Document
 
 
 
 
 
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, 2016

[ ] 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.
[ü] 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).
[ü] 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                     [ü]          Accelerated filer      [ ]
Non-accelerated filer (Do not check if a smaller reporting company) [ ]         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 [ü] No

There were 519,470,882 shares of Registrant’s common stock ($0.01 par value) outstanding on August 1, 2016.



 
 
 
 
 
 
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
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 (Loss)
ASU
 
Accounting Standards Update
ATM
 
Automated 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
CCB
 
Capital Conservation Buffer
CCO
 
Chief Credit Officer
CET1
 
Common Equity Tier 1
CEO
 
Chief Executive Officer
CFPB
 
Consumer Financial Protection Bureau
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
ERISA
 
Employee Retirement Income Security Act of 1974
Fannie Mae (FNMA)
 
Federal National Mortgage Association
FASB
 
Financial Accounting Standards Board
FDIA
 
Federal Deposit Insurance Act
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

3
CITIZENS FINANCIAL GROUP, INC.

 

LCR
 
Liquidity Coverage Ratio
LGD
 
Loss Given Default
LIBOR
 
London Interbank Offered Rate
LIHTC
 
Low Income Housing Tax Credit
LTV
 
Loan to Value
MBS
 
Mortgage-Backed Securities
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
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
SBO
 
Serviced by Others loan portfolio
SEC
 
United States Securities and Exchange Commission
SVaR
 
Stressed Value at Risk
TDR
 
Troubled Debt Restructuring
VaR
 
Value at Risk




4
CITIZENS FINANCIAL GROUP, INC.

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


5
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
June 30, 2016

 
December 31, 2015
ASSETS:
 
 
 
Cash and due from banks

$976

 

$1,099

Interest-bearing cash and due from banks
2,679

 
1,986

Interest-bearing deposits in banks
727

 
356

Securities available for sale, at fair value (including $245 and $4,283 pledged to creditors, respectively) (a)
18,479

 
17,884

Securities held to maturity (including $0 and $135 pledged to creditors, respectively, and fair value of $5,136 and $5,297, respectively) (a)
4,973

 
5,258

Other investment securities, at fair value
73

 
70

Other investment securities, at cost
873

 
863

Loans held for sale, at fair value
478

 
325

Other loans held for sale
372

 
40

Loans and leases
103,551

 
99,042

Less: Allowance for loan and lease losses
1,246

 
1,216

Net loans and leases
102,305

 
97,826

Derivative assets
1,312

 
625

Premises and equipment, net
551

 
595

Bank-owned life insurance
1,587

 
1,564

Goodwill
6,876

 
6,876

Due from broker
132

 
—

Other assets
2,790

 
2,841

TOTAL ASSETS

$145,183

 

$138,208

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

$27,108

 

$27,649

Interest-bearing
79,149

 
74,890

          Total deposits
106,257

 
102,539

Federal funds purchased and securities sold under agreements to repurchase
717

 
802

Other short-term borrowed funds
2,770

 
2,630

Derivative liabilities
1,010

 
485

Deferred taxes, net
961

 
730

Long-term borrowed funds
11,810

 
9,886

Due to broker
86

 
—

Other liabilities
1,346

 
1,490

TOTAL LIABILITIES

$124,957

 

$118,562

Contingencies (refer to Note 12)


 


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, 2016 and December 31, 2015

$247

 

$247

Common stock:
 
 
 
$0.01 par value, 1,000,000,000 shares authorized, 564,437,963 shares issued and 529,094,976 shares outstanding at June 30, 2016 and 1,000,000,000 shares authorized, 563,117,415 shares issued and 527,774,428 shares outstanding at December 31, 2015
6

 
6

Additional paid-in capital
18,735

 
18,725

Retained earnings
2,255

 
1,913

Treasury Stock, at cost, 35,342,987 shares at June 30, 2016 and December 31, 2015, respectively
(858
)
 
(858
)
Accumulated other comprehensive loss
(159
)
 
(387
)
TOTAL STOCKHOLDERS’ EQUITY

$20,226

 

$19,646

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$145,183

 

$138,208

(a) Includes only collateral pledged by the Company where counterparties have the right to sell or pledge the collateral.

