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
September 30, 2015

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

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

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

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

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

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

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

Large accelerated filer                     [X]          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 [X] No

There were 527,636,669 shares of Registrant’s common stock ($0.01 par value) outstanding on November 2, 2015.



 
 
 
 
 
 
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1

CITIZENS FINANCIAL GROUP, INC.

 

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

2

CITIZENS FINANCIAL GROUP, INC.

 

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




3

CITIZENS FINANCIAL GROUP, INC.

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



4

CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
September 30, 2015
 
December 31, 2014
ASSETS:
 
 
 
Cash and due from banks

$1,067

 

$1,171

Interest-bearing cash and due from banks
689

 
2,105

Interest-bearing deposits in banks
363

 
370

Securities available for sale, at fair value
18,197

 
18,656

Securities held to maturity (fair value of $5,386 and $5,193, respectively)
5,285

 
5,148

Other investment securities, at fair value
50

 
33

Other investment securities, at cost
822

 
867

Loans held for sale, at fair value
369

 
256

Other loans held for sale
51

 
25

Loans and leases
97,431

 
93,410

Less: Allowance for loan and lease losses
1,201

 
1,195

Net loans and leases
96,230

 
92,215

Derivative assets (related party balances of $105 and $1, respectively)
838

 
629

Premises and equipment, net
560

 
595

Bank-owned life insurance
1,553

 
1,527

Goodwill
6,876

 
6,876

Other assets (related party balances of $2 and $7, respectively)
2,497

 
2,384

TOTAL ASSETS

$135,447

 

$132,857

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

$27,373

 

$26,086

Interest-bearing (related party balances of $5 and $5, respectively)
74,493

 
69,621

          Total deposits
101,866

 
95,707

Federal funds purchased and securities sold under agreements to repurchase
1,293

 
4,276

Other short-term borrowed funds
5,861

 
6,253

Derivative liabilities (related party balances of $275 and $387, respectively)
641

 
612

Deferred taxes, net
637

 
493

Long-term borrowed funds (related party balances of $2,000 and $2,000, respectively)
4,153

 
4,642

Other liabilities (related party balances of $30 and $30, respectively)
1,396

 
1,606

TOTAL LIABILITIES

$115,847

 

$113,589

Contingencies (refer to Note 13)

 

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

$247

 

$—

Common stock:
 
 
 
$0.01 par value, 1,000,000,000 shares authorized, 562,941,263 shares issued and 527,636,510 shares outstanding at September 30, 2015 and 1,000,000,000 shares authorized, 560,262,638 shares issued and 545,884,519 shares outstanding at December 31, 2014
6

 
6

Additional paid-in capital
18,718

 
18,676

Retained earnings
1,745

 
1,294

Treasury Stock, at cost, 35,304,753 and 14,378,119 shares at September 30, 2015 and December 31, 2014, respectively
(857
)
 
(336
)
Accumulated other comprehensive loss
(259
)
 
(372
)
TOTAL STOCKHOLDERS’ EQUITY

$19,600

 

$19,268

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$135,447

 

$132,857

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

5

CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended September 30,
Nine Months Ended September 30,
 (in millions, except share and per-share data)
2015

2014

2015

2014

INTEREST INCOME:
 
 
 
 
Interest and fees on loans and leases (related party balances of $17, $18, $53 and $54, respectively)

$812


$754


$2,381


$2,235

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

2

8

4

Interest and fees on other loans held for sale
3


7

22

Investment securities
154

155

468

458

Interest-bearing deposits in banks
2

2

4

4

Total interest income
974

913

2,868

2,723

INTEREST EXPENSE:
 
 
 
 
Deposits
65

41

177

108

Deposits held for sale



4

Federal funds purchased and securities sold under agreements to repurchase (related party balances of $1, $3, $6 and $16, respectively)
4

9

13

25

Other short-term borrowed funds (related party balances of $13, $16, $38 and $60, respectively)
17

21

51

70

Long-term borrowed funds (related party balances of $19, $17, $59 and $42, respectively)
32

22

95

55

Total interest expense
118

93

336

262

Net interest income
856

820

2,532

2,461

Provision for credit losses
76

77

211

247

Net interest income after provision for credit losses
780

743

2,321

2,214

NONINTEREST INCOME:
 
