Citizens 10Q - Q2 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
June 30, 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 527,534,073 shares of Registrant’s common stock ($0.01 par value) outstanding on August 3, 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 Right
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
ROTCE
 
Return on Average Tangible Common Equity
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 (UNAUDITED)
(in millions, except share data)
June 30, 2015
 
December 31, 2014
ASSETS:
 
 
 
Cash and due from banks

$961

 

$1,171

Interest-bearing cash and due from banks
1,908

 
2,105

Interest-bearing deposits in banks
186

 
370

Securities available for sale, at fair value
18,662

 
18,656

Securities held to maturity (fair value of $5,611 and $5,193, respectively)
5,567

 
5,148

Other investment securities
866

 
872

Loans held for sale, at fair value
397

 
256

Other loans held for sale
300

 
25

Loans and leases
96,538

 
93,410

Less: Allowance for loan and lease losses
1,201

 
1,195

Net loans and leases
95,337

 
92,215

Derivative assets (related party balances of $36 and $1, respectively)
665

 
629

Premises and equipment, net
580

 
595

Bank-owned life insurance
1,543

 
1,527

Goodwill
6,876

 
6,876

Due from broker
939

 
—

Other assets (related party balances of $5 and $7, respectively)
2,464

 
2,412

TOTAL ASSETS

$137,251

 

$132,857

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

$26,678

 

$26,086

Interest-bearing (related party balances of $5 and $5, respectively)
73,937

 
69,621

          Total deposits
100,615

 
95,707

Federal funds purchased and securities sold under agreements to repurchase
3,784

 
4,276

Other short-term borrowed funds
6,762

 
6,253

Derivative liabilities (related party balances of $300 and $387, respectively)
556

 
612

Deferred taxes, net
558

 
493

Long-term borrowed funds (related party balances of $2,000 and $2,000, respectively)
3,890

 
4,642

Other liabilities (related party balances of $29 and $30, respectively)
1,500

 
1,606

TOTAL LIABILITIES

$117,665

 

$113,589

Contingencies (refer to Note 13)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, $25.00 par value, authorized 100,000,000 shares:
 
 
 
Series A, non-cumulative perpetual, $25.00 par value (liquidation preference $1,000), 250,000 shares authorized and issued net of issuance costs and related premium at June 30, 2015, and no shares outstanding at December 31, 2014

$247

 

$—

Common stock:
 
 
 
$0.01 par value, 1,000,000,000 shares authorized, 562,838,179 shares issued and 537,149,717 shares outstanding at June 30, 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
18,714

 
18,676

Retained earnings
1,585

 
1,294

Treasury Stock, at cost, 25,688,462 and 14,378,119 shares at June 30, 2015 and December 31, 2014, respectively
(607
)
 
(336
)
Accumulated other comprehensive loss
(359
)
 
(372
)
TOTAL STOCKHOLDERS’ EQUITY

$19,586

 

$19,268

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$137,251

 

$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 June 30,
Six Months Ended June 30,
 (in millions, except share and per-share data)
2015

2014

2015

2014

INTEREST INCOME:
 
 
 
 
Interest and fees on loans and leases (related party balances of $17, $18, $35 and $36, respectively)

$790


$751


$1,569


$1,481

Interest and fees on loans held for sale, at fair value
2

1

3

2

Interest and fees on other loans held for sale
4

10

6

22

Investment securities
155

154

314

303

Interest-bearing deposits in banks
1

1

2

2

Total interest income
952

917

1,894

1,810

INTEREST EXPENSE:
 
 
 
 
Deposits
60

34

112

67

Deposits held for sale
—

2

—

4

Federal funds purchased and securities sold under agreements to repurchase (related party balances of ($1), $0, $4 and $13, respectively)
2

1

9

16

Other short-term borrowed funds (related party balances of $15, $28, $25 and $44, respectively)
19

30

34

49

Long-term borrowed funds (related party balances of $20, $13, $40 and $25, respectively)
31

17

63

33

Total interest expense
112

84

218

169

Net interest income
840

833

1,676

1,641

Provision for credit losses
77

49

135

170

Net interest income after provision for credit losses
763

784

1,541

1,471

NONINTEREST INCOME:
 