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

6
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)
2016

2015

2016

2015

INTEREST INCOME:
 
 
 
 
Interest and fees on loans and leases

$896


$790


$1,764


$1,569

Interest and fees on loans held for sale, at fair value
3

3

6

5

Interest and fees on other loans held for sale
4

3

5

4

Investment securities
141

155

286

314

Interest-bearing deposits in banks
2

1

4

2

Total interest income
1,046

952

2,065

1,894

INTEREST EXPENSE:
 
 
 
 
Deposits
63

60

123

112

Federal funds purchased and securities sold under agreements to repurchase
—

2

1

9

Other short-term borrowed funds
12

19

23

34

Long-term borrowed funds
48

31

91

63

Total interest expense
123

112

238

218

Net interest income
923

840

1,827

1,676

Provision for credit losses
90

77

181

135

Net interest income after provision for credit losses
833

763

1,646

1,541

NONINTEREST INCOME:
 
 
 
 
Service charges and fees
150

139

294

274

Card fees
51

60

101

112

Trust and investment services fees
38

41

75

77

Capital markets fees
35

30

57

52

Foreign exchange and letter of credit fees
21

22

42

45

Mortgage banking fees
25

30

43

63

Bank-owned life insurance income
13

14

26

26

Securities gains, net
4

9

13

17

Net securities impairment losses recognized in earnings
(7
)
(2
)
(8
)
(3
)
Other income
25

17

42

44

Total noninterest income
355

360

685

707

NONINTEREST EXPENSE:
 
 
 
 
Salaries and employee benefits
432

411

857

830

Outside services
86

99

177

178

Occupancy
76

90

152

170

Equipment expense
64

65

129

128

Amortization of software
41

37

80

73

Other operating expense
128

139

243

272

Total noninterest expense
827

841

1,638

1,651

Income before income tax expense
361

282

693

597

Income tax expense
118

92

227

198

NET INCOME

$243


$190


$466


$399

Net income available to common stockholders
$243
$190
$459

$399

Weighted-average common shares outstanding:
 
 
 
 
Basic
528,968,330

537,729,248

528,519,489

541,986,653

Diluted
530,365,203

539,909,366

530,396,871

544,804,268

Per common share information:
 
 
 
 
Basic earnings

$0.46


$0.35


$0.87


$0.74

Diluted earnings
0.46

0.35

0.87

0.73

   Dividends declared and paid
0.12

0.10

0.22

0.20

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

7
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2016

2015

2016

2015

Net income

$243


$190


$466


$399

Other comprehensive income (loss):
 
 
 
 
Net unrealized derivative instrument gains (losses) arising during the periods, net of income taxes of $8, ($3), $29 and $36, respectively
13

(5
)
46

60

Reclassification adjustment for net derivative gains included in net income, net of income taxes of ($4), ($1), ($10) and ($2), respectively
(9
)
(2
)
(17
)
(4
)
Net unrealized securities available for sale gains (losses) arising during the periods, net of income taxes of $39, ($66), $131 and ($12), respectively
64

(110
)
218

(20
)
Other-than-temporary impairment not recognized in earnings on securities, net of income taxes of $2, $0, ($13) and ($11), respectively
4

1

(21
)
(18
)
Reclassification of net securities losses (gains) to net income, net of income taxes of $1, ($2), ($2) and ($5), respectively
2

(5
)
(3
)
(9
)
Defined benefit pension plans:
 
 
 
 
Amortization of actuarial loss, net of income taxes of $1, $2, $3 and $3, respectively
3

2

5

4

Total other comprehensive income (loss), net of income taxes
77

(119
)
228

13

Total comprehensive income

$320


$71


$694


$412

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

8
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, 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 purchased
—

