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

For the Quarterly Period Ended
March 31, 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 528,980,180 shares of Registrant’s common stock ($0.01 par value) outstanding on May 2, 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
RWA
 
Risk-weighted Assets
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)
March 31, 2016

 
December 31, 2015
ASSETS:
 
 
 
Cash and due from banks

$839

 

$1,099

Interest-bearing cash and due from banks
1,016

 
1,986

Interest-bearing deposits in banks
534

 
356

Securities available for sale, at fair value (including $297 and $4,283 pledged to creditors, respectively) (a)
17,964

 
17,884

Securities held to maturity (including $0 and $135 pledged to creditors, respectively, and fair value of $5,261 and $5,297, respectively) (a)
5,129

 
5,258

Other investment securities, at fair value
68

 
70

Other investment securities, at cost
896

 
863

Loans held for sale, at fair value
365

 
325

Other loans held for sale
386

 
40

Loans and leases
100,991

 
99,042

Less: Allowance for loan and lease losses
1,224

 
1,216

Net loans and leases
99,767

 
97,826

Derivative assets
1,068

 
625

Premises and equipment, net
570

 
595

Bank-owned life insurance
1,576

 
1,564

Goodwill
6,876

 
6,876

Due from broker
161

 
—

Other assets
2,862

 
2,841

TOTAL ASSETS

$140,077

 

$138,208

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

$27,186

 

$27,649

Interest-bearing
75,420

 
74,890

          Total deposits
102,606

 
102,539

Federal funds purchased and securities sold under agreements to repurchase
714

 
802

Other short-term borrowed funds
3,300

 
2,630

Derivative liabilities
832

 
485

Deferred taxes, net
852

 
730

Long-term borrowed funds (RBS balances of $1,125 and $1,250, respectively)
10,035

 
9,886

Due to broker
276

 
—

Other liabilities
1,497

 
1,490

TOTAL LIABILITIES

$120,112

 

$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 March 31, 2016 and December 31, 2015

$247

 

$247

Common stock:
 
 
 
$0.01 par value, 1,000,000,000 shares authorized, 564,276,714 shares issued and 528,933,727 shares outstanding at March 31, 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
18,730

 
18,725

Retained earnings
2,076

 
1,913

Treasury Stock, at cost, 35,342,987 shares at March 31, 2016 and December 31, 2015.
(858
)
 
(858
)
Accumulated other comprehensive loss
(236
)
 
(387
)
TOTAL STOCKHOLDERS’ EQUITY

$19,965

 

$19,646

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$140,077

 

$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 March 31,
 (in millions, except share and per-share data)
2016

2015

INTEREST INCOME:
 
 
Interest and fees on loans and leases

$868


$779

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

2

Interest and fees on other loans held for sale
1

1

Investment securities
145

159

Interest-bearing deposits in banks
2

1

Total interest income
1,019

942

INTEREST EXPENSE:
 
 
Deposits
60

52

Federal funds purchased and securities sold under agreements to repurchase
1

7

Other short-term borrowed funds
11

15

Long-term borrowed funds (RBS balances of $11 and $20, respectively)
43

32

Total interest expense
115

106

Net interest income
904

836

Provision for credit losses
91

58

Net interest income after provision for credit losses
813

778

NONINTEREST INCOME:
 
 
Service charges and fees
144

135

Card fees
50

52

Trust and investment services fees
37

36

Capital markets fees
22

22

Foreign exchange and letter of credit fees
21

23

Mortgage banking fees
18

33

Bank-owned life insurance income
13

12

Securities gains, net
9

8

Net securities impairment losses recognized in earnings
(1
)
(1
)
Other income
17

27

Total noninterest income
330

347

NONINTEREST EXPENSE:
 
 
Salaries and employee benefits
425

419

Outside services
91

79

Occupancy
76

80

Equipment expense
65

63

Amortization of software
39

36

Other operating expense
115

133

Total noninterest expense
811

810

Income before income tax expense
332

315

Income tax expense
109

106

NET INCOME

$223


$209

Net income available to common stockholders
$216
$209
Weighted-average common shares outstanding:
 
 
Basic
528,070,648

546,291,363

Diluted
530,446,188

549,798,717

Per common share information:
 
 
Basic earnings

$0.41


$0.38

Diluted earnings
0.41

0.38

   Dividends declared and paid
0.10

0.10

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 March 31,
(in millions)
2016

2015

Net income

$223


$209

Other comprehensive income:
 
 
Net unrealized derivative instrument gains arising during the periods, net of income taxes of $21 and $39, respectively
33