 
 
 
Service charges and fees (related party balances of $1, $1, $2 and $3, respectively)
139

147

274

286

Card fees
60

61

112

117

Trust and investment services fees
41

42

77

81

Mortgage banking fees
30

14

63

34

Capital markets fees (related party balances of $3, $2, $6 and $5, respectively)
30

26

52

44

Foreign exchange and trade finance fees (related party balances of ($19), ($1), $16 and ($7), respectively)
22

22

45

44

Bank-owned life insurance income
14

12

26

23

Securities gains, net
9

—

17

25

Net impairment losses recognized in earnings
(2
)
(2
)
(3
)
(6
)
Other income (related party balances of $18, ($82), ($50) and ($135), respectively)
17

318

44

350

Total noninterest income
360

640

707

998

NONINTEREST EXPENSE:
 
 
 
 
Salaries and employee benefits
411

467

830

872

Outside services (related party balances of $3, $8, $5 and $16, respectively)
99

125

178

208

Occupancy (related party balances of $1, $0, $1 and $0, respectively)
90

87

170

168

Equipment expense
65

65

128

129

Amortization of software
37

33

73

64

Other operating expense
139

171

272

317

Total noninterest expense
841

948

1,651

1,758

Income before income tax expense
282

476

597

711

Income tax expense
92

163

198

232

NET INCOME

$190


$313


$399


$479

Net income available to common stockholders
$190
$313
$399
$479
Weighted-average common shares outstanding:
 
 
 
 
Basic
537,729,248

559,998,324

541,986,653

559,998,324

Diluted
539,909,366

559,998,324

544,804,268

559,998,324

Per common share information:
 
 
 
 
Basic earnings

$0.35


$0.56


$0.74


$0.86

Diluted earnings
0.35

0.56

0.73

0.86

   Dividends declared and paid
0.10

0.61

0.20

0.66

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 June 30,
 
Six Months Ended June 30,
(in millions)
2015

2014

 
2015

2014

Net income

$190


$313

 

$399


$479

Other comprehensive income (loss):
 
 
 
 
 
Net unrealized derivative instrument gains (losses) arising during the periods, net of income taxes of ($3), $36, $36 and $70, respectively
(5
)
61

 
60

120

Reclassification adjustment for net derivative (losses) gains included in net income, net of income taxes of ($1), $3, ($2) and $7, respectively
(2
)
6

 
(4
)
13

Net unrealized securities available for sale (losses) gains arising during the periods, net of income taxes of ($66), $68, ($12) and $109, respectively
(110
)
117

 
(20
)
188

Other-than-temporary impairment not recognized in earnings on securities, net of income taxes of $0, ($1), ($11) and ($12), respectively
1

(2
)
 
(18
)
(21
)
Reclassification of net securities gains to net income, net of income taxes of ($2), $0, ($5) and ($7), respectively
(5
)
2

 
(9
)
(12
)
Defined benefit pension plans:
 
 
 
 
 
Amortization of actuarial loss, net of income taxes $2, $0, $3 and $1, respectively
2

1

 
4

2

Total other comprehensive income (loss), net of income taxes
(119
)
185

 
13

290

Total comprehensive income

$71


$498

 

$412


$769

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)
 
Preferred Stock
Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock, at Cost
Accumulated Other Comprehensive Income (Loss)
Total

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


$—

560


$6


$18,603


$1,235


$—


($648
)

$19,196

Dividends to RBS
—

—

—

—

—

(35
)
—

—

(35
)
Dividends to RBS — exchange transactions
—

—

—

—

—

(333
)
—

—

(333
)
Total comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
—

—

—

—

—

479

—

—

479

Other comprehensive income
—

—

—

—

—

—

—

290

290

Total comprehensive income
—

—

—

—

—

479

—

290

769

Balance at June 30, 2014
—


$—

560


$6


$18,603


$1,346


$—


($358
)

$19,597

Balance at January 1, 2015
—


$—

546


$6


$18,676


$1,294


($336
)

($372
)