—

 
—

—

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

 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
—


$247

 
528


$6


$18,725


$1,913


($858
)

($387
)

$19,646

Dividends to common stockholders
—

—

 
—

—

—

(117
)
—

—

(117
)
Dividend to preferred stockholders
—

—

 
—

—

—

(7
)
—

—

(7
)
Share-based compensation plans
—

—

 
1

—

5

—

—

—

5

Employee stock purchase plan shares purchased
—

—

 
—

—

5

—

—

—

5

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

466

—

—

466

Other comprehensive income
—

—

 
—

—

—

—



228

228

Total comprehensive income
—

—

 
—

—

—

466

—

228

694

Balance at June 30, 2016
—


$247

 
529


$6


$18,735


$2,255


($858
)

($159
)

$20,226

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

9
CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended June 30,
(in millions)
2016

2015

OPERATING ACTIVITIES
 
 
Net income

$466


$399

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Provision for credit losses
181

135

Originations of mortgage loans held for sale
(1,135
)
(1,182
)
Proceeds from sales of mortgage loans held for sale
1,022

1,111

Purchases of commercial loans held for sale
(735
)
(632
)
Proceeds from sales of commercial loans held for sale
739

594

Amortization of terminated cash flow hedges
16

9

Depreciation, amortization and accretion
245

234

Mortgage servicing rights valuation charge-off (recovery)
4

(7
)
Securities impairment
8

3

Deferred income taxes
94

56

Share-based compensation
11

15

Net gain on sales of:
 
 
Debt securities
(13
)
(17
)
Marketable equity securities available for sale
—

(3
)
Premises and equipment
(2
)
—

Increase in other assets
(450
)
(138
)
Increase (decrease) in other liabilities
253

(62
)
Net cash provided by operating activities
704

515

INVESTING ACTIVITIES
 
 
Investment securities:
 
 
Purchases of securities available for sale
(2,355
)
(4,089
)
Proceeds from maturities and paydowns of securities available for sale
1,611

1,804

Proceeds from sales of securities available for sale
375

1,251

Purchases of securities held to maturity
—

(811
)
Proceeds from maturities and paydowns of securities held to maturity
290

394

Purchases of other investment securities, at fair value
(114
)
—

Proceeds from sales of other investment securities, at fair value
109

—

Purchases of other investment securities, at cost
(62
)
(14
)
Proceeds from sales of other investment securities, at cost
52

20

Net (increase) decrease in interest-bearing deposits in banks
(371
)
184

Net increase in loans and leases
(5,045
)
(3,573
)
Net increase in bank-owned life insurance
(23
)
(16
)
Premises and equipment:
 
 
Purchases
(22
)
(43
)
Proceeds from sales
3

15

Capitalization of software
(85
)
(92
)
Net cash used in investing activities
(5,637
)
(4,970
)
FINANCING ACTIVITIES
 
 
Net increase in deposits
3,718

4,908

Net decrease in federal funds purchased and securities sold under agreements to repurchase
(85
)
(492
)
Net decrease in other short-term borrowed funds
(1,370
)
(251
)
Proceeds from issuance of long-term borrowed funds
6,995