65

Reclassification adjustment for net derivative gains included in net income, net of income taxes of ($6) and ($1), respectively
(8
)
(2
)
Net unrealized securities available for sale gains arising during the periods, net of income taxes of $92 and $54, respectively
154

90

Other-than-temporary impairment not recognized in earnings on securities, net of income taxes of ($15) and ($11), respectively
(25
)
(19
)
Reclassification of net securities gains to net income, net of income taxes of ($3) and ($3), respectively
(5
)
(4
)
Defined benefit pension plans:
 
 
Amortization of actuarial loss, net of income taxes $2 and $1, respectively
2

2

Total other comprehensive income, net of income taxes
151

132

Total comprehensive income

$374


$341

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
—

—

 
—

—

—

(16
)
—

—

(16
)
Dividends to RBS
—

—

 
—

—

—

(39
)
—

—

(39
)
Share-based compensation plans
—

—

 
1

—

29

—

(21
)
—

8

Employee stock purchase plan shares purchased
—

—

 
—

—

2

—

—

—

2

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

209

—

—

209

Other comprehensive income
—

—

 
—

—

—

—

—

132

132

Total comprehensive income
—

—

 
—

—

—

209

—

132

341

Balance at March 31, 2015
—


$—

 
547


$6


$18,707


$1,448


($357
)

($240
)

$19,564

Balance at January 1, 2016
—


$247

 
528


$6


$18,725


$1,913


($858
)

($387
)

$19,646

Dividends to common stockholders
—

—

 
—

—

—

(53
)
—

—

(53
)
Dividend to preferred stockholders
—

—

 
—

—

—

(7
)
—

—

(7
)
Share-based compensation plans
—

—

 
1

—

2

—

—

—

2

Employee stock purchase plan shares purchased
—

—

 
—

—

3

—

—

—

3

Total comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net income
—

—

 
—

—

—

223

—

—

223

Other comprehensive income
—

—

 
—

—

—

—

—

151

151

Total comprehensive income
—

—

 
—

—

—

223

—

151

374

Balance at March 31, 2016
—


$247

 
529


$6


$18,730


$2,076


($858
)

($236
)

$19,965

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)
 
Three Months Ended March 31,
(in millions)
2016

2015

OPERATING ACTIVITIES
 
 
Net income

$223


$209

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Provision for credit losses
91

58

Originations of mortgage loans held for sale
(484
)
(495
)
Proceeds from sales of mortgage loans held for sale
479

462

Purchases of commercial loans held for sale
(362
)
(288
)
Proceeds from sales of commercial loans held for sale
345

262

Amortization of terminated cash flow hedges
15

4

Depreciation, amortization and accretion
112

113

Mortgage servicing rights valuation charge-off (recovery)
5

(1
)
Securities impairment
1

1

Deferred income taxes
30

14

Share-based compensation
4

6

Gain on sales of:
 
 
Debt securities
(9
)
(8
)
Marketable equity securities available for sale
—

(2
)
Premises and equipment
(2
)
—

Increase in other assets
(339
)
(136
)
Increase (decrease) in other liabilities
265

(101
)
Net cash provided by operating activities
374

98

INVESTING ACTIVITIES
 
 
Investment securities:
 
 
Purchases of securities available for sale
(706
)
(2,190
)
Proceeds from maturities and paydowns of securities available for sale
709

865

Proceeds from sales of securities available for sale
217

1,101

Purchases of securities held to maturity
—

(181
)
Proceeds from maturities and paydowns of securities held to maturity
131

150

Purchases of other investment securities, at fair value
(51
)
—

Proceeds from sales of other investment securities, at fair value
53

—

Purchases of other investment securities, at cost
(37
)
(6
)
Proceeds from sales of other investment securities, at cost
4

11

Net increase in interest-bearing deposits in banks
(178
)
(245
)
Net increase in loans and leases
(2,401
)
(1,183
)
Net increase in bank-owned life insurance
(12
)
(8
)
Premises and equipment:
 
 
Purchases
(8
)
(18
)
Proceeds from sales
3

11

Capitalization of software
(45
)
(47
)
Net cash used in investing activities
(2,321
)
(1,740
)
FINANCING ACTIVITIES
 
 
Net increase in deposits
67

3,283

Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase
(88
)
145

Net increase in other short-term borrowed funds
670

—

Proceeds from issuance of long-term borrowed funds
750

—

Repayments of long-term borrowed funds (RBS balances of $125 and $0, respectively)
(629
)
(3
)
Dividends declared and paid to common stockholders

(53
)
(55
)
Net cash provided by financing activities
717

3,370

(Decrease) increase in cash and cash equivalents
(1,230
)
1,728

Cash and cash equivalents at beginning of period
3,085

3,276

Cash and cash equivalents at end of period

$1,855


$5,004

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 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.
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.