$19,268

Dividends to common stockholders
—

—

—

—

—

(48
)
—

—

(48
)
Dividends to RBS
—

—

—

—

—

(60
)
—

—

(60
)
Issuance of preferred stock
—

247

—

—

—

—

—

—

247

Treasury stock purchased
—

—

(10
)
—

—

—

(250
)
—

(250
)
Share-based compensation plans
—

—

1

—

34

—

(21
)
—

13

Employee stock purchase plan shares issued
—

—

—

—

4

—

—

—

4

Total comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
—

—

—

—

—

399

—

—

399

Other comprehensive income
—

—

—

—

—

—

—

13

13

Total comprehensive income
—

—

—

—

—

399

—

13

412

Balance at June 30, 2015
—


$247

537


$6


$18,714


$1,585


($607
)

($359
)

$19,586

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)
 
Six Months Ended June 30,
(in millions)
2015

 
2014

OPERATING ACTIVITIES
 
 
 
Net income

$399

 

$479

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
135

 
170

Originations of mortgage loans held for sale
(1,182
)
 
(684
)
Proceeds from sales of mortgage loans held for sale
1,111

 
688

Purchases of commercial loans held for sale
(632
)
 
—

Proceeds from sales of commercial loans held for sale
594

 
—

Amortization of terminated cash flow hedges (related party balances of $9 and $12, respectively)
9

 
24

Depreciation, amortization and accretion
234

 
196

Mortgage servicing rights valuation recovery
(7
)
 
(3
)
Securities impairment
3

 
6

Deferred income taxes
56

 
36

Share-based compensation
15

 
19

Loss on disposal/impairment of premises and equipment
—

 
11

Loss on sale of other branch assets held for sale
—

 
9

Gain on sales of:
 
 
 
Debt securities available for sale
(17
)
 
(25
)
Marketable equity securities available for sale
(3
)
 
—

Other loans held for sale
—

 
(11
)
Deposits held for sale
—

 
(286
)
(Increase) decrease in other assets (related party balances of ($34) and $47, respectively)
(138
)
 
57

(Decrease) increase in other liabilities (related party balances of ($88) and ($147), respectively)
(62
)
 
335

Net cash provided by operating activities
515

 
1,021

INVESTING ACTIVITIES
 
 
 
Investment securities:
 
 
 
Purchases of securities available for sale
(4,089
)
 
(4,318
)
Proceeds from maturities and paydowns of securities available for sale
1,804

 
1,421

Proceeds from sales of securities available for sale
1,251

 
711

Purchases of other investment securities
(14
)
 
(68
)
Proceeds from sales of other investment securities
20

 
55

Purchases of securities held to maturity
(811
)
 
(1,174
)
Proceeds from maturities and paydowns of securities held to maturity
394

 
120

Net decrease (increase) in interest-bearing deposits in banks
184

 
(76
)
Net increase in loans and leases
(3,573
)
 
(2,171
)
Net increase in bank-owned life insurance
(16
)
 
(22
)
Premises and equipment:
 
 
 
Purchases
(43
)
 
(37
)
Proceeds from sales
15

 
29

Capitalization of software
(92
)
 
(80
)
Net cash used in investing activities
(4,970
)
 
(5,610
)
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits
4,908

 
(238
)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase
(492
)
 
2,016

Net (decrease) increase in other short-term borrowed funds
(251
)
 
5,450

Proceeds from issuance of long-term borrowed funds (related party balances of $0 and $333, respectively)
—

 
333

Repayments of long-term borrowed funds
(6
)
 
(5
)
Treasury stock purchased
(250
)
 
—

Net proceeds from issuance of preferred stock
247

 
—

Dividends declared and paid to common stockholders

(48
)
 
—

Dividends declared and paid to RBS
(60
)
 
(368
)
Net cash provided by financing activities
4,048

 
7,188

(Decrease) increase in cash and cash equivalents
(407
)
 
2,599

Cash and cash equivalents at beginning of period
3,276

 
2,757

Cash and cash equivalents at end of period

$2,869

 

$5,356

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 restated 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 April 2015, the FASB issued ASU No. 2015-05 “Intangibles - Goodwill and Other - Internal Use Software” which will assist entities in evaluating the accounting for fees paid by a customer in a cloud computing arrangement. The ASU, which allows for early adoption, is effective for the Company beginning on January 1, 2016. Adoption of this guidance is not expected to have a material impact on the Company’s unaudited interim Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-03 “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs”. This standard requires debt issuance costs to be presented in the consolidated balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The ASU, which allows for early adoption, is effective for the Company beginning on January 1, 2016. Adoption of this guidance is not expected to have a material impact on the Company’s unaudited interim Consolidated Financial Statements.

