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FAIR VALUE MEASUREMENTS | 12 Months Ended
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Dec. 31, 2021
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | NOTE 20 - 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 election of the fair value option for financial assets and financial liabilities is optional and irrevocable. Applying fair value accounting to residential mortgage LHFS better aligns the reported results of the economic changes in the value of these loans and their related economic hedge instruments. Certain commercial and industrial, and commercial real estate LHFS are managed by a commercial secondary loan desk that provides liquidity to banks, finance companies and institutional investors. Applying fair value accounting to this portfolio is appropriate because the Company holds these loans with the intent to sell within the near-term periods. The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of LHFS measured at fair value:
| December 31, 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 | $2,657 |  | $2,591 |  | $66 |  |  | $3,416 |  | $3,260 |  | $156 |
Commercial and industrial, and commercial real estate loans held for sale, at fair value | 76 |  | 79 |  | (3) |  |  | 148 |  | 153 |  | (5) |
Residential Mortgage Loans Held for Sale The fair value of residential mortgage LHFS is derived from observable mortgage security prices and includes adjustments for loan servicing value, agency guarantee fees, and other loan level attributes which are mostly observable in the marketplace. Credit risk does not significantly impact the valuation since these loans are sold shortly after origination. Therefore, the Company classifies residential mortgage LHFS in Level 2 of the fair value hierarchy. Residential mortgage loans accounted for under the fair value option are initially measured at fair value when the financial asset is originated or purchased. Subsequent changes in fair value are recognized in mortgage banking fees on the Consolidated Statements of Operations. Interest income on residential mortgage loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income. Commercial and Industrial, and Commercial Real Estate Loans Held for Sale The fair value of commercial and industrial, and commercial real estate LHFS is estimated using observable prices of similar loans that transact in the marketplace. In addition, Citizens uses external pricing services that provide estimates of fair values based on quotes from various dealers transacting in the market, sector curves or benchmarking techniques. Therefore, the Company classifies the commercial and industrial, and commercial real estate loans managed by the commercial secondary loan desk in Level 2 of the fair value hierarchy given the observable market inputs. The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in capital markets fees on the Consolidated Statements of Operations. Since all loans in the Company’s commercial trading portfolio consist of floating rate obligations, all changes in fair value are due to changes in credit risk. Such credit-related fair value changes may include observed changes in overall credit spreads and/or changes to the creditworthiness of an individual borrower. Interest income on commercial and industrial, and commercial real estate loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income. Recurring Fair Value Measurements Citizens measures fair value using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon quoted market prices in an active market, where available. If quoted prices are not available, observable market-based inputs or independently sourced parameters are used to develop fair value, whenever possible. Such inputs may include prices of similar assets or liabilities, yield curves, interest rates, prepayment speeds, and foreign exchange rates. A portion of the Company’s assets and liabilities are carried at fair value, including securities available for sale, derivative instruments and other investment securities. In addition, the Company elects to account for its loans associated with its mortgage banking business and secondary loan trading desk at fair value. Citizens classifies its assets and liabilities that are carried at fair value in accordance with the three-level valuation hierarchy: •Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities. •Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by market data for substantially the full term of the asset or liability. •Level 3. Unobservable inputs that are supported by little or no market information and that are significant to the fair value measurement. Classification in the hierarchy is based upon the lowest level input that is significant to the fair value measurement of the asset or liability. For instruments classified in Levels 1 and 2 where inputs are primarily based upon observable market data, there is less judgment applied in arriving at the fair value. For instruments classified in Level 3, management judgment is more significant due to the lack of observable market data. Citizens reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in fair value measurements may result in a reclassification between the fair value hierarchy levels and are recognized based on period-end balances. Citizens utilizes a variety of valuation techniques to measure its assets and liabilities at fair value on a recurring basis. The valuation methodologies used for significant assets and liabilities carried on the balance sheet at fair value on a recurring basis are presented below: Debt securities available for sale The fair value of debt