Citizens 10Q - Q1 2015

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended
March 31, 2015

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From
(Not Applicable)
Commission File Number 001-36636
CITIZENS FINANCIAL GROUP, INC.
(Exact name of the registrant as specified in its charter)

Delaware
 
05-0412693
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
One Citizens Plaza, Providence, RI 02903
(Address of principal executive offices, including zip code)

(401) 456-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer                     [ ]          Accelerated filer      [ ]
Non-accelerated filer (Do not check if a smaller reporting company) [X]         Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

There were 537,022,384 shares of Registrant’s common stock ($0.01 par value) outstanding on May 1, 2015.


 
 
 
 
 
 
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1
CITIZENS FINANCIAL GROUP, INC.

 

GLOSSARY OF ACRONYMS AND TERMS
The following listing provides a comprehensive reference of common acronyms and terms we regularly use in our financial reporting:
AFS
 
Available for Sale
ALLL
 
Allowance for Loan and Lease Losses
AOCI
 
Accumulated Other Comprehensive Income
ASU
 
Accounting Standards Update
ATM
 
Automatic Teller Machine
BHC
 
Bank Holding Company
bps
 
Basis Points
C&I
 
Commercial and Industrial
Capital Plan Rule
 
Federal Reserve’s Regulation Y Capital Plan Rule
CBNA
 
Citizens Bank, N.A.
CBPA
 
Citizens Bank of Pennsylvania
CCAR
 
Comprehensive Capital Analysis and Review
CCO
 
Chief Credit Officer
CET1
 
Common Equity Tier 1
CEO
 
Chief Executive Officer
CFO
 
Chief Financial Officer
Citizens or CFG or the Company
 
Citizens Financial Group, Inc. and its Subsidiaries
CLTV
 
Combined Loan-to-Value
CMO
 
Collateralized Mortgage Obligation
CRE
 
Commercial Real Estate
CRO
 
Chief Risk Officer
DFAST
 
Dodd-Frank Act Stress Test
Dodd-Frank Act
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS
 
Earnings Per Share
ESPP
 
Employee Stock Purchase Program
ERISA
 
Employee Retirement Income Security Act of 1974
Fannie Mae (FNMA)
 
Federal National Mortgage Association
FASB
 
Financial Accounting Standards Board
FDIC
 
Federal Deposit Insurance Corporation
FHLB
 
Federal Home Loan Bank
FICO
 
Fair Isaac Corporation (credit rating)
FRB
 
Federal Reserve Bank
FRBG
 
Federal Reserve Board of Governors
Freddie Mac (FHLMC)
 
Federal Home Loan Mortgage Corporation
FTP
 
Funds Transfer Pricing
GAAP
 
Accounting Principles Generally Accepted in the United States of America
GDP
 
Gross Domestic Product
Ginnie Mae (GNMA)
 
Government National Mortgage Association
HELOC
 
Home Equity Line of Credit
HTM
 
Held To Maturity
IPO
 
Initial Public Offering
LCR
 
Liquidity Coverage Ratio

2
CITIZENS FINANCIAL GROUP, INC.

 

LGD
 
Loss Given Default
LIBOR
 
London Interbank Offered Rate
LIHTC
 
Low Income Housing Tax Credit
LTV
 
Loan-to-Value
MBS
 
Mortgage-Backed Securities
MD&A
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MSR
 
Mortgage Servicing Rights
NSFR
 
Net Stable Funding Ratio
OCC
 
Office of the Comptroller of the Currency
OCI
 
Other Comprehensive Income
OIS
 
Overnight Index Swap
OTC
 
Over the Counter
PD
 
Probability of Default
peers or peer banks or peer regional banks
 
BB&T, Comerica, Fifth Third, KeyCorp, M&T, PNC, Regions, SunTrust and U.S. Bancorp
RBS
 
The Royal Bank of Scotland Group plc or any of its subsidiaries
RPA
 
Risk Participation Agreement
RWA
 
Risk-weighted Assets
SBO
 
Serviced by Others loan portfolio
SVaR
 
Stress Value-at-Risk
TDR
 
Troubled Debt Restructuring
VaR
 
Value-at-Risk




3
CITIZENS FINANCIAL GROUP, INC.

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



4
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS
 
March 31, 2015
 
December 31, 2014
(in millions, except share data)
(Unaudited)
 
 
ASSETS:
 
 
 
Cash and due from banks

$954

 

$1,171

Interest-bearing cash and due from banks
4,050

 
2,105

Interest-bearing deposits in banks
615

 
370

Securities available for sale, at fair value
19,041

 
18,656

Securities held to maturity (fair value of $5,281 and $5,193, respectively)
5,178