11
CITIZENS FINANCIAL GROUP, INC.

 

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 was effective for the Company beginning on January 1, 2016. Adoption of this guidance did not have a material impact 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:
 
March 31, 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

$16


$—


$—


$16

 

$16


$—


$—


$16

State and political subdivisions
9

—

—

9

 
9

—

—

9

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
17,147

300

(13
)
17,434

 
17,234

153

(67
)
17,320

Other/non-agency
526

2

(40
)
488

 
555

4

(37
)
522

Total mortgage-backed securities
17,673

302

(53
)
17,922

 
17,789

157

(104
)
17,842

Total debt securities available for sale
17,698

302

(53
)
17,947

 
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

$17,715


$302


($53
)

$17,964

 

$17,831


$157


($104
)

$17,884

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

$4,010


$93


$—


$4,103

 

$4,105


$27


($11
)

$4,121

Other/non-agency
1,119

39

—

1,158

 
1,153

23

—

1,176

Total securities held to maturity

$5,129


$132


$—


$5,261

 

$5,258


$50


($11
)

$5,297

Other Investment Securities, at Fair Value
 
 
 
 
 
 
 
 
 
Money market mutual fund

$63


$—


$—


$63

 

$65


$—


$—


$65

Other investments
5

—

—

5

 
5

—

—

5

Total other investment securities, at fair value

$68


$—


$—


$68

 

$70


$—


$—


$70

Other Investment Securities, at Cost
 
 
 
 
 
 
 
 
 
Federal Reserve Bank stock

$468


$—


$—


$468

 

$468


$—


$—


$468

Federal Home Loan Bank stock
428

—

—

428

 
395

—

—

395

Total other investment securities, at cost

$896


$—


$—


$896

 

$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
 March 31
(in millions)
2016

 
2015

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

($41
)
 

($31
)
      Portions of loss recognized in other comprehensive income (before taxes)
40

 
30

Net securities impairment losses recognized in earnings

($1
)
 

($1
)

The following tables summarize those securities whose fair values are below carrying values, segregated by those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer:
 
March 31, 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
U.S. Treasury and other
1


$9


$—

 
—


$—


$—

 
1


$9


$—

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

614

(1
)
 
33

727

(12
)
 
48

1,341

(13
)
Other/non-agency
6

19

—

 
20

344

(40
)
 
26

363

(40
)
Total mortgage-backed securities
21

633

(1
)
 
53

1,071

(52
)
 
74

1,704

(53
)
Total
22


$642


($1
)
 
53


$1,071


($52
)
 
75


$1,713


($53
)

 
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 cash flow model. The inputs to this model include prepayment, default and loss severity assumptions that are based on industry research and observed data. The loss projections generated by the model are reviewed on a quarterly basis by a cross-functional governance committee. This governance committee determines whether security impairments are other-than-temporary based on this review.
The following table presents the cumulative credit-related losses recognized in earnings on debt securities held by the Company:
 
Three Months Ended March 31,
(in millions)
2016

 
2015

Cumulative balance at beginning of period

$66

 

$62

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

 
1

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

$66

 

$62


Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of March 31, 2016 and 2015 were $66 million and $62 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of March 31, 2016 and 2015. For the three months ended March 31, 2016 and 2015, the Company recognized credit related other-than-temporary impairment losses in earnings of $1 million related to non-agency MBS in the AFS portfolio. There were no credit impaired debt securities sold during the three months ended March 31, 2016 and 2015. Reductions in credit losses due to increases in cash flow expectations were $1 million for the three months ended March 31, 2016 and 2015, 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, as of March 31, 2016 and 2015, $40 million and $30 million respectively, of pre-tax non-credit related losses were deferred in OCI.