—

Repayments of long-term borrowed funds
(3,631
)
(6
)
Treasury stock purchased
—

(250
)
Net proceeds from issuance of preferred stock
—

247

Dividends declared and paid to common stockholders

(117
)
(108
)
Dividends declared and paid to preferred stockholders
(7
)
—

Net cash provided by financing activities
5,503

4,048

Increase (decrease) in cash and cash equivalents
570

(407
)
Cash and cash equivalents at beginning of period
3,085

3,276

Cash and cash equivalents at end of period

$3,655


$2,869

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



10
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, 2015. 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.
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 June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” Under current GAAP, the Company reflects credit losses on financial assets measured on an amortized cost basis only when the losses are probable or have been incurred. The ASU replaces this approach with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when the assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. The ASU also revises the approach to recognizing credit losses on securities available for sale by allowing entities to record reversals of credit losses in current-period earnings. The ASU is effective for the Company beginning on January 1, 2020. The Company is currently assessing the impact of this guidance on the Company’s unaudited interim Consolidated Financial Statements.
In May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The ASU supplements the new revenue recognition standard issued in 2014 by addressing certain issues in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s unaudited interim Consolidated Financial Statements.
In April 2016, the FASB issued ASU No. 2016-10 “Identifying Performance Obligations and Licensing.” The ASU supplements the new revenue recognition standard issued in 2014 by clarifying the guidance related to licensing and the identification of performance obligations. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s unaudited interim Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting.” The ASU modifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for the Company beginning on January 1, 2017. Adoption of this guidance is not expected to have a material impact on the Company’s unaudited interim Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The ASU supplements the new revenue recognition standard issued in 2014 by clarifying the implementation guidance on principal versus agent considerations. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s unaudited interim Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-05 “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The ASU clarifies that a change in a counterparty to a derivative instrument that has been designated as a hedging instrument, in and of itself, does not result in a hedge de-designation under ASC 815. The ASU is effective for the Company beginning on January 1, 2017. Adoption of this guidance is not expected to have a material impact on the Company’s unaudited interim Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02 “Leases.” The ASU generally requires lessees to recognize a right-of use asset and corresponding lease liability for all leases with a lease term of greater than one year. The ASU is effective for the Company beginning on January 1, 2019. The Company is currently assessing the impact of this guidance on the Company’s unaudited interim Consolidated Financial Statements.

11
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


In January 2016, the FASB issued ASU No. 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities.” The ASU requires equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in the fair value recognized through net income. The ASU also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements. In addition, the ASU makes several other targeted amendments to the existing accounting and disclosure requirements for financial instruments, including revised guidance related to valuation allowance assessments when recognizing deferred tax assets on unrealized losses on debt securities available for sale. The ASU is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Company’s unaudited interim Consolidated Financial Statements.
NOTE 2 - SECURITIES
The following table provides the major components of securities at amortized cost and fair value:
 
June 30, 2016
 
December 31, 2015
(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 and other

$15


$—


$—


$15

 

$16


$—


$—


$16

State and political subdivisions
9

—

—

9

 
9

—

—

9

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
17,588

401

(8
)
17,981

 
17,234

153

(67
)
17,320

Other/non-agency
489

2

(34
)
457

 
555

4

(37
)
522

Total mortgage-backed securities
18,077

403

(42
)
18,438

 
17,789

157

(104
)
17,842

Total debt securities available for sale
18,101

403

(42
)
18,462

 
17,814

157

(104
)
17,867

Marketable equity securities
5

—

—

5

 
5

—

—

5

Other equity securities
12

—

—

12

 
12

—

—

12

Total equity securities available for sale
17

—

—

17

 
17

—

—

17

Total securities available for sale

$18,118


$403


($42
)

$18,479

 

$17,831


$157


($104
)

$17,884

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

$3,912


$119


$—


$4,031

 

$4,105


$27


($11
)

$4,121

Other/non-agency
1,061

44

—

1,105

 
1,153

23

—

1,176

Total securities held to maturity

$4,973


$163


$—


$5,136

 

$5,258


$50


($11
)

$5,297

Other Investment Securities, at Fair Value
 
 
 
 
 
 
 
 
 
Money market mutual fund

$68


$—


$—


$68

 

$65


$—


$—


$65

Other investments
5

—

—

5

 
5

—

—

5

Total other investment securities, at fair value

$73


$—


$—


$73

 

$70


$—


$—


$70

Other Investment Securities, at Cost
 
 
 
 
 
 
 
 
 
Federal Reserve Bank stock

$463


$—


$—


$463

 

$468


$—


$—


$468

Federal Home Loan Bank stock
410

—

—

410

 
395

—

—

395

Total other investment securities, at cost

$873


$—


$—


$873

 