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 is 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, which allows for early adoption, 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:
 
June 30, 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

$30


$—


$—


$30

 

$15


$—


$—


$15

State and political subdivisions
9

—

—

9

 
10

—

—

10

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
17,830

227

(56
)
18,001

 
17,683

301

(50
)
17,934

Other/non-agency
631

4

(30
)
605

 
703

4

(35
)
672

Total mortgage-backed securities
18,461

231

(86
)
18,606

 
18,386

305

(85
)
18,606

Total debt securities available for sale
18,500

231

(86
)
18,645

 
18,411

305

(85
)
18,631

Marketable equity securities
5

—

—

5

 
10

3

—

13

Other equity securities
12

—

—

12

 
12

—

—

12

Total equity securities available for sale
17

—

—

17

 
22

3

—

25

Total securities available for sale

$18,517


$231


($86
)

$18,662

 

$18,433


$308


($85
)

$18,656

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

$4,253


$28


($12
)

$4,269

 

$3,728


$22


($31
)

$3,719

Other/non-agency
1,314

28

—

1,342

 
1,420

54

—

1,474

Total securities held to maturity

$5,567


$56


($12
)

$5,611

 

$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
5

—

—

5

 
5

—

—

5

Total other investment securities

$866


$—


$—


$866

 

$872


$—


$—


$872


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



The Company has reviewed its securities portfolio for other-than-temporary impairments. The following table presents the net impairment losses (gains) recognized in earnings:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in millions)
2015

2014

 
2015

2014

Other-than-temporary impairment:
 
 
 
 
 
Total other-than-temporary impairment losses

($1
)

($5
)
 

($32
)

($39
)
      Portions of loss (gains) recognized in other comprehensive income (before taxes)
(1
)
3

 
29

33

Net impairment losses recognized in earnings

($2
)

($2
)
 

($3
)

($6
)

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:
 
June 30, 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


$9


$—

 
—


$—


$—

 
1


$9


$—

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
109

5,222

(40
)
 
37

970

(28
)
 
146

6,192

(68
)
Other/non-agency
3

37

(1
)
 
19

398

(29
)
 
22

435

(30
)
Total mortgage-backed securities
112

5,259

(41
)
 
56

1,368

(57
)
 
168

6,627

(98
)
Total
113


$5,268


($41
)
 
56


$1,368


($57
)
 
169


$6,636


($98
)

 
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.


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


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 June 30,
 
Six Months Ended June 30,
(in millions)
2015

2014

 
2015

2014

Cumulative balance at beginning of period

$62


$59

 

$62


$56

Credit impairments recognized in earnings on securities that have been previously impaired
2

2

 
3

6

Reductions due to increases in cash flow expectations on impaired securities
(2
)
(1
)
 
(3
)
(2
)
Cumulative balance at end of period

$62


$60

 

$62


$60


Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of June 30, 2015 and 2014 were $62 million and $60 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of June 30, 2015 and 2014. For the three months ended June 30, 2015 and 2014, the Company recognized credit related other-than-temporary impairment losses in earnings of $2 million related to non-agency MBS in the AFS portfolio. For the six months ended June 30, 2015 and 2014, the Company recognized credit related other-than-temporary impairment losses in earnings of $3 million and $6 million, respectively. There were no credit impaired debt securities sold during the three or six months ended June 30, 2015 and 2014, respectively. Reductions in credit losses due to increases in cash flow expectations were $2 million and $1 million for the three months ended June 30, 2015 and 2014, respectively, and $3 million and $2 million for the six months ended June 30, 2015 and 2014, respectively, and were presented in interest income from investment securities on the Consolidated Statements of Operations. 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.

