SECURITIES

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

NOTE 2 - SECURITIES

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



	September 30, 2020									December 31, 2019
(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		$11		$—		$—			$11		$71		$—		$—			$71
State and political subdivisions	4		—		—			4		5		—		—			5
Mortgage-backed securities, at fair value:
Federal agencies and U.S. government sponsored entities	20,962		617		(38		)	21,541		19,803		143		(71		)	19,875
Other/non-agency	482		33		—			515		638		24		—			662
Total mortgage-backed securities, at fair value	21,444		650		(38		)	22,056		20,441		167		(71		)	20,537
Asset-backed securities, at fair value⁽¹⁾	813		—		—			813		—		—		—			—
Total debt securities available for sale, at fair value		$22,272		$650		($38	)		$22,884		$20,517		$167		($71	)		$20,613
Mortgage-backed securities, at cost:
Federal agencies and U.S. government sponsored entities		$2,578		$131		$—			$2,709		$3,202		$45		($5	)		$3,242
Total debt securities held to maturity, at cost		$2,578		$131		$—			$2,709		$3,202		$45		($5	)		$3,242
Money market mutual fund investments		$57		$—		$—			$57		$47		$—		$—			$47
Total equity securities, at fair value		$57		$—		$—			$57		$47		$—		$—			$47
Federal Reserve Bank stock		$577		$—		$—			$577		$577		$—		$—			$577
Federal Home Loan Bank stock	20		—		—			20		222		—		—			222
Other equity securities	8		—		—			8		8		—		—			8
Total equity securities, at cost		$605		$—		$—			$605		$807		$—		$—			$807

(1) In September 2020, Citizens sold $973 million of private in-school education loans, inclusive of accrued interest, capitalized interest and fees. Additionally, the Company provided financing to the purchaser for a portion of the sale price in the form of $813 million of asset-backed securities, collateralized by the sold assets, which are classified as AFS. Refer to Note 7 for additional information.

Accrued interest receivable on debt securities totaled $57 million and $58 million as of September 30, 2020 and December 31, 2019, respectively, and is included in other assets on the Consolidated Balance Sheets.

The following table presents the amortized cost and fair value of debt securities by contractual maturity as of September 30, 2020. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without incurring penalties.



	September 30, 2020
	Distribution of Maturities
(in millions)	1 Year or Less		After 1 Year through 5 Years		After 5 Years through 10 Years		After 10 Years		Total
Amortized cost:
U.S. Treasury and other		$11		$—		$—		$—		$11
State and political subdivisions	—		—		—		4		4
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	4		147		1,591		19,220		20,962
Other/non-agency	—		—		—		482		482
Asset-backed securities	—		—		813		—		813
Total debt securities available for sale	15		147		2,404		19,706		22,272
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		2,578		2,578
Total debt securities held to maturity	—		—		—		2,578		2,578
Total amortized cost of debt securities		$15		$147		$2,404		$22,284		$24,850

Fair value:
U.S. Treasury and other		$11		$—		$—		$—		$11
State and political subdivisions	—		—		—		4		4
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	4		153		1,647		19,737		21,541
Other/non-agency	—		—		—		515		515
Asset-backed securities	—		—		813		—		813
Total debt securities available for sale	15		153		2,460		20,256		22,884
Mortgage-backed securities:
Federal agencies and U.S. government sponsored entities	—		—		—		2,709		2,709
Total debt securities held to maturity	—		—		—		2,709		2,709
Total fair value of debt securities		$15		$153		$2,460		$22,965		$25,593

Taxable interest income from investment securities as presented on the Consolidated Statements of Operations was $121 million and $153 million for the three months ended September 30, 2020 and 2019, respectively and $398 million and $483 million for the nine months ended September 30, 2020 and 2019, respectively.