 
5,148

Other investment securities
867

 
872

Loans held for sale, at fair value
322

 
256

Other loans held for sale
54

 
25

Loans and leases
94,494

 
93,410

Less: Allowance for loan and lease losses
1,202

 
1,195

Net loans and leases
93,292

 
92,215

Derivative assets (related party balances of $14 and $1, respectively)
742

 
629

Premises and equipment, net
584

 
595

Bank-owned life insurance
1,535

 
1,527

Goodwill
6,876

 
6,876

Other assets (related party balances of $8 and $7, respectively)
2,425

 
2,412

TOTAL ASSETS

$136,535

 

$132,857

LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
LIABILITIES:
 
 
 
Deposits:
 
 
 
      Noninterest-bearing

$26,670

 

$26,086

Interest-bearing (related party balances of $5 and $5, respectively)
72,320

 
69,621

          Total deposits
98,990

 
95,707

Federal funds purchased and securities sold under agreements to repurchase
4,421

 
4,276

Other short-term borrowed funds
7,004

 
6,253

Derivative liabilities (related party balances of $276 and $387, respectively)
616

 
612

Deferred taxes, net
586

 
493

Long-term borrowed funds (related party balances of $2,000 and $2,000, respectively)
3,904

 
4,642

Due to broker
61

 
—

Other liabilities (related party balances of $33 and $30, respectively)
1,389

 
1,606

TOTAL LIABILITIES

$116,971

 

$113,589

Contingencies (refer to Note 13)


 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock:
 
 
 
$25.00 par value, 100,000,000 shares authorized and no shares outstanding at March 31, 2015 and December 31, 2014

$—

 

$—

Common stock:
 
 
 
$0.01 par value, 1,000,000,000 shares authorized, 562,673,438 shares issued and 547,490,812 shares outstanding at March 31, 2015, and 1,000,000,000 shares authorized, 560,262,638 shares issued and 545,884,519 shares outstanding at December 31, 2014
6

 
6

Additional paid-in capital
18,707

 
18,676

Retained earnings
1,448

 
1,294

Treasury stock, at cost, 15,182,626 and 14,378,119 shares at March 31, 2015 and December 31, 2014, respectively
(357
)
 
(336
)
Accumulated other comprehensive loss
(240
)
 
(372
)
TOTAL STOCKHOLDERS’ EQUITY

$19,564

 

$19,268

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$136,535

 

$132,857

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

5
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended March 31,
 (in millions, except share and per-share data)
2015

 
2014

INTEREST INCOME:
 
 
 
Interest and fees on loans and leases (related party balances of $18 and $18, respectively)

$779

 

$730

Interest and fees on loans held for sale
1

 
1

Interest and fees on other loans held for sale
2

 
12

Investment securities
159

 
149

Interest-bearing deposits in banks
1

 
1

Total interest income
942

 
893

INTEREST EXPENSE:
 
 
 
Deposits
52

 
33

Deposits held for sale
—

 
2

Federal funds purchased and securities sold under agreements to repurchase (related party balances of $5 and $13, respectively)
7

 
15

Other short-term borrowed funds (related party balances of $10 and $16, respectively)
15

 
19

Long-term borrowed funds (related party balances of $20 and $12, respectively)
32

 
16

Total interest expense
106

 
85

Net interest income
836

 
808

Provision for credit losses
58

 
121

Net interest income after provision for credit losses
778

 
687

NONINTEREST INCOME:
 
 
 
Service charges and fees (related party balances of $1 and $2, respectively)
135

 
139

Card fees
52

 
56

Trust and investment services fees
36

 
39

Foreign exchange and trade finance fees (related party balances of $35 and ($6), respectively)
23

 
22

Capital markets fees (related party balances of $3 and $3, respectively)
22

 
18

Mortgage banking fees
33

 
20

Bank-owned life insurance income
12

 
11

Securities gains, net
8

 
25

Other-than-temporary impairment:
 
 
 
Total other-than-temporary impairment losses
(31
)
 
(34
)
Portions of loss recognized in other comprehensive income (before taxes)
30

 
30

Net impairment losses recognized in earnings
(1
)
 
(4
)
Other income (related party balances of ($68) and ($53), respectively)
27

 
32

Total noninterest income
347


358

NONINTEREST EXPENSE:
 
 
 
Salaries and employee benefits
419

 
405

Outside services (related party balances of $2 and $8, respectively)
79

 
83

Occupancy
80

 
81

Equipment expense
63

 
64

Amortization of software
36

 
31

Other operating expense
133

 
146

Total noninterest expense
810

 
810

Income before income tax expense
315

 
235

Income tax expense
106

 
69

NET INCOME

$209

 

$166

Weighted-average common shares outstanding:
 
 
 
Basic
546,291,363

 
559,998,324

Diluted
549,798,717

 
559,998,324

Per common share information:
 
 
 
Basic earnings

$0.38

 

$0.30

Diluted earnings
0.38

 
0.30

   Dividends declared and paid
0.10

 
0.04

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

6
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
Three Months Ended March 31,
(in millions)
 
2015

 
2014

Net income
 

$209

 