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


The amortized cost and fair value of debt securities at March 31, 2016 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 and other

$15


$—


$1


$—


$16

State and political subdivisions
—

—

—

9

9

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

37

1,790

15,305

17,147

Other/non-agency
—

57

3

466

526

Total debt securities available for sale
30

94

1,794

15,780

17,698

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

—

—

4,010

4,010

Other/non-agency
—

—

—

1,119

1,119

Total debt securities held to maturity
—

—

—

5,129

5,129

Total amortized cost of debt securities

$30


$94


$1,794


$20,909


$22,827

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

$15


$—


$1


$—


$16

State and political subdivisions
—

—

—

9

9

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

39

1,823

15,557

17,434

Other/non-agency
—

57

3

428

488

Total debt securities available for sale
30

96

1,827

15,994

17,947

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

—

—

4,103

4,103

Other/non-agency
—

—

—

1,158

1,158

Total debt securities held to maturity
—

—

—

5,261

5,261

Total fair value of debt securities

$30


$96


$1,827


$21,255


$23,208


The following table reports the amounts recognized in interest income from investment securities on the Consolidated Statements of Operations:
 
Three Months Ended March 31,
(in millions)
2016

 
2015

Taxable

$145

 

$159

Non-taxable
—

 
—

Total interest income from investment securities and interest-bearing deposits in banks

$145

 

$159



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


Realized gains and losses on securities are shown below:
 
Three Months Ended March 31,
(in millions)
2016

 
2015

Gains on sale of debt securities

$9

 

$12

Losses on sale of debt securities
—

 
(4
)
Debt securities gains, net

$9

 

$8

Equity securities gains

$—

 

$2

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

 
Amortized Cost
Fair Value

Pledged against repurchase agreements

$682


$695

 

$805


$808

Pledged against FHLB borrowed funds
1,129

1,168

 
1,163

1,186

Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law
3,336

3,406

 
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:
 
March 31, 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 no securitizations of mortgage loans retained in the investment portfolio for the three months ended March 31, 2016 and there were $18 million of securitizations of mortgage loans for the three months ended March 31, 2015. These securitizations included a substantive guarantee by a third party. In 2015, the guarantor was Freddie Mac. 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)
March 31, 2016
 
December 31, 2015
Commercial

$34,671

 

$33,264

Commercial real estate
9,406

 
8,971

Leases
3,895

 
3,979

Total commercial
47,972

 
46,214

Residential mortgages
13,345

 
13,318

Home equity loans
2,313

 
2,557

Home equity lines of credit
14,526

 
14,674

Home equity loans serviced by others (1)
930

 
986

Home equity lines of credit serviced by others (1)
339

 
389

Automobile
13,847

 
13,828

Student
5,006

 
4,359

Credit cards
1,581

 
1,634

Other retail
1,132

 
1,083

Total retail
53,019

 
52,828

Total loans and leases (2) (3)

$100,991

 

$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 $751 million and $365 million as of March 31, 2016 and December 31, 2015, respectively.
(3) Mortgage loans serviced for others by the Company’s subsidiaries are not included above and amounted to $17.4 billion and $17.6 billion at March 31, 2016 and December 31, 2015, respectively.

Loans held for sale at fair value totaled $365 million and $325 million at March 31, 2016 and December 31, 2015, respectively, and consisted of residential mortgages originated for sale of $292 million and the commercial trading portfolio of $73 million as of March 31, 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 $386 million and $40 million as of March 31, 2016 and December 31, 2015, respectively. On March 31, 2016, the Company transferred $373 million of TDRs to other loans held for sale, including $288 million of residential mortgages and $85 million of home equity loans. Other loans held for sale also included commercial loans associated with the Company’s syndications business of $13 million as of March 31, 2016 compared with $40 million as of December 31, 2015. The December 31, 2015 balance consisted entirely of commercial loan syndications.
Loans pledged as collateral for FHLB borrowed funds totaled $23.7 billion and $23.2 billion at March 31, 2016 and December 31, 2015, 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 $15.6 billion and $15.9 billion at March 31, 2016 and December 31, 2015, respectively.
During the three months ended March 31, 2016, the Company purchased $134 million of automobile loans, $120 million of residential mortgages, and $369 million of student loans. During the three months ended March 31, 2015, the Company purchased $249 million of residential loans, $393 million of automobile loans, and $261 million of student loans.
During the three months ended March 31, 2016, the Company sold $73 million of commercial loans and $173 million of residential mortgage loans. During the three months ended March 31, 2015, the Company sold $273 million of residential mortgage loans and $111 million of commercial loans.     