 
 
 
Service charges and fees (related party balances of $0, $1, $2 and $4, respectively)
145

144

419

430

Card fees
60

58

172

175

Trust and investment services fees
41

39

118

120

Mortgage banking fees
18

21

81

55

Capital markets fees (related party balances of $2, $4, $8 and $9, respectively)
21

22

73

66

Foreign exchange and trade finance fees (related party balances of $5, $59, $21 and $52, respectively)
22

26

67

70

Bank-owned life insurance income
14

13

40

36

Securities gains, net
2

2

19

27

Net impairment losses recognized in earnings
(2
)
(1
)
(5
)
(7
)
Other income (related party balances of ($75), $5, ($125) and ($130), respectively)
32

17

76

367

Total noninterest income
353

341

1,060

1,339

NONINTEREST EXPENSE:
 
 
 
 
Salaries and employee benefits
404

409

1,234

1,281

Outside services (related party balances of $3, $3, $8 and $19, respectively)
89

106

267

314

Occupancy (related party balances of $0, $0, $1 and $0, respectively)
75

77

245

245

Equipment expense
62

58

190

187

Amortization of software
35

38

108

102

Other operating expense
133

122

405

439

Total noninterest expense
798

810

2,449

2,568

Income before income tax expense
335

274

932

985

Income tax expense
115

85

313

317

NET INCOME

$220


$189


$619


$668

Net income available to common stockholders
$213
$189
$612
$668
Weighted-average common shares outstanding:
 
 
 
 
Basic
530,985,255

559,998,324

538,279,222

559,998,324

Diluted
533,398,158

560,243,747

540,926,361

560,081,031

Per common share information:
 
 
 
 
Basic earnings

$0.40


$0.34


$1.14


$1.19

Diluted earnings
0.40

0.34

1.13

1.19

   Dividends declared and paid
0.10

0.68

0.30

1.34

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

6

CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2015

2014

 
2015

2014

Net income

$220


$189

 

$619


$668

Other comprehensive income (loss):
 
 
 
 
 
Net unrealized derivative instrument gains arising during the periods, net of income taxes of $30, $10, $66 and $80, respectively
48

17

 
108

137

Reclassification adjustment for net derivative (losses) gains included in net income, net of income taxes of ($3), $2, ($5) and $9, respectively
(4
)
3

 
(8
)
16

Net unrealized securities available for sale gains (losses) arising during the periods, net of income taxes of $37, ($36), $25 and $73, respectively
61

(61
)
 
41

127

Other-than-temporary impairment not recognized in earnings on securities, net of income taxes of ($4), $0, ($15) and ($12), respectively
(8
)
(1
)
 
(26
)
(22
)
Reclassification of net securities gains to net income, net of income taxes of $0, $0, ($5) and ($7), respectively

(1
)
 
(9
)
(13
)
Defined benefit pension plans:
 
 
 
 
 
Actuarial loss, net of income taxes of $0, ($35), $0 and ($35), respectively

(59
)
 

(59
)
Net prior service credit, net of income taxes of $0, $3, $0 and $3, respectively

4

 

4

Amortization of actuarial loss, net of income taxes $0, $1, $3 and $2, respectively
3

2

 
7

4

Divestitures to RBS effective September 1, 2014, net of income taxes of $0, $13, $0 and $13, respectively

19

 

19

Total other comprehensive income (loss), net of income taxes
100

(77
)
 
113

213

Total comprehensive income

$320


$112

 

$732


$881

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

7

CITIZENS FINANCIAL GROUP, INC.

 

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

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


$—

560


$6


$18,603


$1,235


$—


($648
)

$19,196

Dividends to RBS





(85
)


(85
)
Dividends to RBS — exchange transactions





(666
)


(666
)
Share-based compensation plans




57




57

Total comprehensive income:
 
 
 
 
 
 
 
 
 
Net income





668



668

Other comprehensive income







213

213

Total comprehensive income





668


213

881

Balance at September 30, 2014


$—

560


$6


$18,660


$1,152


$—


($435
)

$19,383

Balance at January 1, 2015


$—

546


$6


$18,676


$1,294


($336
)

($372
)

$19,268

Dividends to common stockholders





(90
)


(90
)
Dividends to RBS





(71
)