$166

Other comprehensive income (loss):
 
 
 
 
Net unrealized derivative instrument gains (losses) arising during the periods, net of income taxes of $39 and $34, respectively
 
65

 
59

Reclassification adjustment for net derivative losses included in net income, net of income taxes of ($1) and $4, respectively
 
(2
)
 
7

Net unrealized available for sale securities gains (losses) arising during the periods, net of income taxes of $54 and $41, respectively
 
90

 
71

Other-than-temporary impairment not recognized in earnings on securities, net of income taxes of ($11) and ($11), respectively
 
(19
)
 
(19
)
Reclassification of net securities gains to net income, net of income taxes of ($3) and ($7), respectively
 
(4
)
 
(14
)
Defined benefit pension plans:
 
 
 
 
Amortization of actuarial loss, net of income taxes $1 and $1, respectively
 
2

 
1

Total other comprehensive income, net of income taxes
 
132

 
105

Total comprehensive income
 

$341

 

$271

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

7
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
 
Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock, at Cost
Accumulated Other Comprehensive Income (Loss)
Total

(in millions)
Shares
Amount
Balance at January 1, 2014
560


$6


$18,603


$1,235


$—


($648
)

$19,196

Dividend to RBS
—

—

—

(25
)
—

—

(25
)
Total comprehensive income:
 
 
 
 
 
 
 
Net income
—

—

—

166

—

—

166

Other comprehensive income
—

—

—

—

—

105

105

Total comprehensive income
—

—

—

166

—

105

271

Balance at March 31, 2014
560


$6


$18,603


$1,376


$—


($543
)

$19,442

Balance at January 1, 2015
546


$6


$18,676


$1,294


($336
)

($372
)

$19,268

Dividend to common stockholders
—

—

—

(16
)
—

—

(16
)
Dividend to RBS
—

—

—

(39
)
—

—

(39
)
Share-based compensation plans
1

—

29

—

(21
)
—

8

Employee stock purchase plan shares purchased
—

—

2

—

—

—

2

Total comprehensive income:
 
 
 
 
 
 
 
Net income
—

—

—

209

—

—

209

Other comprehensive income
—

—

—

—

—

132

132

Total comprehensive income
—

—

—

209

—

132

341

Balance at March 31, 2015
547


$6


$18,707


$1,448


($357
)

($240
)

$19,564

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.

8
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Three Months Ended March 31,
(in millions)
2015

 
2014

OPERATING ACTIVITIES
 
 
 
Net income

$209

 

$166

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
58

 
121

Originations of mortgage loans held for sale
(495
)
 
(307
)
Proceeds from sales of mortgage loans held for sale
462

 
352

Purchases of commercial loans held for sale
(288
)
 
—

Proceeds from sales of commercial loans held for sale
262

 
—

Amortization of terminated cash flow hedges (related party balances of $4 and $12, respectively)
4

 
12

Depreciation, amortization and accretion
113

 
96

Mortgage servicing rights valuation recovery
(1
)
 
(4
)
Securities impairment
1

 
4

Deferred income taxes
14

 
58

Share-based compensation
6

 
19

Loss on disposal/impairment of premises and equipment
—

 
1

Gain on sales of:
 
 
 
Debt securities available for sale
(8
)
 
(25
)
Marketable equity securities available for sale
(2
)
 
—

(Increase) decrease in other assets (related party balances of ($13) and $61, respectively)
(136
)
 
280

Decrease in other liabilities (related party balances of ($109) and ($38), respectively)
(101
)
 
(73
)
Net cash provided by operating activities
98

 
700

INVESTING ACTIVITIES
 
 
 
Investment securities:
 
 
 
Purchases of securities available for sale
(2,190
)
 
(3,697
)
Proceeds from maturities and paydowns of securities available for sale
865

 
694

Proceeds from sales of securities available for sale
1,101

 
711

Purchases of other investment securities
(6
)
 
—

Proceeds from sales of other investment securities
11

 
—

Purchases of securities held to maturity
(181
)
 
(1,174
)
Proceeds from maturities and paydowns of securities held to maturity
150

 
40

Net decrease in interest-bearing deposits in banks
(245
)
 
(66
)
Net increase in loans and leases
(1,183
)
 
(1,486
)
Net increase in bank-owned life insurance
(8
)
 
(11
)
Premises and equipment:
 
 
 
Purchases
(18
)
 
(7
)
Proceeds from sales
11

 
—

Capitalization of software
(47
)
 
(40
)
Net cash used in investing activities
(1,740
)
 
(5,036
)
FINANCING ACTIVITIES
 
 
 
Net increase in deposits
3,283

 
470

Net increase in federal funds purchased and securities sold under agreements to repurchase
145

 
1,289

Net increase in other short-term borrowed funds
—

 
2,700

Repayments of long-term borrowed funds
(3
)
 
(3
)
Dividends declared and paid to common stockholders

(16
)
 
—

Dividends declared and paid to RBS
(39
)
 
(25
)
Net cash provided by financing activities
3,370

 
4,431

Increase in cash and cash equivalents
1,728

 
95

Cash and cash equivalents at beginning of period
3,276

 
2,757

Cash and cash equivalents at end of period

$5,004

 

$2,852

The accompanying Notes to unaudited interim Consolidated Financial Statements are an integral part of these statements.