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 March 31, 2016
(in millions)
Commercial

Retail

Total

Allowance for loan and lease losses as of January 1, 2016

$596


$620


$1,216

Charge-offs
(13
)
(113
)
(126
)
Recoveries
4

39

43

Net charge-offs
(9
)
(74
)
(83
)
Provision charged to income
46

45

91

Allowance for loan and lease losses as of March 31, 2016
633

591

1,224

Reserve for unfunded lending commitments as of January 1, 2016
58

—

58

Credit for unfunded lending commitments
—

—

—

Reserve for unfunded lending commitments as of March 31, 2016
58

—

58

Total allowance for credit losses as of March 31, 2016

$691


$591


$1,282

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

Retail

Total

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

$544


$651


$1,195

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

33

61

Net recoveries (charge-offs)
22

(76
)
(54
)
Sales/Other
—

(2
)
(2
)
Provision charged to income
12

51

63

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

624

1,202

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

—

61

Provision for unfunded lending commitments
(5
)
—

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

—

56

Total allowance for credit losses as of March 31, 2015

$634


$624


$1,258



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:
 
March 31, 2016
 
December 31, 2015
(in millions)
Commercial

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$439


$775


$1,214

 

$218


$1,165


$1,383

Formula-based evaluation
47,533

52,244

99,777

 
45,996

51,663

97,659

Total

$47,972


$53,019


$100,991

 

$46,214


$52,828


$99,042


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

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$42


$82


$124

 

$36


$101


$137

Formula-based evaluation
649

509

1,158

 
618

519

1,137

Allowance for credit losses

$691


$591


$1,282

 

$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:
 
March 31, 2016
 
 
Criticized
 
(in millions)
Pass

Special Mention

Substandard

Doubtful

Total

Commercial

$32,567


$928


$1,086


$90


$34,671

Commercial real estate
8,864

272

184

86

9,406

Leases
3,767

72

56

—

3,895

Total

$45,198


$1,272


$1,326


$176


$47,972


 
December 31, 2015
 
 
Criticized
 
(in millions)
Pass

Special Mention

Substandard

Doubtful

Total

Commercial

$31,276


$911


$1,002


$75


$33,264

Commercial real estate
8,450

272

171

78

8,971

Leases
3,880

55

44

—

3,979

Total

$43,606


$1,238


$1,217


$153


$46,214



19
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The recorded investment in classes of retail loans, categorized by delinquency status is as follows:
 
March 31, 2016
(in millions)
Current

1-29 Days Past Due
30-59 Days Past Due
60-89 Days Past Due
90 Days or More Past Due
Total

Residential mortgages

$13,058


$77


$52


$7


$151


$13,345

Home equity loans
2,055

147

26

5

80

2,313

Home equity lines of credit
13,870

380

53

17

206

14,526

Home equity loans serviced by others (1)
840

55

14

1

20

930

Home equity lines of credit serviced by others (1)
250

40

9

5

35

339

Automobile
12,827

860

104

20

36

13,847

Student
4,848

87

17

9

45

5,006

Credit cards
1,511

37

10

7

16

1,581

Other retail
1,069

49

9

2

3

1,132

Total

$50,328


$1,732


$294


$73


$592


$53,019

(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, 2015
(in millions)
Current

1-29 Days Past Due
30-59 Days Past Due
60-89 Days Past Due
90 Days or More Past Due
Total

Residential mortgages

$12,905


$97


$54


$16


$246


$13,318

Home equity loans
2,245

164

32

12

104

2,557

Home equity lines of credit
13,982

407

60

20

205

14,674

Home equity loans serviced by others (1)
886

60

14

6

20

986

Home equity lines of credit serviced by others (1)
296

48

10

6

29

389

Automobile
12,670

964

127

32

35

13,828

Student
4,175

113

19

11

41

4,359

Credit cards
1,554

44

11

9

16

1,634

Other retail
1,013

53

8

4

5

1,083

Total

$49,726


$1,950


$335


$116


$701


$52,828


(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.

20
CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Nonperforming Assets
The following table presents nonperforming loans and leases and loans accruing 90 days or more past due:
 
Nonperforming (1)
 
Accruing and 90 days or more past due
(in millions)
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
Commercial

$284

 

$71

 

$2

 

$1

Commercial real estate
86

 
77

 
2

 
—

Leases
—

 
—

 
—

 
—

Total commercial
370

 
148

 
4

 
1

Residential mortgages (2) (3) (4)
174

 
331

 
22

 
—

Home equity loans (2)
99

 
135

 
—

 
—

Home equity lines of credit
261

 
272

 
—

 
—

Home equity loans serviced by others (5)
37

 
38

 
—

 
—

Home equity lines of credit serviced by others (5)
38

 
32

 
—

 
—

Automobile
42

 
42

 
—

 
—

Student
40

 
41

 
5

 
6

Credit card
16

 
16

 
—

 
—

Other retail
2

 
5

 
1

 
2

Total retail
709