(71
)
Dividend to preferred stockholders





(7
)


(7
)
Issuance of preferred stock

247







247

Treasury stock purchased


(20
)



(500
)

(500
)
Share-based compensation plans


2


35


(21
)

14

Employee stock purchase plan shares issued




7




7

Total comprehensive income:
 
 
 
 
 
 
 
 
 
Net income





619



619

Other comprehensive income







113

113

Total comprehensive income





619


113

732

Balance at September 30, 2015


$247

528


$6


$18,718


$1,745


($857
)

($259
)

$19,600

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

8

CITIZENS FINANCIAL GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended September 30,
(in millions)
2015

 
2014

OPERATING ACTIVITIES
 
 
 
Net income

$619

 

$668

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
211

 
247

Originations of mortgage loans held for sale
(1,836
)
 
(1,131
)
Proceeds from sales of mortgage loans held for sale
1,780

 
1,089

Purchases of commercial loans held for sale
(887
)
 

Proceeds from sales of commercial loans held for sale
826

 

Amortization of terminated cash flow hedges (related party balances of $13 and $13, respectively)
13

 
36

Depreciation, amortization and accretion
350

 
313

Mortgage servicing rights valuation recovery
(6
)
 
(8
)
Securities impairment
5

 
7

Deferred income taxes
76

 
31

Share-based compensation
22

 
29

Loss on disposal/impairment of premises and equipment

 
18

Loss on sale of other branch assets held for sale

 
9

Gain on sales of:
 
 
 
Debt securities
(19
)
 
(27
)
Marketable equity securities available for sale
(3
)
 

Premises and equipment
(9
)
 

Other loans held for sale

 
(11
)
Deposits held for sale

 
(286
)
Increase in other assets (related party balances of ($99) and $53, respectively)
(306
)
 
(2,033
)
(Decrease) increase in other liabilities (related party balances of ($112) and ($151), respectively)
(5
)
 
2,256

Net cash provided by operating activities
831

 
1,207

INVESTING ACTIVITIES
 
 
 
Investment securities:
 
 
 
Purchases of securities available for sale
(5,418
)
 
(5,642
)
Proceeds from maturities and paydowns of securities available for sale
2,660

 
2,238

Proceeds from sales of securities available for sale
3,180

 
1,265

Purchases of securities held to maturity
(811
)
 
(1,174
)
Proceeds from maturities and paydowns of securities held to maturity
610

 
216

Proceeds from sales of securities held to maturity
73



Purchases of other investment securities, at fair value
(109
)
 
(97
)
Proceeds from sales of other investment securities, at fair value
92

 
90

Purchases of other investment securities, at cost
(33
)
 
(72
)
Proceeds from sales of other investment securities, at cost
78

 
114

Net decrease (increase) in interest-bearing deposits in banks
7

 
(59
)
Net increase in loans and leases
(4,315
)
 
(4,120
)
Net increase in bank-owned life insurance
(26
)
 
(31
)
Premises and equipment:
 
 
 
Purchases
(54
)
 
(48
)
Proceeds from sales
12

 
29

Capitalization of software
(142
)
 
(116
)
Net cash used in investing activities
(4,196
)
 
(7,407
)
FINANCING ACTIVITIES
 
 
 
Net increase in deposits
6,159

 
1,569

Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase
(2,983
)
 
393

Net (decrease) increase in other short-term borrowed funds
(1,152
)
 
4,462

Proceeds from issuance of long-term borrowed funds (related party balances of $0 and $666, respectively)
250

 
666

Repayments of long-term borrowed funds
(8
)
 
(7
)
Treasury stock purchased
(500
)
 

Net proceeds from issuance of preferred stock
247

 

Dividends declared and paid to common stockholders

(90
)
 

Dividends declared and paid to RBS
(71
)
 
(751
)
Dividends declared and paid to preferred stockholders
(7
)
 

Net cash provided by financing activities
1,845

 
6,332

(Decrease) increase in cash and cash equivalents
(1,520
)
 
132

Cash and cash equivalents at beginning of period
3,276

 
2,757

Cash and cash equivalents at end of period

$1,756

 

$2,889

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

9

CITIZENS FINANCIAL GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION
Basis of Presentation

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

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

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

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

Recent Accounting Pronouncements

In August 2015, the FASB issued ASU No. 2015-15 “Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-Of-Credit Arrangements.” The ASU incorporates guidance from the SEC on deferral of debt issuance costs associated with line-of-credit arrangements, consistent with ASU 2015-03, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This new guidance will not have a material impact on the Company’s unaudited interim Consolidated Financial Statements.