securities classified as AFS is based upon quoted prices, if available. Where observable quoted prices are available in an active market, the security is classified as Level 1 in the fair value hierarchy. Classes of instruments that are valued using this market approach include debt securities issued by the U.S. Treasury. If quoted market prices are not available, the fair value for the security is estimated under the market or income approach using pricing models. These instruments are classified as Level 2 because they currently trade in active markets and the inputs to the valuations are observable. The pricing models used to value securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each security’s value to changes in interest rates and prepayment speeds. Classes of instruments that are valued using this market approach include specified pool mortgage “pass-through” securities, CLOs, and other debt securities issued by U.S. government-sponsored entities and state and political subdivisions. The pricing models used to value securities under the income approach generally begin with the contractual cash flows of each security and make adjustments based on forecasted prepayment speeds, default rates, and other market-observable information. The adjusted cash flows are then discounted at a rate derived from observed rates of return for comparable assets or liabilities that are traded in the market. Classes of instruments that are valued using this market approach include residential and commercial CMOs. A significant majority of the Company’s Level 1 and 2 debt securities are priced using an external pricing service. Citizens verifies the accuracy of the pricing provided by its primary outside pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for the Company’s securities portfolio for comparison purposes. Any valuation discrepancies beyond a certain threshold are researched and, if necessary, corroborated by an independent outside broker. In certain cases where there is limited activity or less transparency around inputs to the valuation model, securities are classified as Level 3. Mortgage Servicing Rights MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. The fair value is calculated using a discounted cash flow model which uses assumptions, including weighted-average life, prepayment assumptions and weighted-average option adjusted spread. The underlying assumptions and estimated values are corroborated by values received from independent third parties based on their review of the servicing portfolio, and comparisons to market transactions. In addition, the MSR Policy is approved by the Asset Liability Committee. Refer to Note 8 for more information. Derivatives The vast majority of the Company’s derivatives portfolio is composed of “plain vanilla” interest rate swaps, which are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined utilizing models that primarily use market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instrument’s fixed and variable cash flows, which are then discounted using an appropriate yield curve (i.e., LIBOR or Overnight Index Swap curve) to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity as the methodologies used do not require significant judgment. Citizens also considers certain adjustments to the modeled price that market participants would make when pricing each instrument, including a credit valuation adjustment that reflects the credit quality of the swap counterparty. Citizens incorporates the effect of exposure to a particular counterparty’s credit by netting its derivative contracts with the available collateral and calculating a credit valuation adjustment on the basis of the net position with the counterparty where permitted. The determination of this adjustment requires judgment on behalf of Company management; however, the total amount of this portfolio-level adjustment is not material to the total fair value of the interest rate swaps. Therefore, interest rate swaps are classified as Level 2 in the valuation hierarchy. 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 fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy. The fair value of TBA contracts 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 TBA contracts in Level 2 of the fair value hierarchy given the observable market inputs. Other contracts primarily consist of interest rate lock commitments and forward sales commitments of residential MBS used to economically hedge existing mortgage commitments that are pending closure. Forward sales commitments are valued based on the value of similarly situated pools of mortgages trading in the market, adjusted for the unique characteristics of the pool. Since these inputs are observable in the market, these derivatives are classified as Level 2 in the fair value hierarchy. Interest rate lock commitments are valued utilizing internally generated loan closing rate assumptions, which are a significant unobservable input, and therefore are classified as Level 3 in the fair value hierarchy. Equity Securities, at fair value The fair value of money market mutual fund investments is determined based upon unadjusted quoted market prices and is considered a Level 1 fair value measurement. The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities, on a recurring basis at December 31, 2021:
(in millions) | Total | Level 1 | Level 2 | Level 3
Debt securities available for sale: |  |  |  |
Mortgage-backed securities | $24,847 |  | $— |  | $24,847 |  | $— |
Collateralized loan obligations | 1,207 |  | — |  | 1,207 |  | — |
State and political subdivisions | 2 |  | — |  | 2 |  | — |
U.S. Treasury and other | 11 |  | 11 |  | — |  | — |
