30,122 |  | $1,031 |
Derivative liabilities: |  |  |  |
Interest rate contracts | $169 |  | $— |  | $169 |  | $— |
Foreign exchange contracts | 205 |  | — |  | 205 |  | — |
Commodities contracts | 822 |  | — |  | 822 |  | — |
TBA contracts | 9 |  | — |  | 9 |  | — |
Total derivative liabilities | 1,205 |  | — |  | 1,205 |  | — |
Total liabilities | $1,205 |  | $— |  | $1,205 |  | $— |
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities, on a recurring basis at December 31, 2020:
(in millions) | Total | Level 1 | Level 2 | Level 3
Debt securities available for sale: |  |  |  |
Mortgage-backed securities | $22,928 |  | $— |  | $22,928 |  | $— |
State and political subdivisions | 3 |  | — |  | 3 |  | — |
U.S. Treasury and other | 11 |  | 11 |  | — |  | — |
Total debt securities available for sale | 22,942 |  | 11 |  | 22,931 |  | — |
Loans held for sale, at fair value: |  |  |  |
Residential loans held for sale | 3,416 |  | — |  | 3,416 |  | — |
Commercial loans held for sale | 148 |  | — |  | 148 |  | — |
Total loans held for sale, at fair value | 3,564 |  | — |  | 3,564 |  | — |
Mortgage servicing rights | 658 |  | — |  | — |  | 658 |
Derivative assets: |  |  |  |
Interest rate contracts | 1,566 |  | — |  | 1,566 |  | — |
Foreign exchange contracts | 320 |  | — |  | 320 |  | — |
Commodities contracts | 62 |  | — |  | 62 |  | — |
TBA contracts | 8 |  | — |  | 8 |  | — |
Other contracts | 197 |  | — |  | — |  | 197 |
Total derivative assets | 2,153 |  | — |  | 1,956 |  | 197 |
Equity securities, at fair value | 66 |  | 66 |  | — |  | — |
Total assets | $29,383 |  | $77 |  | $28,451 |  | $855 |
Derivative liabilities: |  |  |  |
Interest rate contracts | $217 |  | $— |  | $217 |  | $— |
Foreign exchange contracts | 291 |  | — |  | 291 |  | — |
Commodities contracts | 61 |  | — |  | 61 |  | — |
TBA contracts | 65 |  | — |  | 65 |  | — |
Total derivative liabilities | 634 |  | — |  | 634 |  | — |
Total liabilities | $634 |  | $— |  | $634 |  | $— |
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, 2021 |  | Nine Months Ended September 30, 2021
(in millions) | Mortgage Servicing Rights |  | Other Derivative Contracts |  | Mortgage Servicing Rights |  | Other Derivative Contracts
Beginning balance | $902 |  |  | $89 |  |  | $658 |  |  | $197 |
Issuances | 109 |  |  | 81 |  |  | 318 |  |  | 323 |
Settlements(2) | (54) |  |  | (104) |  |  | (159) |  |  | (283) |
Changes in fair value during the period recognized in earnings(3) | 21 |  |  | (13) |  |  | 161 |  |  | (184) |
Ending balance | $978 |  |  | $53 |  |  | $978 |  |  | $53 |
| 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(1) | — |  | — |  | — |  |  | 190 |  | — |  | — |
Beginning balance, adjusted | 568 |  | — |  | 173 |  |  | 832 |  | — |  | 19 |
Purchases | — |  | 813 |  | — |  |  | — |  | 813 |  | — |
Issuances | 85 |  | — |  | 283 |  |  | 238 |  | — |  | 688 |
Settlements(2) | (55) |  | — |  | (372) |  |  | (141) |  | — |  | (792) |
Changes in fair value during the period recognized in earnings(3) | 8 |  | — |  | 125 |  |  | (323) |  | — |  | 294 |
Ending balance | $606 |  | $813 |  | $209 |  |  | $606 |  | $813 |  | $209 |
(1) Effective January 1, 2020, the Company elected to account for all MSRs previously accounted for under the amortization method under the fair value method. (2) 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. (3) Represents changes in value primarily driven by market conditions. These changes are recorded in mortgage banking fees in the Consolidated Statements of Operations. 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, 2021
|  | Valuation Technique | Unobservable Input | Range (Weighted Average)
Mortgage servicing rights |  | Discounted Cash Flow | Constant prepayment rate | 9.96-27.98% CPR (11.3% CPR)
| Option adjusted spread | 350-1,318 bps (582 bps)
Other derivative contracts |  | Internal Model | Pull through rate | 10.96-100.00% (83.30%)
| MSR value | (10.00)-145.29 bps (99.79 bps)
Nonrecurring Fair Value Measurements Fair value is also used on a nonrecurring basis to evaluate certain assets 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 2020 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) | 2021 |  | 2020 |  | 2021 |  | 2020
Collateral-dependent loans | ($4) |  |  | ($21) |  |  | ($23) |  |  | ($65) |
The following table presents assets measured at fair value on a nonrecurring basis:
| September 30, 2021 |  | December 31, 2020
(in millions) | Total | Level 1 | Level 2 | Level 3 |  | Total | Level 1 | Level 2 | Level 3
Collateral-dependent loans | $585 |  | $— |  | $585 |  | $— |  |  | $758 |  | $— |  | $758 |  | $— |
The following tables present 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, 2021
| 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: |  |  |  |  |  |  |  |  |  |  |
Debt securities held to maturity | $2,492 |  | $2,567 |  |  | $— |  | $— |  |  | $1,705 |  | $1,778 |  |  | $787 |  | $789 |
Other loans held for sale | 93 |  | 93 |  |  | — |  | — |  |  | — |  | — |  |  | 93 |  | 93 |
Loans and leases | 123,318 |  | 123,318 |  |  | — |  | — |  |  | 585 |  | 585 |  |  | 122,733 |  | 122,733 |
Other assets | 616 |  | 616 |  |  | — |  | — |  |  | 593 |  | 593 |  |  | 23 |  | 23 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | 152,221 |  | 152,237 |  |  | — |  | — |  |  | 152,221 |  | 152,237 |  |  | — |  | — |
Short-term borrowed funds | 8 |  | 8 |  |  | — |  | — |  |  | 8 |  | 8 |  |  | — |  | — |
Long-term borrowed funds | 6,947 |  | 7,260 |  |  | — |  | — |  |  | 6,947 |  | 7,260 |  |  | — |  | — |
| December 31, 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: |  |  |  |  |  |  |  |  |  |  |
Debt securities held to maturity | $3,235 |  | $3,357 |  |  | $— |  | $— |  |  | $2,342 |  | $2,464 |  |  | $893 |  | $893 |
Other loans held for sale | 439 |  | 439 |  |  | — |  | — |  |  | — |  | — |  |  | 439 |  | 439 |
Loans and leases | 123,090 |  | 123,678 |  |  | — |  | — |  |  | 758 |  | 758 |  |  | 122,332 |  | 122,920 |
Other assets | 604 |  | 604 |  |  | — |  | — |  |  | 596 |  | 596 |  |  | 8 |  | 8 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | 147,164 |  | 147,223 |  |  | — |  | — |  |  | 147,164 |  | 147,223 |  |  | — |  | — |
Short-term borrowed funds | 243 |  | 243 |  |  | — |  | — |  |  | 243 |  | 243 |  |  | — |  | — |
Long-term borrowed funds | 8,346 |  | 8,850 |  |  | — |  | — |  |  | 8,346 |  | 8,850 |  |  | — |  | — |

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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=123874694&loc=d3e19207-110258 + Details
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