In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” which defers the effective date of the new revenue standard by one year. As a result of this deferral, the new revenue standard is effective for the Company beginning on January 1, 2018. The Company is currently assessing the impact of this guidance on the Consolidated Financial Statements.

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

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

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

In January 2015, the FASB issued ASU No. 2015-01 “Income Statement: Extraordinary and Unusual Items.” This ASU eliminates from GAAP the concept of extraordinary items. Accounting Standards Codification Subtopic 225-20 required that an entity separately classify, present, and disclose extraordinary events and transactions that were unusual in nature and infrequent

10

CITIZENS FINANCIAL GROUP, INC.

 

in occurrence. This ASU, which allows for early adoption, is effective for the Company beginning on January 1, 2016. The adoption of this guidance is not expected to have a material impact on the Company’s unaudited interim Consolidated Financial Statements.

NOTE 2 - SECURITIES
The following table provides the major components of securities at amortized cost and fair value:
 
September 30, 2015
 
December 31, 2014
(in millions)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Securities Available for Sale
 
 
 
 
 




U.S. Treasury

$15


$—


$—


$15

 

$15


$—


$—


$15

State and political subdivisions
9



9

 
10



10

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
17,340

292

(25
)
17,607

 
17,683

301

(50
)
17,934

Other/non-agency
587

3

(41
)
549

 
703

4

(35
)
672

Total mortgage-backed securities
17,927

295

(66
)
18,156

 
18,386

305

(85
)
18,606

Total debt securities available for sale
17,951

295

(66
)
18,180

 
18,411

305

(85
)
18,631

Marketable equity securities
5



5

 
10

3


13

Other equity securities
12



12

 
12



12

Total equity securities available for sale
17



17

 
22

3


25

Total securities available for sale

$17,968


$295


($66
)

$18,197

 

$18,433


$308


($85
)

$18,656

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

$4,092


$67


($4
)

$4,155

 

$3,728


$22


($31
)

$3,719

Other/non-agency
1,193

38


1,231

 
1,420

54


1,474

Total securities held to maturity

$5,285


$105


($4
)

$5,386

 

$5,148


$76


($31
)

$5,193

Other Investment Securities, at Fair Value
 
 
 
 
 
 
 
 
 
Money market mutual fund

$45


$—


$—


$45

 

$28


$—


$—


$28

Venture capital and other investments
5



5

 
5



5

Total other investment securities, at fair value

$50


$—


$—


$50

 

$33


$—


$—


$33

 
 
 
 
 
 
 
 
 
 
Other Investment Securities, at Cost
 
 
 
 
 
 
 
 
 
Federal Reserve Bank stock

$468


$—


$—


$468

 

$477


$—


$—


$477

Federal Home Loan Bank stock
354



354

 
390



390

Total other investment securities, at cost

$822


$—


$—


$822

 

$867


$—


$—


$867


11

CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in millions)
2015

2014

 
2015

2014

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

($14
)

($3
)
 

($46
)

($42
)
      Portions of loss recognized in other comprehensive income (before taxes)
12

2

 
41

35

Net impairment losses recognized in earnings

($2
)

($1
)
 

($5
)

($7
)

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:
 
September 30, 2015
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
 
Number of Issues
Fair Value
Gross Unrealized Losses
State and political subdivisions
1


$9


$—

 


$—


$—

 
1


$9


$—

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal agencies and U.S. government sponsored entities
35

2,985

(12
)
 
37

960

(17
)
 
72

3,945

(29
)
Other/non-agency
6

52

(1
)
 
19

366

(40
)
 
25

418

(41
)
Total mortgage-backed securities
41

3,037

(13
)
 
56

1,326

(57
)
 
97

4,363

(70
)
Total
42


$3,046


($13
)
 
56


$1,326


($57
)
 
98


$4,372


($70
)

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


$—


$—

 
1


$10


$—

 
1


$10


$—

Mortgage-backed securities:






 






 