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 June 30, 2015 and 2014, $29 million and $33 million, respectively, of pre-tax non-credit related losses were deferred in OCI.


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


The amortized cost and fair value of debt securities at June 30, 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 incurring 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

$30


$—


$—


$—


$30

State and political subdivisions
—

—

—

9

9

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

52

2,002

15,776

17,830

Other/non-agency
—

75

13

543

631

Total debt securities available for sale
30

127

2,015

16,328

18,500

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

—

—

4,253

4,253

Other/non-agency
—

—

—

1,314

1,314

Total debt securities held to maturity
—

—

—

5,567

5,567

Total amortized cost of debt securities

$30


$127


$2,015


$21,895


$24,067

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

$30


$—


$—


$—


$30

State and political subdivisions
—

—

—

9

9

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

55

2,014

15,932

18,001

Other/non-agency
—

76

13

516

605

Total debt securities available for sale
30

131

2,027

16,457

18,645

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

—

—

4,269

4,269

Other/non-agency
—

—

—

1,342

1,342

Total debt securities held to maturity
—

—

—

5,611

5,611

Total fair value of debt securities

$30


$131


$2,027


$22,068


$24,256


The following table reports the amounts recognized in interest income from investment securities on the Consolidated Statements of Operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2015

2014

 
2015

2014

Taxable

$155


$154

 

$314


$303

Non-taxable
—

—

 
—

—

Total interest income from investment securities

$155


$154

 

$314


$303



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


Realized gains and losses on AFS securities are shown below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2015

2014

 
2015

2014

Gains on sale of debt securities

$10


$—

 

$22


$25

Losses on sale of debt securities
(1
)
—

 
(5
)
—

Debt securities gains, net

$9


$—

 

$17


$25

Equity securities gains

$1


$—

 

$3


$—


The amortized cost and fair value of securities pledged are shown below:
 
June 30, 2015
 
December 31, 2014
(in millions)
Amortized Cost
Fair Value

 
Amortized Cost
Fair Value

Pledged against repurchase agreements

$3,749


$3,785

 

$3,650


$3,701

Pledged against FHLB borrowed funds
1,254

1,280

 
1,355

1,407

Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law
3,955

4,013

 
3,453

3,520


There were no loan securitizations for the three or six months ended June 30, 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:
 
June 30, 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

($3,050
)

$—


($3,050
)
 

($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.”

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 June 30, 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

$—


$250


$1,000


$1,800


$3,050


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.
 

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


NOTE 3 - LOANS AND LEASES
A summary of the loans and leases portfolio follows:
(in millions)
June 30, 2015
 
December 31, 2014
Commercial

$33,027

 

$31,431

Commercial real estate
8,157

 
7,809

Leases
3,884

 
3,986

Total commercial
45,068

 
43,226

Residential mortgages
12,253

 
11,832

Home equity loans
3,022

 
3,424

Home equity lines of credit
14,917

 
15,423

Home equity loans serviced by others (1)
1,126

 
1,228

Home equity lines of credit serviced by others (1)
494

 
550

Automobile
13,727

 
12,706

Student
3,355

 
2,256

Credit cards
1,613

 
1,693

Other retail
963

 
1,072

Total retail
51,470

 
50,184

Total loans and leases (2) (3)

$96,538

 

