SECURITIES

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

SECURITIES

NOTE 3 - SECURITIES

Investments include debt and equity securities and other investment securities. Citizens classifies debt securities as AFS, HTM, or trading based on management’s intent to hold to maturity at the time of purchase. Equity securities are recorded at fair value or at cost if there is not a readily determinable fair value.

Debt securities that will be held for indefinite periods of time and may be sold in response to changes in interest rates, changes in prepayment risk, or other factors considered in managing the Company’s asset/liability strategy are classified as AFS and reported at fair value, with unrealized gains and losses reported in OCI, net of taxes, as a separate component of stockholders’ equity. Gains and losses on the sales of securities are recognized in noninterest income and are computed using the specific identification method.

Debt securities for which the Company has the ability and intent to hold to maturity are classified as HTM and reported at amortized cost. Transfers of debt securities to the HTM classification are recognized at fair value at the date of transfer.

For debt securities classified as AFS or HTM, interest income is recorded on the accrual basis including the amortization of premiums and the accretion of discounts. Premiums and discounts on debt securities are amortized or accreted using the effective interest method over the estimated lives of the individual securities. Citizens uses actual prepayment experience and estimates of future prepayments to determine the constant effective yield necessary to apply the effective interest method of income recognition. Estimates of future prepayments are based on the underlying collateral characteristics of each security and are derived from market sources. Judgment is involved in making determinations about prepayment expectations and in changing those expectations in response to changes in interest rates and macroeconomic conditions. The amortization of premiums and discounts associated with mortgage-backed securities may be significantly impacted by changes in prepayment assumptions.

Securities classified as trading are bought and held principally for selling them in the near term and carried at fair value, with changes in fair value recognized in earnings. When applicable, realized and unrealized gains and losses on such assets are reported in noninterest income in the Consolidated Statements of Operations.

Equity securities are primarily composed of FHLB stock and FRB stock (which are carried at cost) and money market mutual fund investments held by the Company’s broker-dealers (which are carried at fair value, with changes in fair value recognized in noninterest income). Equity securities that are carried at cost are reviewed at least annually for impairment, with valuation adjustments recognized in noninterest income.

The following table presents the major components of securities at amortized cost and fair value:

	December 31, 2019									December 31, 2018
(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and other		$71		$—		$—			$71		$24		$—		$—			$24
State and political subdivisions	5		—		—			5		5		—		—			5
Mortgage-backed securities, at fair value:
Federal agencies and U.S. government sponsored entities	19,803		143		(71		)	19,875		20,211		28		(605		)	19,634
Other/non-agency	638		24		—			662		236		3		(7		)	232
Total mortgage-backed securities, at fair value	20,441		167		(71		)	20,537		20,447		31		(612		)	19,866
Total debt securities available for sale, at fair value		$20,517		$167		($71	)		$20,613		$20,476		$31		($612	)		$19,895
Federal agencies and U.S. government sponsored entities		$3,202		$45		($5	)		$3,242		$3,425		$—		($132	)		$3,293
Other/non-agency	—		—		—			—		740		8		—			748
Total mortgage-backed securities, at cost	3,202		45		(5		)	3,242		4,165		8		(132		)	4,041
Total debt securities held to maturity		$3,202		$45		($5	)		$3,242		$4,165		$8		($132	)		$4,041
Money market mutual fund investments		$47		$—		$—			$47		$181		$—		$—			$181
Total equity securities, at fair value		$47		$—		$—			$47		$181		$—		$—			$181
Federal Reserve Bank stock		$577		$—		$—			$577		$463		$—		$—			$463
Federal Home Loan Bank stock	222		—		—			222		364		—		—			364
Other equity securities	8		—		—			8		7		—		—			7
Total equity securities, at cost		$807		$—		$—			$807		$834		$—		$—			$834

The following table presents the amortized cost and fair value of debt securities by contractual maturity as of December 31, 2019. 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:
U.S. Treasury and other		$71		$—		$—		$—		$71
State and political subdivisions	—		—		—		5		5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		215		1,534		18,054		19,803
Other/non-agency	—		—		—		638		638
Total debt securities available for sale	71		215		1,534		18,697		20,517
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		3,202		3,202
Other/non-agency	—		—		—		—		—
Total debt securities held to maturity	—		—		—		3,202		3,202
Total amortized cost of debt securities		$71		$215		$1,534		$21,899		$23,719
Fair value:
U.S. Treasury and other		$71		$—		$—		$—		$71
State and political subdivisions	—		—		—		5		5
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		217		1,553		18,105		19,875
Other/non-agency	—		—		—		662		662
Total debt securities available for sale	71		217		1,553		18,772		20,613
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		3,242		3,242
Total debt securities held to maturity	—		—		—		3,242		3,242
Total fair value of debt securities		$71		$217		$1,553		$22,014		$23,855

Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $642 million, $672 million and $625 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The following table presents realized gains and losses on securities:

	Year Ended December 31,
(in millions)	2019			2018		2017
Gains on sale of debt securities (1)		$41			$19		$11
Losses on sale of debt securities	(16		)	—		—
Debt securities gains, net		$25			$19		$11
Equity securities gains		$—			$—		$1

⁽¹⁾ For the year ended December 31, 2019, $6 million of gains on sale of debt securities were recognized in mortgage banking fees in the Consolidated Statements of Operations, as they related to AFS securities held as economic hedges of the value of the MSR portfolio recognized using the amortization method.    

The following table presents the amortized cost and fair value of debt securities pledged:

	December 31, 2019				December 31, 2018
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Pledged against repurchase agreements		$265		$266		$344		$338
Pledged against FHLB borrowed funds	638		662		745		752
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law	3,670		3,672		3,592		3,460

Citizens regularly enters into security repurchase agreements with unrelated counterparties, which involve the transfer of a security from one party to another, and a subsequent transfer of substantially the same security back to the original party. The Company’s repurchase agreements are typically short-term in nature and are accounted for as secured borrowed funds on the Company’s Consolidated Balance Sheets. Citizens recognized no offsetting of short-term receivables or payables as of December 31, 2019 or 2018. Citizens offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information see Note 13.

Securitizations of mortgage loans retained in the investment portfolio for the years ended December 31, 2019, 2018 and 2017, were $150 million, $142 million and $134 million, respectively. These securitizations include a substantive guarantee by a third party. In 2019, 2018 and 2017 the guarantors were FNMA, FHLMC, and GNMA. The debt securities received from the guarantors are classified as AFS.

Impairment

Citizens reviews its securities for other-than-temporary impairment on a quarterly basis or more frequently if a potential loss triggering event occurs. The initial indicator of other-than-temporary impairment for both debt and equity securities is a decline in fair value below its recorded investment amount, as well as the severity and duration of the decline. For a security that has declined in fair value below the cost basis, the Company recognizes other-than-temporary impairment if management has the intent to sell the security, it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the entire cost basis of the security.

Estimating the recovery of the amortized cost basis of a debt security is based upon an assessment of the cash flows expected to be collected. If the present value of cash flows expected to be collected, discounted at the security’s original effective yield, exceeds the amortized cost, no credit impairment has occurred. If this amount is less than the amortized cost, other-than-temporary impairment is considered to have occurred. 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: (i) the type of investment, (ii) various market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), (iii) the length and severity of impairment, and (iv) the public credit rating of the instrument.

Citizens estimates the portion of loss attributable to credit using a collateral loss model and integrated cash flow engine. The model calculates prepayment, default and loss severity assumptions using collateral performance data. These assumptions are used to produce cash flows that generate loss projections. These loss projections are reviewed on a quarterly basis by a cross-functional governance committee to determine whether security impairments are other-than-temporary.

If the Company intends to sell an impaired security, or if it is more likely than not Citizens will be required to sell the security before recovery, the impairment loss recognized in current period earnings equals the difference between the amortized cost basis and the fair value of the security. If the Company does not intend to sell the impaired security, and it is not likely that the Company will be required to sell the impaired security, the other-than-temporary impairment write-down is separated into an amount representing the credit loss, which is recognized in current period earnings and the amount related to all other factors, which is recognized in OCI.

The following table presents the net securities impairment losses recognized in earnings:

	Year Ended December 31,
(in millions)	2019			2018			2017
Other-than-temporary impairment:
Total other-than-temporary impairment losses		($2	)		($7	)		($7	)
Portions of loss recognized in other comprehensive income (before taxes)	—			4			—
Net securities impairment losses recognized in earnings on debt securities		($2	)		($3	)		($7	)

The following tables present mortgage-backed debt securities with fair values below their respective carrying values, separated by the duration the securities have been in a continuous unrealized loss position:

	December 31, 2019
	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
Federal agencies and U.S. government sponsored entities	106		$5,135		($24	)	120		$3,748		($52	)	226		$8,883		($76	)
Other/non-agency	—	—		—			—	—		—			—	—		—
Total	106		$5,135		($24	)	120		$3,748		($52	)	226		$8,883		($76	)

	December 31, 2018
	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
Federal agencies and U.S. government sponsored entities	166		$4,881		($89	)	429		$15,124		($648	)	595		$20,005		($737	)
Other/non-agency	10	139		(1		)	11	72		(6		)	21	211		(7		)
Total	176		$5,020		($90	)	440		$15,196		($654	)	616		$20,216		($744	)