Federal agencies and U.S. government sponsored entities
75

3,282

(24
)
 
52

1,766

(57
)
 
127

5,048

(81
)
Other/non-agency
6

80

(2
)
 
17

397

(33
)
 
23

477

(35
)
Total mortgage-backed securities
81

3,362

(26
)
 
69

2,163

(90
)
 
150

5,525

(116
)
Total
81


$3,362


($26
)
 
70


$2,173


($90
)
 
151


$5,535


($116
)

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


12

CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

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

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2015

2014

 
2015

2014

Cumulative balance at beginning of period

$62


$60

 

$62


$56

Credit impairments recognized in earnings on securities not previously impaired


 


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

1

 
5

7

Reductions due to increases in cash flow expectations on impaired securities
(1
)
(1
)
 
(4
)
(3
)
Cumulative balance at end of period

$63


$60

 

$63


$60


Cumulative credit losses recognized in earnings for impaired AFS debt securities held as of September 30, 2015 and 2014 were $63 million and $60 million, respectively. There were no credit losses recognized in earnings for the Company’s HTM portfolio as of September 30, 2015 and 2014. For the three months ended September 30, 2015 and 2014, the Company recognized credit related other-than-temporary impairment losses in earnings of $2 million and $1 million, respectively, related to non-agency MBS in the AFS portfolio. For the nine months ended September 30, 2015 and 2014, the Company recognized credit related other-than-temporary impairment losses in earnings of $5 million and $7 million, respectively. There were no credit impaired debt securities sold during the three or nine months ended September 30, 2015 and 2014, respectively. Reductions in credit losses due to increases in cash flow expectations were $1 million for the three months ended September 30, 2015 and 2014, and $4 million and $3 million for the nine months ended September 30, 2015 and 2014, respectively, and were presented in interest income from investment securities on the Consolidated Statements of Operations. The Company does not currently have the intent to sell these debt securities, and it is not likely that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases.

The Company has determined that credit losses are not expected to be incurred on the remaining agency and non-agency MBS identified with unrealized losses as of the current reporting date. The unrealized losses on these debt securities reflect the reduced liquidity in the MBS market and the increased risk spreads due to the uncertainty of the U.S. macroeconomic environment. Therefore, the Company has determined that these debt securities are not other-than-temporarily impaired because the Company does not currently have the intent to sell these debt securities, and it is not likely that the Company will be required to sell these debt securities prior to the recovery of their amortized cost bases. Any subsequent increases in the valuation of impaired debt securities do not impact their recorded cost bases. As of September 30, 2015 and 2014, $41 million and $35 million, respectively, of pre-tax non-credit related losses were deferred in OCI.


13

CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The amortized cost and fair value of debt securities at September 30, 2015 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.
 
Distribution of Maturities
(in millions)
1 Year or Less
1-5 Years
5-10 Years
After 10 Years
Total

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

$15


$—


$—


$—


$15

State and political subdivisions



9

9

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

47

1,972

15,321

17,340

Other/non-agency

70

9

508

587

Total debt securities available for sale
15

117

1,981

15,838

17,951

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



4,092

4,092

Other/non-agency



1,193

1,193

Total debt securities held to maturity



5,285

5,285

Total amortized cost of debt securities

$15


$117


$1,981


$21,123


$23,236

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

$15


$—


$—


$—


$15

State and political subdivisions



9

9

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

50

2,006

15,551

17,607

Other/non-agency

71

9

469

549

Total debt securities available for sale
15

121

2,015

16,029

18,180

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



4,155

4,155

Other/non-agency



1,231

1,231

Total debt securities held to maturity



5,386

5,386

Total fair value of debt securities

$15


$121


$2,015


$21,415


$23,566


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

2014

 
2015

2014

Taxable

$154


$155

 

$468


$458

Non-taxable


 


Total interest income from investment securities

$154


$155

 

$468


$458



14

CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

2014

 
2015

2014

Gains on sale of debt securities

$7


$7

 

$29


$32

Losses on sale of debt securities
(7
)
(5
)
 
(12
)
(5
)
Debt securities gains, net

$—


$2

 

$17


$27

Equity securities gains

$—


$—

 

$3


$—


In advance of the Volcker Rule effective date, during the three months ended September 30, 2015, the Company sold a $73 million mortgage-backed security that was classified as HTM that would have been prohibited under the Volcker Rule beginning in July 2017. Upon sale the Company recognized a $2 million gain.