$93,410


(1) The Company’s SBO portfolio consists of purchased 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 $697 million as of June 30, 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 $17.8 billion and $17.9 billion at June 30, 2015 and December 31, 2014, respectively.
Loans held for sale at fair value totaled $397 million and $256 million at June 30, 2015 and December 31, 2014, respectively, and consisted of residential mortgages originated for sale of $318 million and the commercial trading portfolio of $79 million as of June 30, 2015. As of December 31, 2014, residential mortgages originated for sale were $213 million, and commercial trading portfolio totaled $43 million. Other loans held for sale totaled $300 million as of June 30, 2015 and consisted of $260 million of commercial loan syndications and a $40 million credit card portfolio. Other loans held for sale totaled $25 million as of December 31, 2014 and consisted of commercial loan syndications.
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 an 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 August 2015.
Loans pledged as collateral for FHLB borrowed funds totaled $22.3 billion and $22.0 billion at June 30, 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 $12.9 billion and $11.8 billion at June 30, 2015 and December 31, 2014, respectively.
During the six months ended June 30, 2015, the Company purchased a portfolio of residential mortgages with an outstanding principal balance of $636 million, a portfolio of automobile loans with an outstanding principal balance of $809 million, and a portfolio of student loans with an outstanding principal balance of $463 million. During the six months ended June 30, 2014, the Company purchased a portfolio of residential loans with an outstanding principal balance of $878 million, a portfolio of auto loans with an outstanding principal balance of $759 million and a portfolio of student loans with an outstanding principal balance of $59 million.
During the six months ended June 30, 2015, the Company sold a portfolio of residential mortgages with an outstanding principal balance of $273 million. During the six months ended June 30, 2014, in addition to the $1.1 billion loans sold as part of the Company's sale of its Chicago-area retail branches, the Company sold portfolios of residential mortgage loans with outstanding principal balances of $126 million and student loans of $357 million as well as commercial loans with an outstanding principal balance of $132 million.

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


NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK
The allowance for credit losses consists of the ALLL and the reserve for unfunded commitments. It 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 reserve 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:

Six Months Ended June 30, 2015
(in millions)
Commercial

Retail

Total

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

$544


$651


$1,195

Charge-offs
(21
)
(215
)
(236
)
Recoveries
36

68

104

Net (charge-offs) recoveries
15

(147
)
(132
)
Sales/Other
—

(2
)
(2
)
Provision charged to income
6

134

140

Allowance for loan and lease losses as of June 30, 2015
565

636

1,201

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 June 30, 2015
56

—

56

Total allowance for credit losses as of June 30, 2015

$621


$636


$1,257

 
Six Months Ended June 30, 2014
(in millions)
Commercial

Retail

Total

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

$498


$723


$1,221

Charge-offs
(14
)
(231
)
(245
)
Recoveries
35

55

90

Net (charge-offs) recoveries
21

(176
)
(155
)
Provision charged to income
(11
)
155

144

Allowance for loan and lease losses as of June 30, 2014
508

702

1,210

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

—

39

Credit for unfunded lending commitments
26

—

26

Reserve for unfunded lending commitments as of June 30, 2014
65

—

65

Total allowance for credit losses as of June 30, 2014

$573


$702


$1,275



The recorded investment in loans and leases based on the Company’s evaluation methodology is as follows:
 
June 30, 2015
 
December 31, 2014
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$156


$1,189


$1,345

 

$205


$1,208


$1,413

Formula-based evaluation
44,912

50,281

95,193

 
43,021

48,976

91,997

Total

$45,068


$51,470


$96,538

 

$43,226


$50,184


$93,410



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


The following is a summary of the allowance for credit losses by evaluation method:
 
June 30, 2015
 
December 31, 2014
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$21


$107


$128

 

$20


$109


$129

Formula-based evaluation
600

529

1,129

 
585

542

1,127

Allowance for credit losses

$621


$636


$1,257

 

$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:
 
June 30, 2015
 
 
Criticized
 
(in millions)
Pass

Special Mention

Substandard

Doubtful

Total

Commercial

$31,443


$865


$635


$84


$33,027

Commercial real estate
7,949

133

34

41

8,157

Leases
3,831

4

49

—

3,884

Total

$43,223


$1,002


$718


$125


$45,068


 
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



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


The recorded investment in classes of retail loans, categorized by delinquency status is as follows:
 
June 30, 2015
(in millions)
Current

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

Residential mortgages

$11,853


$89


$65


$246


$12,253

Home equity loans
2,652

187

48

135

3,022

Home equity lines of credit
14,253

406

73

185

14,917

Home equity loans serviced by others (1)
1,027

58

20

21

1,126

Home equity lines of credit serviced by others (1)
390

61

22

21

494

Automobile
12,817

784

104

22

13,727

Student
3,209

87

24

35

3,355

Credit cards
1,542

39

18

14

1,613

Other retail
889

57

14

3

963

Total

$48,632


$1,768


$388


$682


$51,470

(1) The Company’s SBO portfolio consists of purchased 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