$863


$—


$—


$863


12
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



The Company has reviewed its securities portfolio for other-than-temporary impairments. The following table presents the net securities impairment losses recognized in earnings:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2016

 
2015

 
2016

 
2015

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

($1
)
 

($1
)
 

($42
)
 

($32
)
      Portions of loss recognized in other comprehensive income (before taxes)
(6
)
 
(1
)
 
34

 
29

Net securities impairment losses recognized in earnings

($7
)
 

($2
)
 

($8
)
 

($3
)

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, 2016
 
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
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
7


$95


$—

 
33


$734


($8
)
 
40


$829


($8
)
Other/non-agency
4

19

—

 
20

330

(34
)
 
24

349

(34
)
Total mortgage-backed securities
11

114

—

 
53

1,064

(42
)
 
64

1,178

(42
)
Total
11


$114


$—

 
53


$1,064


($42
)
 
64


$1,178


($42
)

 
December 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


$9


$—

 
—


$—


$—

 
1


$9


$—

U.S. Treasury and other
1

15

—

 
—

—

—

 
1

15

—

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
162

7,423

(51
)
 
36

819

(27
)
 
198

8,242

(78
)
Other/non-agency
2

9

—

 
20

361

(37
)
 
22

370

(37
)
Total mortgage-backed securities
164

7,432

(51
)
 
56

1,180

(64
)
 
220

8,612

(115
)
Total
166


$7,456


($51
)
 
56


$1,180


($64
)
 
222


$8,636


($115
)

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.

13
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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 collateral loss model and an integrated cash flow engine. The model calculates prepayment, default, and loss severity assumptions using collateral performance data. These assumptions are used to produce cash flows that generate loss projections. These loss projections 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)
2016

 
2015

 
2016

 
2015

Cumulative balance at beginning of period

$66

 

$62

 

$66

 

$62

Credit impairments recognized in earnings on securities that have been previously impaired
7

 
2

 
8

 
3

Reductions due to increases in cash flow expectations on impaired securities
—

 
(2
)
 
(1
)
 
(3
)
Cumulative balance at end of period

$73

 

$62

 

$73

 

$62


Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of June 30, 2016 and 2015 were $73 million and $62 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of June 30, 2016 and 2015. For the three months ended June 30, 2016 and 2015, the Company recognized credit related other-than-temporary-impairment losses in earnings of $7 million and $2 million respectively, related to non-agency MBS in the AFS portfolio. The $5 million increase from June 30, 2015 to June 30, 2016 is primarily attributable to a one-time adjustment tied to a new model implementation. This adjustment is the result of the Company migrating in June 2016 from a proprietary internal process to a vendor-based model to estimate other-than-temporary impairment. For the six months ended June 30, 2016 and 2015, the Company recognized credit related other-than-temporary impairment losses in earnings of $8 million and $3 million, respectively. The other-than-temporary impairment losses for the six months ended June 30, 2016 include the impact of the one-time adjustment tied to the new model implementation discussed above. There were no credit impaired debt securities sold during the three and six months ended June 30, 2016 and 2015. Reductions in credit losses due to increases in cash flow expectations were none and $2 million for the three months ended June 30, 2016 and 2015, respectively, and $1 million and $3 million for the six months ended June 30, 2016 and 2015, 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. Additionally, $34 million and $29 million of pre-tax non-credit related losses were deferred in OCI for the six months ended June 30, 2016 and 2015, respectively.


14
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The amortized cost and fair value of debt securities 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.
 