9
CITIZENS FINANCIAL GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION
Basis of Presentation

The unaudited interim Consolidated Financial Statements, including the Notes thereto of Citizens Financial Group, Inc., have been prepared in accordance with GAAP interim reporting requirements, and therefore do not include all information and Notes included in the audited Consolidated Financial Statements in conformity with GAAP. These unaudited interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying Notes included in the Company’s Form 10-K for the year ended December 31, 2014. The Company is an indirect subsidiary of The Royal Bank of Scotland Group plc. The Company’s principal business activity is banking, conducted through its subsidiaries, Citizens Bank, N.A. and Citizens Bank of Pennsylvania.

The unaudited interim Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.

On August 22, 2014, the Company’s Board of Directors declared a 165,582-for-1 stock split. Except for the amount of authorized shares and par value, all references to share and per share amounts in the unaudited interim Consolidated Financial Statements and accompanying Notes have been retroactively adjusted to reflect the stock split.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on net income, total comprehensive income, total assets or total stockholders’ equity as previously reported.

Recent Accounting Pronouncements

In February 2015, the FASB issued ASU No. 2015-02 “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. This standard focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (e.g., collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). This new standard simplifies consolidation accounting by reducing the number of consolidation models. The ASU will be effective for the Company beginning on January 1, 2016. Early adoption is permitted, including adoption in an interim period. The potential impact the adoption of this guidance will have to the Company’s unaudited interim Consolidated Financial Statements in under review.

In January 2015, the FASB issued ASU No. 2015-01 “Income Statement: Extraordinary and Unusual Items.” This ASU eliminates from GAAP the concept of extraordinary items. Accounting Standards Codification Subtopic 225-20 required that an entity separately classify, present, and disclose extraordinary events and transactions that were unusual in nature and infrequent in occurrence. This ASU is effective for the Company, beginning on January 1, 2016. The adoption of this guidance is not expected to have a material impact on the Company’s unaudited interim Consolidated Financial Statements.


10
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SECURITIES
The following table provides the major components of securities at amortized cost and fair value:
 
March 31, 2015
 
December 31, 2014
(in millions)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Securities Available for Sale
 
 
 
 
 




U.S. Treasury

$15


$—


$—


$15

 

$15


$—


$—


$15

State and political subdivisions
10

—

—

10

 
10

—

—

10

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
17,999

382

(25
)
18,356

 
17,683

301

(50
)
17,934

Other/non-agency
667

4

(31
)
640

 
703

4

(35
)
672

Total mortgage-backed securities
18,666

386

(56
)
18,996

 
18,386

305

(85
)
18,606

Total debt securities available for sale
18,691

386

(56
)
19,021

 
18,411

305

(85
)
18,631

Marketable equity securities
7

1

—

8

 
10

3

—

13

Other equity securities
12

—

—

12

 
12

—

—

12

Total equity securities available for sale
19

1

—

20

 
22

3

—

25

Total securities available for sale

$18,710


$387


($56
)

$19,041

 

$18,433


$308


($85
)

$18,656

Securities Held to Maturity
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities

$3,799


$52


($4
)

$3,847

 

$3,728


$22


($31
)

$3,719

Other/non-agency
1,379

55

—

1,434

 
1,420

54

—

1,474

Total securities held to maturity

$5,178


$107


($4
)

$5,281

 

$5,148


$76


($31
)

$5,193

Other Investment Securities
 
 
 
 
 
 
 
 
 
Federal Reserve Bank stock

$468


$—


$—


$468

 

$477


$—


$—


$477

Federal Home Loan Bank stock
393

—

—

393

 
390

—

—

390

Venture capital and other investments
6

—

—

6

 
5

—

—

5

Total other investment securities

$867


$—


$—


$867

 

$872


$—


$—


$872


The following tables summarize those securities whose fair values are below carrying values, segregated by those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer:
 
March 31, 2015
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
State and political subdivisions
1


$10


$—

 
—


$—


$—

 
1


$10


$—

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
14

561

(2
)
 
40

1,292

(27
)
 
54

1,853

(29
)
Other/non-agency
6

75

(2
)
 
17

385

(29
)
 
23

460

(31
)
Total mortgage-backed securities
20

636

(4
)
 
57

1,677

(56
)
 
77

2,313

(60
)
Total
21


$646


($4
)
 
57


$1,677


($56
)
 
78


$2,323


($60
)


11
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
December 31, 2014
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
State and political subdivisions
—


$—


$—

 
1


$10


$—

 
1


$10


$—

Mortgage-backed securities:






 






 






Federal agencies and U.S. government sponsored entities
75

3,282

(24
)
 
52

1,766

(57
)
 
127

5,048

(81
)
Other/non-agency
6

80

(2
)
 
17

397

(33
)
 
23

477

(35
)
Total mortgage-backed securities
81

3,362

(26
)
 
69

2,163

(90
)
 
150

5,525

(116
)
Total
81


$3,362


($26
)
 
70


$2,173


($90
)
 
151


$5,535


($116
)

For each debt security identified with an unrealized loss, the Company reviews the expected cash flows to determine if the impairment in value is temporary or other-than-temporary. If the Company has determined that the present value of the debt security’s expected cash flows is less than its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. The amount of impairment loss that is recognized in current period earnings is dependent on the Company’s intent to sell (or not sell) the debt security.

If the Company intends to sell the impaired debt security, the impairment loss recognized in current period earnings equals the difference between the debt security’s fair value and its amortized cost. If the Company does not intend to sell the impaired debt security, and it is not likely that the Company will be required to sell the impaired security, the credit-related impairment loss is recognized in current period earnings and equals the difference between the amortized cost of the debt security and the present value of the expected cash flows that have currently been projected.

In addition to these cash flow projections, several other characteristics of each debt security are reviewed when determining whether a credit loss exists and the period over which the debt security is expected to recover. These characteristics include: (1) the type of investment, (2) various market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), (3) the length and severity of impairment, and (4) the public credit rating of the instrument.

The Company estimates the portion of loss attributable to credit using a cash flow model. The inputs to this model include prepayment, default and loss severity assumptions that are based on industry research and observed data. The loss projections generated by the model are reviewed on a quarterly basis by a cross-functional governance committee. This governance committee determines whether security impairments are other-than-temporary based on this review.

The following table presents the cumulative credit related losses recognized in earnings on debt securities held by the Company:

 
Three Months Ended March 31,
(in millions)
2015

 
2014

Cumulative balance at beginning of period

$62

 

$56

Credit impairments recognized in earnings on securities that have been previously impaired
1

 
4

Reductions due to increases in cash flow expectations on impaired securities
(1
)
 
(1
)
Cumulative balance at end of period

$62

 

$59


Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of March 31, 2015 and 2014 were $62 million and $59 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of March 31, 2015 and 2014. In the three months ended March 31, 2015 and 2014, the Company recognized credit related other-than-temporary impairment losses in earnings of $1 million and $4 million, respectively, related to non-agency MBS in the AFS portfolio. There were no impaired debt securities sold during the three months ended March 31, 2015 and 2014. Reductions in credit losses due to increases in cash flow expectations were $1 million for the three months ended March 31, 2015 and 2014, and were presented in investment securities interest income on the Consolidated Statements of Operations. The Company

12
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


does not currently have the intent to sell these debt securities, and it is not likely that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases.

The Company has determined that credit losses are not expected to be incurred on the remaining agency and non-agency MBS identified with unrealized losses as of the current reporting date. The unrealized losses on these debt securities reflect the reduced liquidity in the MBS market and the increased risk spreads due to the uncertainty of the U.S. macroeconomic environment. Therefore, the Company has determined that these debt securities are not other-than-temporarily impaired because the Company does not currently have the intent to sell these debt securities, and it is not likely that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases. Any subsequent increases in the valuation of impaired debt securities do not impact their recorded cost bases. As of March 31, 2015 and 2014, $30 million of pre-tax non-credit related losses were deferred in OCI.

The amortized cost and fair value of debt securities at March 31, 2015 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Distribution of Maturities
(in millions)
1 Year or Less
1-5 Years
5-10 Years
After 10 Years
Total

Amortized Cost:
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
U.S. Treasury

$15


$—


$—


$—


$15

State and political subdivisions
—

—

—

10

10

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
2

53

2,196

15,748

17,999

Other/non-agency
—

54

44

569

667

Total debt securities available for sale
17

107

2,240

16,327

18,691

Debt securities held to maturity
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
—

—

—

3,799

3,799

Other/non-agency
—

—

—

1,379

1,379

Total debt securities held to maturity
—

—

—

5,178

5,178

Total amortized cost of debt securities

$17


$107


$2,240


$21,505


$23,869

 
 
 
 
 
 
Fair Value:
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
U.S. Treasury

$15


$—


$—


$—


$15

State and political subdivisions
—

—

—

10

10

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
2

56

2,226

16,072

18,356

Other/non-agency
—

54

45

541

640

Total debt securities available for sale
17

110

2,271

16,623

19,021

Debt securities held to maturity
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
—

—

—

3,847

3,847

Other/non-agency
—

—

—

1,434

1,434

Total debt securities held to maturity
—

—

—

5,281

5,281

Total fair value of debt securities

$17


$110


$2,271


$21,904


$24,302



13
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following table reports the amounts recognized in interest income from investment securities on the Consolidated Statement of Operations:
 