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

 
Amortized Cost
Fair Value

Pledged against repurchase agreements

$1,275


$1,294

 

$3,650


$3,701

Pledged against FHLB borrowed funds
1,203

1,241

 
1,355

1,407

Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law
3,442

3,517

 
3,453

3,520


There were no loan securitizations for the three or nine months ended September 30, 2015 and 2014.

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

The effects of this offsetting on the Consolidated Balance Sheets are presented in the following table:
 
September 30, 2015
 
December 31, 2014
(in millions)
Gross Assets (Liabilities)
Gross Assets (Liabilities) Offset
Net Amounts of Assets (Liabilities)
 
Gross Assets (Liabilities)
Gross Assets (Liabilities) Offset
Net Amounts of Assets (Liabilities)
Securities purchased under agreements to resell

$1,300


($1,300
)

$—

 

$—


$—


$—

Securities sold under agreements to repurchase
(1,800
)
1,300

(500
)
 
(2,600
)

(2,600
)

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


15

CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Securities purchased under agreements to resell
 
 
 
 
 
Mortgage-backed securities - Agency

$—


$500


$300


$500


$1,300

Total securities purchased under agreements to resell

$—


$500


$300


$500


$1,300

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

$—


($500
)

($800
)

($500
)

($1,800
)
Total securities sold under agreement to repurchase

$—


($500
)

($800
)

($500
)

($1,800
)

For these securities sold under the agreements to repurchase, the Company would be obligated to provide additional collateral in the event of a significant decline in fair value of the collateral pledged. The Company manages the risk by monitoring the liquidity and credit quality of the collateral, as well as the maturity profile of the transactions.
 
NOTE 3 - LOANS AND LEASES
A summary of the loans and leases portfolio follows:
(in millions)
September 30, 2015
 
December 31, 2014
Commercial

$32,726

 

$31,431

Commercial real estate
8,678

 
7,809

Leases
3,865

 
3,986

Total commercial
45,269

 
43,226

Residential mortgages
12,792

 
11,832

Home equity loans
2,842

 
3,424

Home equity lines of credit
14,707

 
15,423

Home equity loans serviced by others (1)
1,054

 
1,228

Home equity lines of credit serviced by others (1)
441

 
550

Automobile
13,876

 
12,706

Student
3,846

 
2,256

Credit cards
1,628

 
1,693

Other retail
976

 
1,072

Total retail
52,162

 
50,184

Total loans and leases (2) (3)

$97,431

 

$93,410


(1) The Company’s SBO portfolio consists of purchased home equity loans and lines that were originally serviced by others. The Company now services a portion of this portfolio internally.
(2) Excluded from the table above are loans held for sale totaling $420 million as of September 30, 2015 and $281 million as of December 31, 2014.
(3) Mortgage loans serviced for others by the Company’s subsidiaries are not included above, and amounted to $17.7 billion and $17.9 billion at September 30, 2015 and December 31, 2014, respectively.
Loans held for sale at fair value totaled $369 million and $256 million at September 30, 2015 and December 31, 2014, respectively, and consisted of residential mortgages originated for sale of $269 million and the commercial trading portfolio of $100 million as of September 30, 2015. As of December 31, 2014, residential mortgages originated for sale were $213 million, and commercial trading portfolio totaled $43 million. Other loans held for sale totaled $51 million and $25 million as of September 30, 2015 and December 31, 2014, respectively and consisted of commercial loan syndications.
Loans pledged as collateral for FHLB borrowed funds totaled $22.1 billion and $22.0 billion at September 30, 2015 and December 31, 2014, respectively. This collateral consists primarily of residential mortgages and home equity loans. Loans pledged as collateral to support the contingent ability to borrow at the FRB discount window, if necessary, totaled $12.7 billion and $11.8 billion at September 30, 2015 and December 31, 2014, respectively.