June 30, 2016
 
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 and other

$15


$—


$—


$—


$15

State and political subdivisions
—

—

—

9

9

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
15

36

1,668

15,869

17,588

Other/non-agency
—

50

2

437

489

Total debt securities available for sale
30

86

1,670

16,315

18,101

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

—

—

3,912

3,912

Other/non-agency
—

—

—

1,061

1,061

Total debt securities held to maturity
—

—

—

4,973

4,973

Total amortized cost of debt securities

$30


$86


$1,670


$21,288


$23,074

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

$15


$—


$—


$—


$15

State and political subdivisions
—

—

—

9

9

Mortgage-backed securities:
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
15

38

1,710

16,218

17,981

Other/non-agency
—

50

3

404

457

Total debt securities available for sale
30

88

1,713

16,631

18,462

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

—

—

4,031

4,031

Other/non-agency
—

—

—

1,105

1,105

Total debt securities held to maturity
—

—

—

5,136

5,136

Total fair value of debt securities

$30


$88


$1,713


$21,767


$23,598


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)
2016

 
2015

 
2016

 
2015

Taxable

$141

 

$155

 

$286

 

$314

Non-taxable
—

 
—

 
—

 
—

Total interest income from investment securities

$141

 

$155

 

$286

 

$314



15
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Realized gains and losses on securities are shown below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2016

 
2015

 
2016

 
2015

Gains on sale of debt securities

$4

 

$10

 

$13

 

$22

Losses on sale of debt securities
—

 
(1
)
 
—

 
(5
)
Debt securities gains, net

$4

 

$9

 

$13

 

$17

Equity securities gains

$—

 

$1

 

$—

 

$3

The amortized cost and fair value of securities pledged are shown below:
 
June 30, 2016
 
December 31, 2015
(in millions)
Amortized Cost
Fair Value

 
Amortized Cost
Fair Value

Pledged against repurchase agreements

$705


$720

 

$805


$808

Pledged against FHLB borrowed funds
1,070

1,114

 
1,163

1,186

Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law
4,236

4,341

 
3,579

3,610


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, 2016
 
December 31, 2015
(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 purchased under agreements to resell

$—


$—


$—

 

$500


($500
)

$—

Securities sold under agreements to repurchase
—

—

—

 
(500
)
500

—


Note: The Company also offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 11 “Derivatives.”

There were $5 million in securitizations of mortgage loans retained in the investment portfolio for the three and six months ended June 30, 2016 and none in 2015. These securitizations included a substantive guarantee by a third party. In 2016, the guarantors were Fannie Mae and Ginnie Mae. These securitizations were accounted for as a sale of the transferred loans and as a purchase of securities. The securities received from the guarantors are classified as AFS.

16
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 3 - LOANS AND LEASES
A summary of the loans and leases portfolio follows:
(in millions)
June 30, 2016
 
December 31, 2015
Commercial

$35,927

 

$33,264

Commercial real estate
9,825

 
8,971

Leases
3,805

 
3,979

Total commercial
49,557

 
46,214

Residential mortgages
13,855

 
13,318

Home equity loans
2,177

 
2,557

Home equity lines of credit
14,418

 
14,674

Home equity loans serviced by others (1)
860

 
986

Home equity lines of credit serviced by others (1)
273

 
389

Automobile
14,075

 
13,828

Student
5,516

 
4,359

Credit cards
1,613

 
1,634

Other retail
1,207

 
1,083

Total retail
53,994

 
52,828

Total loans and leases (2) (3)

$103,551

 