The following table presents realized gains and losses on securities:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2020		2019		2020		2019
Gains on sale of debt securities⁽¹⁾		$1		$5		$4		$21
Losses on sale of debt securities	—		—		—		—
Debt securities gains, net		$1		$5		$4		$21

⁽¹⁾ For the three and nine months ended September 30, 2019, $2 million and $6 million, respectively, of gains on sale of debt securities were recognized in mortgage banking fees in the Consolidated Statement 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:



	September 30, 2020				December 31, 2019
(in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Pledged against repurchase agreements		$227		$234		$265		$266
Pledged against FHLB borrowed funds	478		515		638		662
Pledged against derivatives, to qualify for fiduciary powers, and to secure public and other deposits as required by law	3,506		3,620		3,670		3,672

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 September 30, 2020 or December 31, 2019. Citizens offsets certain derivative assets and derivative liabilities on the Consolidated Balance Sheets. For further information, see Note 9.

Securitizations of mortgage loans retained in the investment portfolio were $34 million for the three and nine months ended September 30, 2020. Securitizations of mortgage loans retained in the investment portfolio were $28 million and $72 million for the three and nine months ended September 30, 2019, respectively. These securitizations include a substantive guarantee by a third party. In 2020, the guarantors were FNMA and FHLMC. In 2019, the guarantors were FNMA, FHLMC, and GNMA. The debt securities received from the guarantors are classified as AFS.

Impairment

Upon purchase of HTM investment securities and at each subsequent measurement date, Citizens is required to evaluate the securities for risk of loss over their life and, if necessary, establish an associated reserve. Recognition of a reserve for expected credit losses is not required if the amount the Company expects to realize is zero (commonly referred to as “zero expected credit losses”). The Company evaluated its existing HTM portfolio and concluded that all of the securities met the zero expected credit loss criteria, and therefore no CECL reserve was booked for HTM securities as of the balance sheet date.

Citizens reviews its AFS debt securities for impairment at the individual security level on a quarterly basis, or more frequently if a potential loss triggering event occurs. The initial indicator of impairment for debt securities classified as AFS is a decline in fair value below its amortized cost basis. For any security that has declined in fair value below the amortized cost basis, the Company recognizes an impairment loss in current period earnings if management has the intent to sell the security or if it is more likely than not it will be required to sell the security before recovery of its amortized cost basis.

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, is less than the amortized cost basis, impairment equal to the shortfall in cash flows has occurred. Citizens evaluates whether any portion of the impairment is attributable to credit-related factors or various other market factors affecting the fair value of the security (e.g., interest rates, spread levels, liquidity in the sector, etc.), and the public credit rating of the security. If credit-related factors exist, credit-related impairment has occurred regardless of the Company’s intent to hold the security until it recovers.

The credit-related portion of impairment is recognized in current period earnings as provision expense through the establishment of an allowance for AFS securities, to the extent the allowance does not reduce the value of the AFS security below its current fair value. The remaining non-credit related portion of impairment is recognized in OCI. Improvement in credit losses in subsequent periods results in a reversal of the allowance for AFS securities and a corresponding decrease to provision expense, to the extent the allowance does not become negative. Accrued interest receivable on AFS debt securities is excluded from the balances used to calculate the allowance for AFS securities. All accrued and uncollected interest is immediately reversed against interest income when it is deemed uncollectible. The Company has evaluated any AFS securities in an unrealized loss position at September 30, 2020 and concluded that all unrealized losses are due to non-credit related factors. As such, the Company does not have an allowance for AFS securities as of September 30, 2020.

The following table presents AFS 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:



	September 30, 2020
	Less than 12 Months					12 Months or Longer				Total
(dollars in millions)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities		$2,524		($38	)		$—		$—		$2,524		($38	)

The following table present AFS and HTM 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)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Federal agencies and U.S. government sponsored entities		$5,135		($24	)		$3,748		($52	)		$8,883		($76	)

Citizens does not currently have the intent to sell these impaired debt securities, and it is not more likely than not that the Company will be required to sell these debt securities prior to recovery of their amortized cost bases. Citizens 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 September 30, 2020. The unrealized losses on these debt securities reflect non-credit-related factors such as changing interest rates and market liquidity. Therefore, Citizens has determined that these debt securities are not other-than-temporarily impaired. Any subsequent increases in the valuation of impaired debt securities will not impact their recorded cost bases.