16

CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During the nine months ended September 30, 2015, the Company purchased a portfolio of automobile loans with an outstanding principal balance of $1.1 billion, a portfolio of residential mortgages with an outstanding principal balance of $887 million, and a portfolio of student loans with an outstanding principal balance of $615 million. During the nine months ended September 30, 2014, the Company purchased a portfolio of residential loans with an outstanding principal balance of $1.5 billion, a portfolio of auto loans with an outstanding principal balance of $1.3 billion and a portfolio of student loans with an outstanding principal balance of $59 million.
During the nine months ended September 30, 2015, the Company sold a portfolio of residential mortgages with an outstanding principal balance of $273 million and $41 million of credit card balances associated with a terminated agent credit card servicing agreement. During the nine months ended September 30, 2014, in addition to the $1.1 billion loans sold as part of the Company's sale of its Chicago-area retail branches, the Company sold portfolios of residential mortgage loans with outstanding principal balances of $126 million and student loans of $357 million as well as commercial loans with an outstanding principal balance of $165 million.

NOTE 4 - ALLOWANCE FOR CREDIT LOSSES, NONPERFORMING ASSETS, AND CONCENTRATIONS OF CREDIT RISK
The allowance for credit losses consists of the ALLL and the reserve for unfunded commitments. It is increased through a provision for credit losses that is charged to earnings, based on the Company’s quarterly evaluation of the loan portfolio, and is reduced by net charge-offs and the ALLL associated with sold loans. See Note 1 “Significant Accounting Policies” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2014, for a detailed discussion of ALLL reserve methodologies and estimation techniques.
On a quarterly basis, the Company reviews and refines its estimate of the allowance for credit losses, taking into consideration changes in portfolio size and composition, historical loss experience, internal risk ratings, current economic conditions, industry performance trends and other pertinent information.
There were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALLL and the reserve for unfunded lending commitments.
The following is a summary of changes in the allowance for credit losses:
 
Nine Months Ended September 30, 2015
(in millions)
Commercial

Retail

Total

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

$544


$651


$1,195

Charge-offs
(32
)
(324
)
(356
)
Recoveries
42

107

149

Net (charge-offs) recoveries
10

(217
)
(207
)
Provision charged to income
21

192

213

Allowance for loan and lease losses as of September 30, 2015
575

626

1,201

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


61

Credit for unfunded lending commitments
(2
)

(2
)
Reserve for unfunded lending commitments as of September 30, 2015
59


59

Total allowance for credit losses as of September 30, 2015

$634


$626


$1,260


17

CITIZENS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Nine Months Ended September 30, 2014
(in millions)
Commercial

Retail

Total

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

$498


$723


$1,221

Charge-offs
(30
)
(344
)
(374
)
Recoveries
47

84

131

Net (charge-offs) recoveries
17

(260
)
(243
)
Provision charged to income
27

196

223

Allowance for loan and lease losses as of September 30, 2014
542

659

1,201

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


39

Provision for unfunded lending commitments
24


24

Reserve for unfunded lending commitments as of September 30, 2014
63


63

Total allowance for credit losses as of September 30, 2014

$605


$659


$1,264



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

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$194


$1,170


$1,364

 

$205


$1,208


$1,413

Formula-based evaluation
45,075

50,992

96,067

 
43,021

48,976

91,997

Total

$45,269


$52,162


$97,431

 

$43,226


$50,184


$93,410


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

Retail

Total

 
Commercial

Retail

Total

Individually evaluated

$23


$104


$127

 

$20


$109


$129

Formula-based evaluation
611

522

1,133

 
585

542

1,127

Allowance for credit losses

$634


$626


$1,260

 

$605


$651


$1,256


For commercial loans and leases, the Company utilizes regulatory classification ratings to monitor credit quality. Loans with a “pass” rating are those that the Company believes will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are “criticized” are those that have some weakness that indicates an increased probability of future loss. For retail loans, the Company primarily uses the loan’s payment and delinquency status to monitor credit quality. The further a loan is past due, the greater the likelihood of future credit loss. These credit quality indicators for both commercial and retail loans are continually updated and monitored.
The recorded investment in classes of commercial loans and leases based on regulatory classification ratings is as follows:
 
September 30, 2015
 
 
Criticized
 
(in millions)
Pass

Special Mention

Substandard

Doubtful

Total

Commercial

$31,005


$924


$712


$85


$32,726

Commercial real estate
8,326

207

103

42

8,678

Leases
3,796

22

47


3,865

Total

$43,127


$1,153


$862


$127


$45,269



18