$99,042


(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 $850 million and $365 million as of June 30, 2016 and December 31, 2015, respectively.
(3) Mortgage loans serviced for others by the Company’s subsidiaries are not included above and amounted to $17.2 billion and $17.6 billion at June 30, 2016 and December 31, 2015, respectively.
During the three months ended June 30, 2016, the Company purchased $348 million of student loans, $200 million of automobile loans and $63 million of residential mortgages. During the three months ended June 30, 2015, the Company purchased $202 million of student loans, $416 million of automobile loans and $387 million of residential mortgages. During the six months ended June 30, 2016, the Company purchased $717 million of student loans, $334 million of automobile loans and $183 million of residential mortgages. During the six months ended June 30, 2015, the Company purchased $463 million of student loans, $809 million of automobile loans and $636 million of residential mortgages.
During the three months ended June 30, 2016, the Company sold $108 million of residential mortgage loans and $45 million of commercial loans. During the three months ended June 30, 2015, the Company sold $114 million of commercial loans. During the six months ended June 30, 2016, the Company sold $281 million of residential mortgage loans and $118 million of commercial loans. During the six months ended June 30, 2015, the Company sold $273 million of residential mortgage loans and $225 million of commercial loans.
Loans held for sale at fair value totaled $478 million and $325 million at June 30, 2016 and December 31, 2015, respectively, and consisted of residential mortgages originated for sale of $424 million and the commercial trading portfolio of $54 million as of June 30, 2016. As of December 31, 2015, residential mortgages originated for sale were $268 million and the commercial trading portfolio totaled $57 million.
Other loans held for sale, at lower of cost or market value, totaled $372 million and $40 million as of June 30, 2016 and December 31, 2015, respectively. Other loans held for sale, as of June 30, 2016, contained $322 million of TDRs, including $262 million of residential mortgages and $60 million of home equity loans. Other loans held for sale also included commercial loans associated with the Company’s syndications business of $50 million as of June 30, 2016 compared with $40 million as of December 31, 2015.
Loans pledged as collateral for FHLB borrowed funds totaled $23.2 billion at June 30, 2016 and December 31, 2015. 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 $16.6 billion and $15.9 billion at June 30, 2016 and December 31, 2015, respectively.

17
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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, 2015, 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:
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Allowance for loan and lease losses, beginning of period

$633


$591


$1,224

 

$596


$620


$1,216

Charge-offs
(7
)
(106
)
(113
)
 
(20
)
(219
)
(239
)
Recoveries
5

43

48

 
9

82

91

Net charge-offs
(2
)
(63
)
(65
)
 
(11
)
(137
)
(148
)
Provision charged to income
45

42

87

 
91

87

178

Allowance for loan and lease losses, end of period
676

570

1,246

 
676

570

1,246

Reserve for unfunded lending commitments, beginning of period
58

—

58

 
58

—

58

Credit for unfunded lending commitments
3

—

3

 
3

—

3

Reserve for unfunded lending commitments as of period end
61

—

61

 
61

—

61

Total allowance for credit losses as of period end

$737


$570


$1,307

 

$737


$570


$1,307

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

Retail

Total

 
Commercial

Retail

Total

Allowance for loan and lease losses, beginning of period

$578


$624


$1,202

 

$544


$651


$1,195

Charge-offs
(15
)
(106
)
(121
)
 
(21
)
(215
)
(236
)
Recoveries
8

35

43

 
36

68

104

Net recoveries (charge-offs)
(7
)
(71
)
(78
)
 
15

(147
)
(132
)
Sales/Other
—

—

—

 
—

(2
)
(2
)
Provision charged to income
(6
)
83

77

 
6

134

140

Allowance for loan and lease losses, end of period
565

636

1,201

 
565

636

1,201

Reserve for unfunded lending commitments, beginning of period
56

—

56

 
61

—

61

Provision for unfunded lending commitments
—

—

—

 
(5
)
—

(5
)
Reserve for unfunded lending commitments as of period end
56

—

56

 
56

—

56

Total allowance for credit losses as of period end

$621


$636


$1,257

 

$621


$636


$1,257



18
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The recorded investment in loans and leases based on the Company’s evaluation methodology is as follows:
 
June 30, 2016
 
December 31, 2015
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$408


$802


$1,210

 

$218


$1,165


$1,383

Formula-based evaluation
49,149

53,192

102,341

 
45,996

51,663

97,659

Total

$49,557


$53,994


$103,551

 

$46,214


$52,828


$99,042


The following is a summary of the allowance for credit losses by evaluation method:
 
June 30, 2016
 
December 31, 2015
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$52


$79


$131

 

$36


$101


$137

Formula-based evaluation
685

491

1,176

 
618

519

1,137

Allowance for credit losses

$737


$570


$1,307

 

$654


$620


$1,274


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, 2016
 
 
Criticized
 
(in millions)
Pass

Special Mention
Substandard

Doubtful

Total

Commercial

$33,931


$855


$1,015


$126