Total debt securities available for sale | 26,067 |  | 11 |  | 26,056 |  | — |
Loans held for sale, at fair value: |  |  |  |
Residential loans held for sale | 2,657 |  | — |  | 2,657 |  | — |
Commercial loans held for sale | 76 |  | — |  | 76 |  | — |
Total loans held for sale, at fair value | 2,733 |  | — |  | 2,733 |  | — |
Mortgage servicing rights | 1,029 |  | — |  | — |  | 1,029 |
Derivative assets: |  |  |  |
Interest rate contracts | 692 |  | — |  | 692 |  | — |
Foreign exchange contracts | 263 |  | — |  | 263 |  | — |
Commodities contracts | 508 |  | — |  | 508 |  | — |
TBA contracts | 8 |  | — |  | 8 |  | — |
Other contracts | 38 |  | — |  | — |  | 38 |
Total derivative assets | 1,509 |  | — |  | 1,471 |  | 38 |
Equity securities, at fair value(1) | 102 |  | 95 |  | 7 |  | — |
Total assets | $31,440 |  | $106 |  | $30,267 |  | $1,067 |
Derivative liabilities: |  |  |  |
Interest rate contracts | $176 |  | $— |  | $176 |  | $— |
Foreign exchange contracts | 231 |  | — |  | 231 |  | — |
Commodities contracts | 505 |  | — |  | 505 |  | — |
TBA contracts | 8 |  | — |  | 8 |  | — |
Other contracts | 2 |  | — |  | 2 |  | — |
Total derivative liabilities | 922 |  | — |  | 922 |  | — |
Total liabilities | $922 |  | $— |  | $922 |  | $— |
(1) Excludes investments of $7 million that are measured at fair value using the net asset value per share (or its equivalent) practical expedient. 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 table presents a roll forward of the balance sheet amounts for assets measured at fair value on a recurring basis and classified as Level 3:
| For the Year Ended December 31,
| 2021 |  | 2020
(in millions) | Mortgage Servicing Rights |  |  |  | Other Derivative Contracts |  | Mortgage Servicing Rights |  | Asset-Backed Securities |  | Other Derivative Contracts
Beginning balance | $658 |  |  |  |  | $197 |  |  | $642 |  |  | $— |  |  | $19 |
Transfers upon election of fair value method(1) | — |  |  |  |  | — |  |  | 190 |  |  | — |  |  | — |
Beginning balance, adjusted | 658 |  |  |  |  | 197 |  |  | 832 |  |  | — |  |  | 19 |
Purchases | — |  |  |  |  | — |  |  | — |  |  | 813 |  |  | — |
Issuances | 419 |  |  |  |  | 377 |  |  | 324 |  |  | — |  |  | 900 |
Settlements(2) | (212) |  |  |  |  | (328) |  |  | (196) |  |  | — |  |  | (1,133) |
Changes in fair value during the period recognized in earnings(3) | 164 |  |  |  |  | (208) |  |  | (302) |  |  | — |  |  | 411 |
Transfer from AFS to HTM(4) | — |  |  |  |  | — |  |  | — |  |  | (813) |  |  | — |
Ending balance | $1,029 |  |  |  |  | $38 |  |  | $658 |  |  | $— |  |  | $197 |
(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. (4) In October 2020, Citizens concluded that it has the ability and intent to hold these assets to maturity and transferred them to HTM. Refer to Note 11 for additional information. 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 December 31, 2021
|  | Valuation Technique | Unobservable Input | Range (Weighted Average)
Mortgage servicing rights |  | Discounted Cash Flow | Constant prepayment rate | 9.40-26.32% CPR (10.70% CPR)
| Option adjusted spread | 370-1,228 bps (596 bps)
Other derivative contracts |  | Internal Model | Pull through rate | 9.39-100.00% (77.51%)
| MSR value | (17.00)-168.75 bps (96.13 bps)
Nonrecurring Fair Value Measurements Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. An example of a nonrecurring use of fair value includes loan impairments for certain loans and leases. The following valuation techniques are utilized to measure significant assets for which the Company utilizes fair value on a nonrecurring basis: Impaired Loans The carrying amount of collateral-dependent impaired loans is compared to the appraised value of the collateral less costs to dispose and is classified as Level 2. Any excess of carrying amount over the appraised value is charged to the ALLL. The following table presents losses on assets measured at fair value on a nonrecurring basis and recorded in earnings:
| Year Ended December 31,
(in millions) | 2021 |  | 2020 |  | 2019
Collateral-dependent loans | ($27) |  |  | ($82) |  |  | ($34) |
The following table presents assets measured at fair value on a nonrecurring basis:
| December 31, 2021 |  | December 31, 2020
(in millions) | Total | Level 1 | Level 2 | Level 3 |  | Total | Level 1 | Level 2 | Level 3
Collateral-dependent loans | $645 |  | $— |  | $645 |  | $— |  |  | $758 |  | $— |  | $758 |  | $— |
Disclosures about Fair Value of Financial Instruments The following table presents the estimated fair value for financial instruments not recorded at fair value in the Consolidated Financial Statements. The carrying amounts are recorded in the Consolidated Balance Sheets under the indicated captions:
| December 31, 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 | $2,242 |  | $2,289 |  |  | $— |  | $— |  |  | $1,505 |  | $1,557 |  |  | $737 |  | $732 |
Other loans held for sale | 735 |  | 735 |  |  | — |  | — |  |  | — |  | — |  |  | 735 |  | 735 |
Loans and leases | 128,163 |  | 128,156 |  |  | — |  | — |  |  | 645 |  | 645 |  |  | 127,518 |  | 127,511 |
Other assets | 624 |  | 624 |  |  | — |  | — |  |  | 609 |  | 609 |  |  | 15 |  | 15 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | 154,361 |  | 154,366 |  |  | — |  | — |  |  | 154,361 |  | 154,366 |  |  | — |  | — |
Short-term borrowed funds | 74 |  | 74 |  |  | — |  | — |  |  | 74 |  | 74 |  |  | — |  | — |
Long-term borrowed funds | 6,932 |  | 7,188 |  |  | — |  | — |  |  | 6,932 |  | 7,188 |  |  | — |  | — |
| 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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