Three Months Ended March 31,
(in millions)
2015

 
2014

Taxable

$159

 

$149

Non-taxable
—

 
—

Total interest income from investment securities

$159

 

$149


Realized gains and losses on AFS securities are shown below:
 
Three Months Ended March 31,
(in millions)
2015

 
2014

Gains on sale of debt securities

$12

 

$25

Losses on sale of debt securities
(4
)
 
—

Debt securities gains, net

$8

 

$25

Equity securities gains

$2

 

$—


The amortized cost and fair value of securities pledged are shown below:
 
March 31, 2015
 
December 31, 2014
(in millions)
Amortized Cost
Fair Value

 
Amortized Cost
Fair Value

Pledged against repurchase agreements

$4,334


$4,423

 

$3,650


$3,701

Pledged against FHLB borrowed funds
1,315

1,367

 
1,355

1,407

Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law
3,657

3,745

 
3,453

3,520


There were no loan securitizations for the three months ended March 31, 2015 and 2014.

The Company regularly enters into security repurchase agreements with unrelated counterparties. Repurchase agreements are financial transactions that involve the transfer of a security from one party to another and a subsequent transfer of the same (or “substantially the same”) security back to the original party. The Company’s repurchase agreements are typically short-term transactions, but they may be extended to longer terms to maturity. Such transactions are accounted for as secured borrowed funds on the Company’s financial statements. When permitted by GAAP, the Company offsets the short-term receivables associated with its reverse repurchase agreements with the short-term payables associated with its repurchase agreements.

The effects of this offsetting on the Consolidated Balance Sheets are presented in the following table:
 
March 31, 2015
 
December 31, 2014
(in millions)
Gross Assets (Liabilities)
Gross Assets (Liabilities) Offset
Net Amounts of Assets (Liabilities)
 
Gross Assets (Liabilities)
Gross Assets (Liabilities) Offset
Net Amounts of Assets (Liabilities)
Securities sold under agreements to repurchase

($3,400
)

$—


($3,400
)
 

($2,600
)

$—


($2,600
)

Note: The Company also offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 12 “Derivatives.”


14
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Securities under the agreements to repurchase or resell are accounted for as secured borrowings. The following table presents the Company's related activity, by collateral type and remaining contractual maturity, at March 31, 2015:
 
Remaining Contractual Maturity of the Agreements
(in millions)
Overnight and Continuous
Up to 30 Days
30-90 Days
Greater Than 90 Days
Total

Securities sold under agreements to repurchase
 
 
 
 
 
Mortgage-backed securities - Agency

$—


($350
)

($1,000
)

($2,050
)

($3,400
)

For these securities sold under the agreements to repurchase, the Company would be obligated to provide additional collateral in the event of a significant decline in fair value of the collateral pledged. The Company manages the risk by monitoring the liquidity and credit quality of the collateral, as well as the maturity profile of the transactions.
 
NOTE 3 - LOANS AND LEASES
A summary of the loans and leases portfolio follows:
(in millions)
March 31, 2015
 
December 31, 2014
Commercial

$32,249

 

$31,431

Commercial real estate
7,863

 
7,809

Leases
3,870

 
3,986

Total commercial
43,982

 
43,226

Residential mortgages
11,808

 
11,832

Home equity loans
3,212

 
3,424

Home equity lines of credit
15,127

 
15,423

Home equity loans serviced by others (1)
1,192

 
1,228

Home equity lines of credit serviced by others (1)
544

 
550

Automobile
13,179

 
12,706

Student
2,852

 
2,256

Credit cards
1,588

 
1,693

Other retail
1,010

 
1,072

Total retail
50,512

 
50,184

Total loans and leases (2) (3)

$94,494

 

$93,410


(1) The Company’s SBO portfolio consists of home equity loans and lines that were originally serviced by others. The Company now services a portion of this portfolio internally.
(2) Excluded from the table above are loans held for sale totaling $376 million as of March 31, 2015 and $281 million as of December 31, 2014.
(3) Mortgage loans serviced for others by the Company’s subsidiaries are not included above, and amounted to $18.0 billion and $17.9 billion at March 31, 2015 and December 31, 2014, respectively.

Loans held for sale totaled $322 million and $256 million at March 31, 2015 and December 31, 2014, respectively, and consisted of residential mortgages originated for sale and the commercial trading portfolio. Other loans held for sale totaled $54 million and $25 million at March 31, 2015 and December 31, 2014, respectively, and consisted of commercial loan syndications and a credit card portfolio transferred to held for sale. In March 2015, the Company transferred $41 million to loans held for sale associated with a terminated agent credit card services agreement consisting of $43 million of outstanding credit card balances and a $2 million valuation allowance. The terms of the agreement provided the agent the option, after a designated period of time, to purchase the credit card relationships covered under the agreement from Citizens or cause another financial institution to purchase the interests in these credit card relationships. The transaction is expected to close in mid-2015.

Loans pledged as collateral for FHLB borrowed funds totaled $22.8 billion and $22.0 billion at March 31, 2015 and December 31, 2014, respectively. This collateral consists primarily of residential mortgages and home equity loans. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, totaled $13.0 billion and $11.8 billion at March 31, 2015 and December 31, 2014, respectively.


15
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During the three months ended March 31, 2015, the Company purchased a portfolio of residential mortgages with an outstanding principal balance of $249 million, a portfolio of automobile loans with an outstanding principal balance of $393 million, and a portfolio of student loans with an outstanding principal balance of $261 million. The Company sold a portfolio of residential mortgages with an outstanding principal balance of $273 million as well as commercial leases with an outstanding principal balance of $111 million during the three months ended March 31, 2015.

In March 2014, the Company purchased a portfolio of residential mortgages with an outstanding principal balance of $483 million, a portfolio of automobile loans with an outstanding principal balance of $202 million and a portfolio of student loans with an outstanding principal balance of $40 million. The Company also sold a portfolio of residential mortgage loans with outstanding balances of $126 million in March 2014.

NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK
The ALLL is increased through a provision for credit losses that is charged to earnings, based on the Company’s quarterly evaluation of the loan portfolio, and is reduced by net charge-offs and the ALLL associated with sold loans. See Note 1 “Significant Accounting Policies” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2014, for a detailed discussion of ALLL methodologies and estimation techniques.
On a quarterly basis, the Company reviews and refines its estimate of the allowance for credit losses, taking into consideration changes in portfolio size and composition, historical loss experience, internal risk ratings, current economic conditions, industry performance trends and other pertinent information.
There were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and the reserve for unfunded lending commitments.
The following is a summary of changes in the allowance for credit losses:

Three Months Ended March 31, 2015
(in millions)
Commercial

Retail

Total

Allowance for loan and lease losses as of January 1, 2015

$544


$651


$1,195

Charge-offs
(6
)
(109
)
(115
)
Recoveries
28

33

61

Net recoveries (charge-offs)
22

(76
)
(54
)
Sales/Other
—

(2
)
(2
)
Provision charged to income
12

51

63

Allowance for loan and lease losses as of March 31, 2015
578

624

1,202

Reserve for unfunded lending commitments as of January 1, 2015
61

—

61

Credit for unfunded lending commitments
(5
)
—

(5
)
Reserve for unfunded lending commitments as of March 31, 2015
56

—

56

Total allowance for credit losses as of March 31, 2015

$634


$624


$1,258

 
Three Months Ended March 31, 2014
(in millions)
Commercial

Retail

Total

Allowance for loan and lease losses as of January 1, 2014

$498


$723


$1,221

Charge-offs
(6
)
(122
)
(128
)
Recoveries
14

27

41

Net recoveries (charge-offs)
8

(95
)
(87
)
Provision charged to income
21

104

125

Allowance for loan and lease losses as of March 31, 2014
527

732

1,259

Reserve for unfunded lending commitments as of January 1, 2014
39

—

39

Credit for unfunded lending commitments
(4
)
—

(4
)
Reserve for unfunded lending commitments as of March 31, 2014
35

—

35

Total allowance for credit losses as of March 31, 2014

$562


$732


$1,294


16
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The recorded investment in loans and leases based on the Company’s evaluation methodology is as follows:
 
March 31, 2015
 
December 31, 2014
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$194


$1,202


$1,396

 

$205


$1,208


$1,413

Formula-based evaluation
43,788

49,310

93,098

 
43,021

48,976

91,997

Total

$43,982


$50,512


$94,494

 

$43,226


$50,184


$93,410


The following is a summary of the allowance for credit losses by evaluation method:
 
March 31, 2015
 
December 31, 2014
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$35


$107


$142

 

$20


$109


$129

Formula-based evaluation
599

517

1,116

 
585

542

1,127

Allowance for credit losses

$634


$624


$1,258

 

$605


$651


$1,256


For commercial loans and leases, the Company utilizes regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that the Company believes will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness that indicates an increased probability of future loss. For retail loans, the Company primarily uses the loan’s payment and delinquency status to monitor credit quality. The further a loan is past due, the greater the likelihood of future credit loss. These credit quality indicators for both commercial and retail loans are continually updated and monitored.
The recorded investment in classes of commercial loans and leases based on regulatory classification ratings is as follows:
 
March 31, 2015
 
 
Criticized
 
(in millions)
Pass

Special Mention

Substandard

Doubtful

Total

Commercial

$30,623


$903


$626


$97


$32,249

Commercial real estate
7,547

198

52

66

7,863

Leases
3,813

6

51

—

3,870

Total

$41,983


$1,107


$729


$163


$43,982


 
December 31, 2014
 
 
Criticized
 
(in millions)
Pass

Special Mention

Substandard

Doubtful

Total

Commercial

$30,022


$876


$427


$106


$31,431

Commercial real estate
7,354

329

61

65

7,809

Leases
3,924

12

50

—

3,986

Total

$41,300


$1,217


$538


$171


$43,226



17
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The recorded investment in classes of retail loans, categorized by delinquency status is as follows:
 
March 31, 2015
(in millions)
Current

1-29 Days Past Due
30-89 Days Past Due
90 Days or More Past Due
Total

Residential mortgages

$11,373


$80


$97


$258


$11,808

Home equity loans
2,817

193

57

145

3,212

Home equity lines of credit
14,471

386

77

193

15,127

Home equity loans serviced by others (1)
1,082

67

22

21

1,192

Home equity lines of credit serviced by others (1)
455

59

11

19

544

Automobile
12,378

695

85

21

13,179

Student
2,725

70

27

30

2,852

Credit cards
1,517

37

18

16

1,588

Other retail
929

61

15

5

1,010

Total

$47,747


$1,648


$409


$708


$50,512

(1) The Company’s SBO portfolio consists of home equity loans and lines that were originally serviced by others. The Company now services a portion of this portfolio internally.

 
December 31, 2014
(in millions)
Current

1-29 Days Past Due
30-89 Days Past Due
90 Days or More Past Due
Total

Residential mortgages

$11,352


$114


$97


$269


$11,832

Home equity loans
2,997

222

60

145

3,424

Home equity lines of credit
14,705

447

73

198

15,423

Home equity loans serviced by others (1)
1,101

78

26

23

1,228

Home equity lines of credit serviced by others (1)
455

66

10

19

550

Automobile
11,839

758

93

16

12,706

Student
2,106

108

25

17

2,256

Credit cards
1,615

39

22

17

1,693

Other retail
985

65

18

4

1,072

Total

$47,155


$1,897


$424


$708


$50,184


(1) The Company’s SBO portfolio consists of home equity loans and lines that were originally serviced by others. The Company now services a portion of this portfolio internally.


18
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Nonperforming Assets
A summary of nonperforming loans and leases by class is as follows:
 
March 31, 2015
 
December 31, 2014
(in millions)
Nonaccruing
Accruing and 90 Days or More Delinquent
Total Nonperforming Loans and Leases
 
Nonaccruing
Accruing and 90 Days or More Delinquent
Total Nonperforming Loans and Leases
Commercial

$94


$3


$97

 

$113


$1


$114

Commercial real estate
60

—

60

 
50

—

50

Leases
1

—

1

 
—

—

—

Total commercial
155

3

158

 
163

1

164

Residential mortgages
347

—

347

 
345

—

345

Home equity loans
210

—

210

 
203

—

203

Home equity lines of credit
270

—

270

 
257

—

257

Home equity loans serviced by others (1)
44

—

44

 
47

—

47

Home equity lines of credit serviced by others (1)
25

—

25

 
25

—

25

Automobile
30

—

30

 
21

—

21

Student
26

4

30

 
11

6

17

Credit cards
16

—

16

 
16

1

17

Other retail
4

2

6

 
5

—

5

Total retail
972

6

978

 
930

7

937

Total

$1,127


$9


$1,136

 

$1,093


$8


$1,101


(1) The Company’s SBO portfolio consists of home equity loans and lines that were originally serviced by others. The Company now services a portion of this portfolio internally.

The recorded investment in mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings are in process was $232 million as of March 31, 2015.

A summary of other nonperforming assets is as follows:
(in millions)
March 31, 2015
 
December 31, 2014
Nonperforming assets, net of valuation allowance:
 
 
 
Commercial

$1

 

$3

Retail
37

 
39

Nonperforming assets, net of valuation allowance

$38

 

$42


Nonperforming assets consist primarily of other real estate owned and are presented in other assets on the Consolidated Balance Sheets.


19
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A summary of key performance indicators is as follows:

March 31, 2015
 
December 31, 2014
Nonperforming commercial loans and leases as a percentage of total loans and leases
0.17
%
 
0.18
%
Nonperforming retail loans as a percentage of total loans and leases
1.03

 
1.00

Total nonperforming loans and leases as a percentage of total loans and leases
1.20
%
 
1.18
%
 
 
 
 
Nonperforming commercial assets as a percentage of total assets
0.12
%
 
0.13
%
Nonperforming retail assets as a percentage of total assets
0.74

 
0.73

Total nonperforming assets as a percentage of total assets
0.86
%
 
0.86
%

The following is an analysis of the age of the past due amounts (accruing and nonaccruing):
 
March 31, 2015
 
December 31, 2014
(in millions)
 30-89 Days Past Due
 90 Days or More Past Due
 Total Past Due
 
 30-89 Days Past Due
 90 Days or More Past Due
 Total Past Due
Commercial

$42


$97


$139

 

$57


$114


$171

Commercial real estate
19

60

79

 
26

50